In recent years, many employers have begun offering employees stock ownership in the company either in lieu of bonuses, or as deferred compensation—often called Employee Stock Ownership Plans (ESOPs).
Once such employer is Citigroup, which offers a voluntary employee incentive compensation plan that provides employees with shares of restricted company stock at a reduced price as a portion of that employee’s annual cash compensation. In selecting this voluntary compensation plan, employees agreed in writing that if they resigned or were terminated before the end of the two year period in which the stock ownership vested, the stock would be forfeited.
David Schachter was employed as a stockbroker by Smith Barney, Inc., a subsidiary of Citigroup, in the company’s Los Angeles office. Schachter chose to participate in Citigroup’s ESOP, taking 5 percent of his annual compensation in the form of restricted stock. Sixteen months later, Schacter resigned—just eight month’s before his stock was scheduled to vest.
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Schachter then brought a class action lawsuit, claiming that Citigroup’s ESOP terms violated the California Labor Code. In California, employers are prohibited from retaining any portion of an employee’s earned compensation, and must pay resigning employees all earned wages within 72-hours of the employee’s last day of work. Thus, Schachter asserted that the ESOP agreement’s forfeiture provision was unlawful.
The California Supreme Court disagreed. Specifically, the court found that because Schachter’s ownership rights to the compensation hadn’t yet vested, and because Schachter voluntarily elected to take part of his compensation as stock knowing when it would vest, the employer’s ESOP terms do not violate California law.
We’ll have more on this case, and provide an overview of the rules of ESOPs, in an upcoming issue of California Employer Advisor (www.employeradvice.com).