Tuesday, November 3, 2009

California Supreme Court Carves Out Additional Exception to Definition of Accrued Wages in Schachter v. Citigroup, Inc.

On November 2, 2009, the California Supreme Court issued an opinion in Schachter v. Citigroup, Inc., __ Cal.4th __ (2009), holding that an employment incentive provision calling for the forfeiture of restricted company stock if the employment relationship was terminated before vesting did not run afoul California Labor Code sections 201, 202, and 219.

Under the specific facts of the case, Citigroup had offered a voluntary employee incentive compensation plan that provided employees with shares of restricted company stock at a reduced price in lieu of a portion of the participating employee’s annual cash compensation. Under the provision at issue, employees agreed that, should they resign or be terminated for cause before their restricted shares of stock vest, they would forfeit the stock and the portion of cash compensation they directed be paid in the form of the restricted stock. Thus, the issue at hand turned on whether the forfeiture provision violated Labor Code sections 201, 202, and 219 by requiring employees to forfeit “earned and unpaid” wages upon resigning or being terminated for cause. Id., at 8. The Court held that it did not.

As a beginning point, the Court noted that there was no dispute among the parties as to whether both the cash compensation and restricted stock constituted “wages” under Labor Code section 200. Id., at 8-9. All parties agreed that both were wages. Moreover, the plaintiff did not allege that the company failed to “pay” him the compensation he elected to receive in lieu of his annual cash compensation. Id. Rather, the plaintiff alleged that he and other similarly impacted employees were entitled to receive the portion of the cash compensation used to purchase the unvested stock upon termination because Labor Code section 219 prevented employees from agreeing to the Plan (and the forfeiture clause) in the first instance. Id., at 9-10.

The Court disagreed, reasoning that plaintiff could not assert the Plan constituted an improper agreement under section 219 without first establishing the Plan’s forfeiture provision violated sections 201 and 202 – a point which the plaintiff conceded. Id., at 9-10. The Court further reasoned that the Plan’s forfeiture provision did not violate sections 201 and 202, as employees who opted into the Plan entered into a lawful agreement to alter the terms of their employment (i.e. an agreement to exchange a portion of present wages for contingent incentive compensation). Id., at 10-11. Based on this fact, plaintiff was bound by the terms of that agreement, including the Plan’s forfeiture provision, and was not entitled to leverage section 219 to overcome his failure to perform a material condition the agreement (i.e. remain employed until the point off the stock’s vesting) to achieve reimbursement of the wages used to purchase the unvested stock upon termination. Id., at 11-14.

All in all, the Court’s opinion is seems logical and strait forward. As the plaintiff voluntarily entered into the Plan, and voluntarily terminated his employment with the company, the plaintiff really was not in the greatest position to establish wrongdoing on the part of the employer. The future impact of the Court’s decision likely will turn on cases presenting facts which vary from these two distinctions.

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