Today, the California Court of Appeal (Second District) held that a forfeiture provision found in an incentive compensation plan that required participants to forfeit unvested stock upon resignation or for-cause termination did not violate the California Labor Code. Schachter v. Citigroup, Inc.
In Schachter, the court held that the incentive compensation plan did not violate Labor Code sections 201 and 202 regarding payment of wages, as Schachter “expressly directed [his employer] to purchase for him restricted stock from the cash compensation paid to him.” This process did not violate Labor Code section 224 (which prohibits secret deductions) because an employer may withhold or divert wages for the benefit of the employee if authorized to do so in writing by the employee. Further, the court held that the forfeiture provisions did not constitute “an unlawful forfeiture of earned wages,” and therefore did not violate Labor Code section 219.
The court also held that payment of wages may be in the form of restricted stock (as opposed to cash that the employee directed to be invested in restricted stock). The fact that the restricted shares could not be sold or transferred is immaterial; the Labor Code “does not prescribe how the value is to be determined or otherwise prohibit employees from negotiating a compensation package that includes as part of their wages a conditional future interest in a valuable asset.”
Even assuming that Schachter was correct in arguing that his wages were not paid, the court held he nevertheless agreed that his compensation would “consist of cash payments and a retention-based conditional interest in the shares, with the latter being earned only if he remained at [his employer] for two years.” Because he did not remain employed for the designated period, he did not earn either the stock or the funds used to purchase the stock.
Read the court’s decision here.
Keesal, Young & Logan Employment Group