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Kim v. Citigroup-Class Action Defense Cases: Forfeiture Aspect Of Capital Accumulation Plan Did Not Violate State’s Wage Act Illinois Court Holds

Trial Court Erred in Finding that Employees Voluntary Participation in a Capital Accumulation Plan Violated Illinois Wage Act Because of Two-Year Forfeiture Period

Plaintiff filed a class action against Citigroup, Travelers Group, Primerica Financial Services, Salomon Smith Barney Holdings and Salomon Smith Barney alleging that a voluntary capital accumulation plan (CAP), whereby a portion of employee compensation and wages were paid in the form of restricted stock, violated Illinois labor laws because the CAP contained a two-year forfeiture period. Kim v. Citigroup, Inc., ___ N.E.2d ___, 2006 WL 2796362 (Ill.App. September 29, 2006). Plaintiff argued that the forfeiture of a portion of the stock upon termination of employment violated the Illinois Wage Payment and Collection Act (“the Act’), which requires that employees be paid all earned wages upon termination of employment. Defense attorneys argued that the CAP program is for the benefit of employees and does not violate state law. The trial court sided with plaintiff, but the appellate court reversed.

Plaintiff was a financial consultant for Salomon Smith Barney with responsibility for managing $30-$40 million in assets. He voluntarily agreed to participate in the CAP, which he believed to be “an innovative and attractive savings vehicle.” Slip Opn., at 2. Plaintiff elected to have 10% of his compensation paid in the form of restricted stock, which allowed him to receive Citigroup stock at a 25% discount subject to a two-year vesting period. Id., at 2-3. When plaintiff left to join UBS Paine Webber, Salomon Smith Barney kept the unvested shares of his CAP stock, which represented approximately $18,000 in earned wages. Id., at 3.

The trial court “specifically found that the monies deducted from the participant’s income were clearly wages due and owing at the time they were payable by defendants,” and that the CAP program clearly violated state law, which requires that “the employee shall receive all earned benefits upon leaving his employer.” Id., at 5. Because the restricted stock represented a portion of the cash compensation due plaintiff, the trial court reasoned that it was an “earned benefit” that could not be forfeited, thus entitling the employee to the cash compensation paid for the stock, but not the value of the stock or any appreciation in stock value. Id. In response to defense arguments that the CAP program benefited employees, the court observed that an employee “loses everything” upon leaving, and found “it would not be inconsistent with the Act to return to the employee whatever he put into the plan without interest or the value of the stock, whichever is less.” Id.

The appellate court affirmed the lower court’s judgment in part, holding that it correctly determined that the CAP stock was compensation and thus governed by the Act. Slip Opn., at 11. However, it reversed the balance of the judgment, concluding that the CAP program did not violate state labor laws. The Court explained that the deductions “were made pursuant to a valid wage deduction order with plaintiff’s express written consent, which was voluntarily given,” and – contrary to the trial court – found that “plaintiff benefited from the deductions.” Id. The Court examined the manner in which state and federal courts had addressed the CAP program, and held at page 14:

After a careful review of the [Act] and its purposes, cases from Illinois, and cases from other jurisdictions that have had [the] opportunity to review CAP programs, we conclude that voluntary forfeiture of earned compensation by an employee does not violate the public policy of the state and that the trial court erred in so holding.

Accordingly, the appellate court affirmed the trial court judgment insofar as it found that the CAP program was governed by the Act, but reversed the balance of the judgment because the CAP program did not violate Illinois state labor laws.

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