Defense Motion for Summary Judgment in Labor Law Class Action Properly Granted because Employee Incentive Compensation Plan did not Violate California law by Providing for Forfeiture of Stock for Following Resignation or Termination for Cause During Plan’s Two-Year Vesting Period California State Court Holds
Plaintiffs filed a putative class action against their employer, Citigroup, alleging violations of California’s Labor Code; specifically, the class action alleged that the financial brokerage company’s voluntary incentive compensation plan – which “allows participants the option of using a portion of their annual earnings to purchase shares in the company’s stock at a price below the stock’s publicly-traded market price” but provides further that “[i]f the participating employee resigns or is terminated for cause within a two-year vesting period, the employee forfeits the stock as well as the money used to purchase it” – violates California law because the money used to purchase the shares were wages and their forfeiture constituted a conversion of wages. Schachter v. Citigroup, Inc., 159 Cal.App.4th 10, 70 Cal.Rptr.3d 776, 778 (Cal.App. 2008). Defense attorneys moved for summary judgment; the trial court granted the motion and dismissed the class action. The Court of Appeal affirmed.
The appellate court framed the issue as follows: “Do the forfeiture provisions of this voluntary incentive compensation plan violate Labor Code sections 201 and 202, which require an employer to pay its employee all earned but unpaid compensation following the employee’s discharge or his or her voluntary termination of employment?” Schachter, at 778 (footnote omitted). In brief, the Plan permitted employees to purchase company stock “at a 25 percent discount below the stock’s then-current market price,” but the stock “could not be sold, transferred, pledged or assigned during a two-year period, which commenced on the date the stock was initially acquired.” Id., at 779. During this two-year vesting period, the employees received any stock dividends and exercised the right to vote their shares. At the end of the two-year period, the stock fully vested in the employee, but if “the employee voluntarily terminated his or her employment or was terminated for cause during the two-year period, he or she forfeited the shares, as well as the money used to purchase them.” Id. The employee could contribute from 5-25% of their compensation to the program, id. n.4, and employees who retired or were involuntarily terminated without cause were not subject to the forfeiture provisions of the Plan, id. n.7. The appellate court concluded at page 778, “As a matter of economic reality, employees who elect to participate in the plan’s stock-purchase program are paid all the wages they designate to invest in company stock. Thus, the plan’s forfeiture provisions do not violate the Labor Code; and the trial court in this case properly granted summary judgment in favor of the brokerage company.”
The first issue addressed by the appellate court was whether the monies used to purchase restricted stock constituted “wages” within the meaning of California Labor Code section 221, and the court had no difficulty concluding that the funds were employee wages. Schachter, at 781-82. The question, then, was whether Citigroup failed to promptly pay earned but unpaid wages at the time of resignation or termination as required by California law, id., at 782. Plaintiff’s class action alleged that the two-year vesting provisions result not only in the forfeiture of stock “but also the ‘earned but unpaid compensation’ used to purchase those shares” in violation of California Labor Code sections 201 and 202. Id., at 782-83. The appellate court disagreed, explaining at page 783 that plaintiff’s theory “is grounded on the erroneous premise he was not in fact paid the money used to purchase the restricted Citigroup shares” and that it “ignores both the substance and the economic reality of the transaction he authorized.”
Members of the putative class action authorized their employer to purchase restricted stock at a substantial discount with a certain percentage of their wages, but they could have elected not to participate in the Plan. Schachter, at 783. Employees voluntarily participated in order to realize tax deferred benefits and in the hope of securing “a return far greater than the funds used to purchase it.” Id. But the transaction could have been divided into “discrete steps” – Citigroup could have paid the participating employees their wages in full, and then the employees could have used a percentage of their compensation to buy the restricted stock – and, so structured, plaintiff concedes the transaction would not have violated California law. Id. Thus, in the appellate court’s view, “At most, the omission of the intermediate step of delivering the money to [plaintiff] before implementing his request to use it to purchase the designated restricted stock amounts to a deduction of wages for an authorized use, a transaction expressly permitted by section 224.” Id.
The appellate court also held that even if plaintiff “was paid in part in shares of restricted stock, rather than cash,” the Plan’s forfeiture provisions were still lawful, Schachter, at 784, and easily dismissed plaintiff’s assertion that “he received nothing of value when he acquired the shares of restricted stock,” see id., at 785-86. At bottom the appellate court concluded that “there was simply no unlawful forfeiture of earned wages in violation of the Labor Code” because plaintiff “was paid all his compensation, either directly or indirectly through a deduction that [he] requested and expressly authorized, or he did not earn the shares or the money used to purchase them because he left [his employment] before the two-year retention period was satisfied.” Id., at 788. Accordingly, summary judgment was proper. Id.