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California law allows mandatory forfeiture of unvested restricted stock upon termination of employment

I just updated the choice-of-law cheat sheet to reflect a recent decision by the California Supreme Court that’s tangentially related to the state’s prohibition of employee noncompetition covenants. In a November 2 decision, the supreme court held that an employer’s stock incentive plan can require an employee who resigns (or is terminated for cause) to forfeit unvested restricted stock that the employee elected to accept in lieu of a portion of the employee’s cash compensation, along with cash to be used to purchase such stock:

Citigroup offered a voluntary employee incentive compensation plan that provides employees with shares of restricted company stock at a reduced price in lieu of a portion of that employee’s annual cash compensation.

Employees agree 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.

We consider here whether the incentive plan?s forfeiture provision violates Labor Code sections 201, 202, and 219, which provide that employees be paid all earned, unpaid wages upon termination or resignation and prohibit agreements that purport to circumvent that requirement.

We conclude the forfeiture provision does not run afoul of the Labor Code because no earned, unpaid wages remain outstanding upon termination according to the terms of the incentive plan.

Accordingly, we affirm the judgment of the Court of Appeal.

Schachter v. Citigroup, Inc., No. S161385, at 1 (Cal. Nov. 2, 2009) (in effect affirming summary judgment in favor of employer) (extra paragraphing added). [Hat tip: Sidley Austin LLP]

{ 2 comments… add one }
  • Bruce Brumberg 2009-11-18, 16:21

    Do you view this as a case involving a stock incentive plan, or really a type of nonqualified deferred compensation plan where you deferred salary into stock? Would the outcome be different?

    Bruce Brumberg, Editor

  • D. C. Toedt 2009-11-18, 19:12

    @Bruce, the California S. Ct. appears to have agreed with the court of appeals that the stock plan was substantively identical to a two-step transaction in which cash wages were paid (not deferred), and the employee then used a portion of those wages to purchase stock that was subject to time-based restrictions:

    As the company persuasively argues, Schachter?s “bargained-for ‘wages’ have been paid in full. He received all of his promised cash compensation, received immediately exercisable voting and dividend rights in the restricted stock, and was awarded contingent rights of full ownership in that stock. The only thing that has not been ‘paid’ is something Schachter never ‘earned’ — fully vested [company] stock. Schachter therefore has no claim under [section] 201 or [section] 202.”

    Op. at 13 (quoting company brief).

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