Schachter v. Citigroup: Cal. Supreme Court Upholds Bonus Compensation Plan

In Schachter v. Citigroup, Inc. (November 2, 2009) 47 Cal.4th 610, the California Supreme Court upheld an employer's bonus compensation plan against allegations that it worked a forfeiture of wages in violation of California law. The Court described the plan and the issues presented as follows:

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.

The Court held that:

1. shares of restricted stock constituted a wage; but
2. compensation plan did not violate statute prohibiting agreements that attempt to circumvent requirements of Labor Code;
3. forfeiture provision did not violate statutes requiring prompt payment of all earned wages upon termination or resignation;
4. employer was not required to provide cash compensation for forfeited stock; and
5. employee was not entitled to a pro rata payment for the elapsed portion of the two-year vesting period for the forfeited stock.

In light of the Supreme Court's decision a couple of years ago in Prachasaisoradej and Court of Appeal decisions such as Neisendorf v. Levi Strauss, this decision does not come as a real surprise.