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Schachter v. Citigroup

November 2, 2009

DAVID B. SCHACHTER, PLAINTIFF AND APPELLANT,
v.
CITIGROUP, INC., ET AL., DEFENDANTS AND RESPONDENTS.



Ct.App. 2/7 B193713 Los Angeles County Super. Ct. No. BC191447. Judge: Victoria G. Chaney.

The opinion of the court was delivered by: Moreno, J.

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.

Background

David B. Schachter was employed as a stockbroker by Smith Barney, Inc., now a subsidiary of Citigroup, Inc. (the company) from April 28, 1992 to March 29, 1996. Schachter, along with officers and other key individuals in the company‟s employ, was given the option to participate in the company‟s capital accumulation plan (the Plan),*fn1 a program that provided incentives to those employees who directly influenced the company‟s value.

Under the Plan, eligible employees could elect to receive awards of restricted company stock "in lieu of cash payment of a percentage of the employee‟s annual compensation." Participating employees could elect to receive 5, 10, 15, 20, or 25 percent of their "total compensation in the form of restricted stock." To participate in the Plan for the following calendar year, an employee had to execute a "Capital Accumulation Plan Election to Receive Restricted Stock" form at the end of the current calendar year indicating the amount of "total compensation in the form of restricted stock" he or she wished to receive. The percentage of "total compensation" received as restricted stock could be different for the first and second six-month periods of the year.

Restricted stock could not be sold, transferred, pledged, or assigned for a two-year period commencing on the date of the award; however, the Plan provided that participating employees "shall have the right to direct the vote" and "receive any regular dividends on restricted stock shares" during the restricted period.*fn2

For purposes of determining the number of shares to be acquired under the Plan, the purchase price of the stock was discounted at a rate of 25 percent of its then-current market price, averaged over the five days preceding the date of the acquisition, to "reflect the impact of the restrictions on the value of the restricted stock, as well as the possibility of forfeiture of restricted stock." On the date of the purchase, the company either issued stock certificates to a participating employee, to be held by the company until the restricted period lapsed, or made a "book entry" in the company‟s records evidencing the award. Although a participating employee could elect to pay taxes on the restricted stock when the stock was purchased (see 26 U.S.C. § 83), "the participating employees‟ restricted shares [were] not included in the participating employees‟ gross income for federal tax purposes until the two-year vesting period had expired."

If an employee remained in the company‟s employ for the two years following the purchase of restricted stock, title to the shares vested fully with the employee, free of any restrictions. However, if an employee voluntarily terminated employment or was terminated for cause before the end of the two-year period, the employee forfeited his or her restricted stock as well as the percentage of annual income designated by the employee to be paid as shares of restricted stock. In contrast, if an employee was involuntarily terminated without cause, the employee forfeited his or her restricted stock, but received in return, without interest, "a cash payment equal to the portion of his or her annual compensation that had been paid in the form of such forfeited [r]estricted [s]tock."

On December 21, 1994, Schachter enrolled in the Plan, and elected to receive 5 percent of his total compensation in 1995 in the form of restricted stock for both six-month periods. On July 1, 1995, Schachter received 44 shares of restricted stock with a vesting date of July 1, 1997, and on January 2, 1996, he received 38 shares of restricted stock with a vesting date of January 2, 1998. At the end of 1995, Schachter again elected to participate in the Plan during the 1996 calendar year, but modified his election such that no restricted stock would be purchased during the first half of 1996, and 5 percent of his total compensation between July and December 1996 would constitute restricted stock. On March 31, 1996, Schachter voluntarily terminated his employment with the company. Because Schachter‟s resignation occurred prior to the vesting dates of his restricted stock, he forfeited all of his shares of stock and the percentage of his annual compensation he directed be paid to him in the form of restricted stock.

In May 1998, Schachter filed a putative class action against the company alleging (1) that the Plan‟s forfeiture provision violated Labor Code*fn3 sections 201*fn4 and 202,*fn5 which require the prompt payment of all earned wages when an employee is terminated or when an employee resigns, (2) that the Plan‟s forfeiture provision violated section 221,*fn6 which prohibits an employee from returning wages to an employer, and (3) that forfeiture of the percentage of annual compensation received in the form of shares of stock constituted the unlawful conversion of wages. The company filed a motion for summary judgment or adjudication, which the trial court denied in its entirety on October 20, 1998.

Years of litigation followed, and after a class consisting of former employees "who have suffered financial damages as a result of the forfeiture provisions of the [P]lan" was certified, and an intervening appeal (Schachter v. Citigroup, Inc. (2005) 126 Cal.App.4th 726) was completed, the trial court "elected to exercise its inherent authority to reconsider its original denial of the [company‟s summary judgment] motion in accordance with Le Francois v. Goel [(2005)] 35 Cal.4th 1094."*fn7 Upon reconsideration, the trial court concluded that the Plan‟s forfeiture provision did not violate sections 201 and 202, and it granted the company‟s motion for summary judgment. Schachter appealed, and the Court of Appeal affirmed the trial court‟s grant of summary judgment.

The Court of Appeal concluded that the Plan‟s forfeiture provision did not violate sections 201 and 202, and, accordingly, the Plan did not violate section 219, which provides that wage payment statutes, among others, cannot "be contravened or set aside by private agreement." Schachter argued that the forfeiture provision violated the Labor Code because an employee‟s resignation or termination for cause resulted in the employee‟s forfeiture of "not only the shares of the restricted [company] stock they had purchased," which Schachter conceded was lawful, "but also the "earned but unpaid compensation‟ used to purchase those shares." In rejecting Schachter‟s argument, the court concluded that Schachter was paid all of his earned wages - some in the form of restricted stock with an immediate right to vote and earn dividends, and some in the form of cash compensation. The court also reasoned (and Schachter conceded) that if he had been paid all of his compensation in cash and then used a portion of those paid wages to purchase restricted stock, no Labor Code violation would have occurred. The court concluded that the only difference between the instant transaction and a certainly lawful two-step transaction in which the company paid Schachter and then permitted him to use his earnings to purchase restricted stock was the Plan‟s tax deferral benefits. The court found that "at most, the omission of the intermediate step of delivering the money to [Schachter] 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."*fn8

Schachter also argued that the Plan‟s forfeiture provision amounted to a deferral and withholding of wages because the shares lacked ascertainable value and therefore did not constitute a wage. The court rejected his argument, explaining that the shares of restricted stock had value and constituted a wage within the meaning of section 200.*fn9 The court explained that Schachter received these wages and no wages were deferred or withheld. Alternatively, the court opined that if Schachter was correct and the restricted stock did not constitute a wage, his claim would nonetheless fail because forfeiture of the stock (that is, forfeiture of something that is not a wage) would not violate the Labor Code.

Finally, the court reasoned that even if it accepted Schachter‟s argument that he was never paid wages either as cash or as restricted stock, his claim that the Plan‟s forfeiture provision violated the Labor Code "would still fail as a matter of law because he could not show the funds used to purchase the shares were actually earned." The court explained, "Under basic incentive compensation plans the point at which the wage is actually earned is determined by the parties‟ agreement." Payment of incentive compensation may be contingent upon the happening of a future event, such as continued employment. Relying on Neisendorf v. Levi Strauss & Co. (2006) 143 Cal.App.4th 509, 524 (Neisendorf), which held that an employee is not eligible to receive a bonus if his or her employment terminates prior to the happening of a contingent future event such as employment on a specified date, the court explained that Schachter "elected not to remain [in the company‚Äüs employ] for the designated period (presumably after making a calculated decision that the economic and non-economic reasons to leave outweighed the ...


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