Important Disclaimer Schachter v. Citigroup, Inc.:
California Supreme Court Addresses Forfeiture Provisions in Incentive Compensation Agreement November 10, 2009 Last week, the California Supreme Court issued its highly anticipated decision in Schachter v. Citigroup, Inc., unanimously holding that the forfeiture provision contained in Citigroup's stock purchase plan did not violate California Labor Code wage payment requirements. The decision provides helpful guidance to California employers regarding the structuring of incentive compensation plans generally. Moreover, in reaching its holding, the court relied upon a variety of principles helpful to employers that had emerged from earlier cases. For example, the court reiterated the following: - Eligibility to receive incentive compensation is determined by general contract principles and the terms of the plan in question.
- An employee who resigns or is terminated for cause prior to satisfying a condition precedent to receipt of incentive compensation—such as the employee's continued employment as of a particular target date—has not earned the incentive compensation and the employer in such circumstances need not pay the compensation upon the employee's separation from employment.
- Employers and employees may freely agree to alter terms of future employment.
- The presumption of at-will employment, which permits employers to terminate or demote an employee with or without notice and with or without cause, also permits employers "to unilaterally alter the terms of employment, provided that the alteration does not violate a statute or breach an implied or express contractual agreement."
- An employee who remains employed after receiving notice from his or her employer of changed terms or conditions of employment will be deemed to have accepted the new terms and conditions.
The incentive compensation plan at issue in Schachter provided eligible employees with the opportunity to purchase shares of restricted company stock at a reduced price in lieu of receiving a portion of the employees' cash compensation. To participate in the plan, an employee needed to submit an election form in which he or she directed that a portion of the following year's cash compensation be paid in the form of restricted stock. Title to the shares vested fully with the employee after two years, provided that the employee remained employed by Citigroup throughout that period. If the employee separated from employment for any reason prior to the conclusion of the two-year period, the employee forfeited his or her unvested shares. If Citigroup terminated the employee without cause prior to expiration of the two-year period, the plan provided that the employee would receive a cash payment equal to the portion of his or her annual compensation that had been paid in the form of stock. However, if the employee voluntarily resigned or Citigroup terminated the employee for cause, the plan provided that the employee would forfeit both the portion of cash compensation the employee had allocated to the award of restricted stock, as well as the restricted stock portion of the employee's compensation. The plaintiff in Schachter, David Schachter, enrolled in the plan in 1994 and 1995 and elected to receive a portion of his total compensation for the following years in the form of restricted stock. On March 31, 1996, prior to vesting in any shares, he voluntarily resigned his employment with the company. Consistent with the terms of the plan, Schachter forfeited his unvested shares upon his voluntary resignation, and did not receive a cash payment equal to the portion of his compensation he had directed the company to pay to him as stock. Following his resignation, Schachter filed a putative class action against Citigroup asserting that the company's failure to pay him an amount equal to the portion of his salary he had chosen to receive as stock violated Sections 201, 202, and 221 of the California Labor Code, which require the prompt payment of earned wages when an employee separates from employment.1 (Notably, Schachter did not contend that he was entitled to retain the unvested shares of restricted stock.) The trial court granted summary judgment in favor of Citigroup, a ruling subsequently affirmed by a California appellate court. The California Supreme Court, in affirming the appellate court's decision, rejected Schachter's argument that "the portion of compensation he directed be paid to him in the form of restricted stock should have been transformed into a cash payment upon his resignation." The court disagreed, stating that when Schachter submitted the incentive plan election forms and enrolled in the plan, he "essentially renegotiated the terms of his compensation with the company," electing to be compensated with a mixture of cash and restricted stock. The court explained further that "Schachter understood that the restricted stock he opted to receive would have limited and conditional present value and would not fully vest until two years following the date he received it, provided he remained employed by the company." The court concluded that, having not elected to remain employed for two years from the date he received the restricted stock, Schachter did not earn, and had no right to receive, either the restricted stock or the funds that were used to purchase it. The court also rejected Schachter's argument that incentive compensation, like vacation pay, should vest on a pro rata basis. The court distinguished vacation pay, which is a form of compensation for past services, from incentive pay, which is intended to motivate employees to provide future services to the employer. Schachter makes it clear that employers have wide flexibility in drafting incentive compensation plans, including bonus, commission, and equity plans, provided that the plan is clear and unambiguous. Indeed, Citigroup prevailed principally because the forfeiture provisions of the plan were in writing, carefully drafted, unambiguous, and communicated to affected employees. The failure to reduce such compensation arrangements to writing, or the lack of clear communication to an employee, could easily result in a less favorable outcome than Citigroup enjoyed in Schachter. Schachter's teachings will assist companies as they prepare equity plans, commission plans, sabbatical policies, and many other compensation arrangements. For more information about the implications of the California Supreme Court's Schachter decision, please contact Fred Alvarez, Rico Rosales, Marina Tsatalis, Kristen Garcia Dumont, Alicia Farquhar, or any other member of Wilson Sonsini Goodrich & Rosati's employment law practice.
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