Labor & Employment Law

Vesting of Incentive Compensation -- Schachter v. Citigroup, Inc.

The California Labor Code is very strict in protecting an employee's right to be paid for all compensation that he earns.  As we have repeatedly blogged in the past, it is often a thorny issue to determine exactly when these protections attach -- in other words, when has a mere hope or expectation of a reward matured into a fully vested proprty right that must be paid by the employer without further delay or reduction?  

The California Supreme Court recently shed a bit more light on this issue in Schachter v. Citigroup, Inc.  In that case, a stockbroker had elected to take some of his compensation in the form of "restricted stock," which would only vest if he were still employed by the Company on a specified date.  The broker quit before the vesting date and never received the stock.  Schachter argued that  this arrangement violated the Labor Code because it required him to "forfeit" compensation that he had already earned.  (He also argued that it was irrelevant that he had agreed to the deal in the first place because the Labor Code also prohibits any agreement to waive its protections).

The Supreme Court rejected the theory that this restricted stock deal was an illegal forfeiture.  In doing so, the Court basically construed the deal as a "stay bonus" or "longevity bonus."  Under this construction, the employee never earned the compensation in the first place because he voluntarily quit.

Only when an employee satisfies the condition(s) precedent to receiving incentive compensation, which often includes remaining employed for a particular period of time, can that employee be said to have earned the incentive compensation (thereby necessitating payment upon resignation or termination).

The Court seemingly went out of its way, however, to caution employers against overreaching.  For example, the Court specifically noted that bonuses, commissions, and other incentive compensation may have to be paid out where the worker does not quit but is fired.  

If the employee is discharged before completion of all of the terms of the bonus agreement, and there is not valid cause, based on conduct of the employee, for the discharge, the employee may be entitled to recover at least a pro-rata share of the promised bonus.  In the analogous context of commissions on sales, it has long been the rule that termination (whether voluntary or involuntary) does not necessarily impede an employee's right to receive a commission where no other action is required on the part of the employee to complete the sale leading to the commission payment.  This concept has been colorfully described as 'He who shakes the tree is the one to gather the fruit.'

The Bottom Line:  Employers may lawfully condition bonus payments on an employee's voluntary decision to quit.  But employers generally cannot condition payment on matters solely within their own unilateral control, such as a decision to fire an employee before he can perform all of the contractual conditions.  

Full post as published by California Labor & Employment Defense Blog on November 06, 2009 (boomark / email).