Court Rules Forfeiture of Incentive Does not Violate State Wage Law

According to the court opinion, another statute specifically excludes from coverage under the state weekly wage act “certain types of deductions from wages made by an employer at an employee’s request, including, among other things, deductions of amounts used to purchase company stock pursuant to an employee stock purchase plan.” Using this statute, the court determined the forfeiture of the stock purchased at participants’ direction in the payroll program of the CAP did not violate the wage act.

Regarding the bonus program of the CAP, the court said: “The operative fact here is that bonus awards under these programs are discretionary, not because they are labeled bonuses, but because the employers are, apparently, under no obligation to award them.” The court, referencing a similar decision by a Connecticut court, said that for this reason, amounts under the bonus and branch manager programs of the CAP do not constitute wages under state law.

Additionally, the court noted that the awards of stock under these programs were awards of restricted stock, which is not only discretionary, but also had a contingency attached to it, that an employee who received such an award would receive the full benefit of the stock only if the employee remained with the company for the defined period after the award. “The only thing they ‘earned’ as a result of their bonus was stock that had limited value to them until it vested,” the court said in its opinion.

Smith Barney Inc. instituted its CAP in 1989 under which brokers could elect to have part of their compensation diverted to purchase restricted shares of stock in Smith Barney’s parent company, Citigroup Inc., at 25% below market price. Stock ownership was not fully vested until completion of a two-year period, during which participants could not sell their shares but could receive dividends and exercise voting rights. Employees who quit or were let go prior to the vesting period forfeited their interests in the stock.

Lawsuits over the forfeiture provision of the CAP sprung up in several states, including Connecticut, Florida, Georgia, and New Jersey, which all agreed the provision did not violate state wage laws (see NJ High Court Approves Forfeiture of Exec Incentive).