Metropolitan News-Enterprise


Tuesday, November 3, 2009


Page 1


High Court Upholds Legality of Restricted Stock Ownership Plan




A voluntary incentive plan by which a corporation’s employees took part of their compensation in restricted stock, subject to forfeiture if the employee left the company before the right to the stock vested, does not violate California labor laws, the state Supreme Court ruled yesterday.

Justice Carlos Moreno, writing for a unanimous court, said Los Angeles Superior Court Judge Victoria Chaney—since elevated to the Court of Appeal—correctly granted summary judgment to Citigroup Inc. in a class action brought by a former stockbroker at its Smith Barney subsidiary.

David B. Schachter challenged a feature of the Capital Accumulation Plan, which allowed employees to apply a portion of their deferred compensation to the purchase of discounted company stock. The shares were restricted and did not vest for two years.

If the employee quit or was fired for cause before the two years was up, he or she would lose both the stock and the deferred compensation used to purchase the shares. Schachter claimed that this aspect constituted a deprivation of earned wages, in violation of the Labor Code, as well as common-law conversion and a violation of the Unfair Business Practices Act.

Summary Judgment

The defendants’ first motion for summary judgment was denied by Los Angeles Superior Court Judge Aurelio Munoz in 2000. Munoz reasoned that unlike a bonus plan, in which the bonus is not earned until the employee has worked for the company the requisite period of time, the CAP required an employee to give back money that the employee had already been paid.

“This amounts to a rebate to the employer in violation of Labor Code [Sec.] 224 since the employee is getting nothing back in return,” Munoz wrote.

Two years later, however, the defendants renewed the motion, citing a ruling by Los Angeles Superior Court Judge Carolyn Kuhl upholding the legality of a similar plan offered by another stock brokerage.

Judge Victoria Chaney, to whom the Schachter case had been reassigned, granted summary judgment for the defendants under the court’s inherent power to reconsider its own rulings sua sponte.

Overturned on Appeal

That ruling was overturned on appeal in 2005 by this district’s Div. Seven, which said that while the judge purported to be acting sua sponte, her consideration of the renewed motion violated the statutory requirement that motions to reconsider be based on facts or law not previously considered.

The panel expressed concern that allowing reconsideration under the circumstances would place an unfair burden on opposing parties by forcing them to respond multiple times to the same motion.

When the case returned to the trial court, however, Chaney granted reconsideration on her own motion and granted summary judgment, which was affirmed by the Court of Appeal.

Moreno, writing yesterday for the high court, agreed with the lower courts that an employee who voluntarily participates in a deferred compensation plan like Smith Barney’s does not forfeit “earned and unpaid wages” by leaving the company or being fired for cause before the employee’s rights vest.

“[I]t is settled that an employer may unilaterally alter the terms of an employment agreement, provided such alteration does not run afoul of the Labor Code,” the justice wrote. Under the CAP in which Schacter participated, he noted, employees could move in and out of the plan, or increase or decrease the percentage of compensation used to buy restricted stock, for six months at a time.

Moreno explained:

“When he executed the Plan election forms, Schachter essentially renegotiated the terms of his compensation with the company. Schachter elected to be compensated with a mixture of cash and restricted stock in 1995, and for one six-month period in 1996. He also elected to be paid wholly in cash for one six-month period in 1996. 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.”

Fully Compensated

When he left the company, the justice said, Schachter received all of the compensation that he had bargained for. Moreno agreed with the Court of Appeal that “the only thing that has not been ‘paid’ is something Schachter never ‘earned’—fully vested [company] stock.”

The justice went on to distinguish Suastez v. Plastic Dress-Up Co. (1982) 31 Cal.3d 774, holding that the right to vacation pay vests at the beginning of employment, so that an employee who leaves before his or her anniversary date is entitled to such pay on a pro rata basis. That principle cannot extend, Moreno said, to an incentive program designed to create an incentive for employees to remain with the company and perform “efficient and faithful service.”

The case was argued on appeal by Barbara Brudno of the Law Offices of Ashley D. Posner in Sherman Oaks for the plaintiff and Raoul D. Kennedy of Skadden, Arps, Slate, Meagher & Flom’s San Francisco office for the defendants.

The case is Schachter v. Citigroup, Inc., 09 S.O.S. 6303.


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