Schachter v. Citigroup, Inc.
Filed January 18, 2008,
Second District, Div. Seven
Cite as 2008 SOS 426

Incentive Compensation Plan with Forfeiture Conditions does not Violate Labor Code Secs. 201 and 202.

David Schachter worked as a securities salesperson for Salomon and Smith Barney, which is a subsidiary of Citigroup, Inc. On December 21, 1994, Schachter and others decided to participate in the company's incentive compensation plan called the Capital Accumulation Plan. This plan was intended by the company to encourage the retention of high-level employees.

According to the terms of the plan, it allowed the employees to use a portion of their earnings to buy shares in the company's stock.

The good part of the plan was that the stock could be purchased at a price below the publicly traded market price. On the other hand, the not-so-good part of it was that, if the employee resigned or became terminated for cause within a two-year vesting period, the employee forfeited the stock, as well as the money he or she used to pay for the stock.

Schachter failed to maintain his shares of restricted stock within the plan's two-year vesting period. Thus, he forfeited 82 shares of restricted stock and the money used to purchase these shares.

Schachter brought a class action lawsuit against Citigroup and Smith Barney, alleging that the Plan's violation of Sections 201 and 202 of the Labor Code in the Los Angeles County Superior Court.

The Trial Court granted the defendants' Motion for Summary Judgment. Plaintiff Schachter appealed to the California Court of Appeals, 2nd District Appellate Court.

The question in the case is, "do the forfeiture provisions of this voluntary incentive compensation plan violate Labor Code Sections 201 and 202?" These Labor Code sections require an employer to pay its employee all earned but unpaid compensation upon resignation or separation of the employee from the company.

The Appellate Court affirmed the trial court's grant of summary judgment of Citigroup, ruling that the plan's forfeiture conditions did not violate the Labor Code sections 201, 202 or other provisions of the Labor Code.

Court's analysis on this matter started with establishing the definitions of wages. It cited Labor Code Section 202, stating that wages include all amounts for labor performed by employees of every description, whether the amount is fixed or ascertained by the standard of time, piece, task, commission or other method of wage calculation.

The Court explained that this transaction was allowed under Labor Code's section 224. Since the funds were deducted for the purpose of, buying restricted stock and the deduction was done at the request of the employee and with his authorization.

The Court noted, "Even if Schachter did not receive cash, either directly or indirectly, and instead was 'paid a portion of his compensation in the form of shares of restricted stock', his wages were not deferred and then withheld. He received them."

The Court also declares that the financial product had a real value measured in part by the cost, the potential return and the risk associated with the investment.

Furthermore, the Court rejected Schachter's argument under Labor Code Section 212, regarding indebtedness. The Court explained that those shares were not given as instruments of indebtedness of compensation. To the contrary, they were the compensation. Schachter did not earn, and did not have the right to receive, either the restricted stock, or the funds used to purchase it because he had not fulfilled the requirement of staying with the company for two years, as stated in the plan.

Moreover, the Court rejected an argument based on Labor Code Section 219 that bars employers from contracting with employees for forfeiture of wages. According to the Court, there was simply no unlawful forfeiture of wages on violation of the Labor Code.