Are Stock Options and Stocks Considered Wages?

There has been an increase in companies that compensate employees with stock options or equity (e.g. stock). This practice is used to reduce the financial burden on cash-strapped startups or to incentivize employees to maximize a company’s financial success. Because it is unclear if stock options or equity have tangible value, there is ambiguity regarding whether these items are considered wages under California law.

Whether stock options or equity are classified as wages is important because California law prohibits employers from reducing, denying, or taking back a worker’s rightfully earned wages. Thus, workers will receive additional legal protections if the law considers their stock options or equity to be wages. Currently, two cases have discussed this issue.

Stock Options and Equity Are Not Wages:

In IBM v. Bajorek (1999) 191 F.3d 1033, the Ninth Circuit Court of Appeals held that equity is not considered a wage because it has no monetary value. In this case, the Plaintiff, Dr. Bajorek, claimed that his employer, IBM, illegally deducted his wages by cancelling the stocks the company granted him. As part of his employment agreement, IBM provided Dr. Bajorek with a stock option plan. However, the plan required him to return any stock option profits if he joined a competitor within six months of exercising his stock options to purchase IBM stock. After exercising his stock options, Dr. Bajorek immediately left to work for a competitor. In response, IBM notified him that his stocks were being cancelled.     

Dr. Bajorek filed a lawsuit in California state court seeking a declaratory judgment that he was in compliance with the stock option agreement. IBM countered by filing a lawsuit in New York state court for a breach of contract for violating the agreement. Both cases were removed to federal court, and then consolidated in California. When deciding which state’s laws governed these issues, the federal district court determined that California law would be used to decide the dispute.

Dr. Bajorek argued that under California law, IBM’s actions violated California’s prohibitions against: 1) unlawful restraint of trade; and 2) deduction of wages paid to an employee. The district court granted judgment on the pleadings for Dr. Bajorek and held IBM’s reimbursement provision to be unenforceable because it served as an unlawful restraint on Dr. Bajorek’s ability to practice his trade.

On appeal, the appellate court found IBM’s stock option agreement to be valid under California law. First the court found that a limited restraint on trade was not illegal. Only a complete restraint is illegal, and Dr. Bajorek’s agreement only prevented him from working for a competitor for a six month period.

Next, the court analyzed California’s prohibition against an employer illegally deducting an employee’s wages by collecting “any part of wages theretofore paid by said employer to said employee.” To determine if IBM unlawfully deducted Dr. Bajorek’s wages, the Court needed to determine if his stocks constituted wages. To answer this question, the court focused on the definition of wages as “all amounts for labor performed by employees of every description, whether the amount is fixed or ascertained by the standard of time, task, piece, commission basis, or other method of calculation.”

The appellate court concluded that Dr. Bajorek’s stocks were not wages because stocks have no fixable or ascertainable worth due to their value depending on the “vagaries of stock market valuations” on the date of purchase. Furthermore, the court also reasoned that stock options have no value because stock options are a contractual right to purchase stock in the future. The court considered a contractual right to be different from earned wages with a definite value.

Stock Options and Equity Are Wages:

Ten years later, in Schachter v. Citigroup (2009) 47 Cal.4th 610, the California Supreme Court held that stocks are wages under California law. The court discussed whether an employer, Citigroup, failed to pay employees all wages due upon their separation from employment when employees forfeited unvested stocks at the end of their employment.

As part of an employee’s compensation plan, Citigroup provided certain employees with the choice to purchase company stocks at a reduced price for a portion of their annual compensation. However, the employee agreed to forfeit his or her stocks, and the compensation contributed for the stocks, if he or she was terminated for cause or resigned before the vesting of the stocks. Employees filed a class action alleging that the agreement violated an employer’s legal duty to pay all wages upon separation from employment because Citigroup failed to repay the compensation contributed to the unvested stocks.

On summary judgment, the trial court held that the agreement did not violate the law. The Court of Appeal affirmed the trial court’s grant of summary judgment for Citigroup. On review, the California Supreme Court held that Citigroup did not violate the law. Nevertheless, the court held that stocks are wages because wages include “other benefits to which [an employee] is entitled to as a part of his compensation.” The reason that Citigroup did not violate the law is because an employer may condition compensation upon completion of specific terms. Since employees voluntarily chose to receive a portion of their compensation in the form of stock, employees assumed the risk of loss if they failed to satisfy the necessary terms to acquire full ownership of the stock.

Split Between the Courts

As it stands, California and federal courts differ regarding whether stock options or equity are classified as wages. If you feel that you have not been paid your rightful wages, please feel free to contact Hunter Pyle Law for a free consultation at (510) 444-4400 or contact us today.