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.
Are You a Salaried Employee If You are Paid by the Hour?
Under California law, employers must pay workers overtime when work is performed: 1) over forty hours in a workweek; 2) over eight hours each day; or 3) on the seventh consecutive day in a workweek. However, employees that fall under the professional, executive, and administrative exemptions may be excluded from earning overtime compensation. For an employer to claim that its employee falls within these exemptions, the employee’s work conditions must satisfy both the “salary basis” and “job duties” test. The purpose of this article is to discuss the legal requirements of the “salary basis” test.
Although it is commonly understood that a salary is a fixed amount of pay, the legal definition of a salary is much more complex. These requirements are set forth in the “salary basis” test. To constitute a salary, an employee must be paid: 1) a set amount of compensation; 2) that is not subject to any reductions or variations. If an employee’s compensation fails to satisfy this test, the employee must be paid overtime. Employers cannot avoid paying overtime by improperly labeling an employee’s pay as a salary.
What is a Salary?
In Negri v. Koning & Associates (2013) 216 Cal.App.4th 392, the California Sixth District Court of Appeals held that a salary must be a predetermined amount of pay that is not subject to reductions or variations. However, there are specific exceptions, which are related to absences, under the Code of Federal Regulations[1].
The key issue in this case is whether a compensation system based on an hourly rate of pay qualifies as a salary. Mark Negri, the Plaintiff, was an insurance adjuster employed by Koning & Associates. He was paid an hourly rate, twenty-nine dollars per hour, with no guarantee of the minimum number of hours to be worked. Whenever Mr. Negri worked more than forty hours in a workweek, his employer only paid him at his hourly rate instead of an overtime rate of one-and-one half times his hourly rate. His employer argued that Mr. Negri was not entitled to overtime pay because he was an exempt administrative employee.
Mr. Negri argued that he was entitled to overtime pay, because his compensation structure did not comply with the “salary basis” test. Due to being paid on an hourly basis, his pay was not fixed because it fluctuated based on the number of hours worked each week. In contrast, his employer argued that Mr. Negri was paid a de facto salary because he always worked sixty hours each week. Therefore, his salary was fixed because it was predetermined and not subject to reduction or variation. Furthermore, Mr. Negri’s employer emphasized that it never reduced Mr. Negri’s de facto salary by reducing his workload.
Due to a technical nuance that occurred during the lawsuit, the appellate court held that Mr. Negri was not paid a salary. As the case proceeded through litigation, both the employer and Mr. Negri stipulated that it never paid Mr. Negri a fixed amount of compensation. A stipulation is when a piece of evidence is submitted to the court as the truth. In the stipulation, the employer stated, “[I]f he [Mr. Negri] worked fewer claims ‘he made less money than if he worked more claims.’” Essentially, the employer admitted that Mr. Negri was never provided a fixed amount of pay because it was possible for his compensation to change based on the number of hours he worked. Despite Mr. Negri prevailing on his claim, the appellate court noted that employees with a fixed salary may receive extra payment without losing their exemption.
Conclusion
As it stands, a salary is a predetermined amount of pay: 1) that is not subject to reductions or variations; and 2) twice the state minimum wage. However, employers may pay an exempt employee additional compensation beyond the predetermined salary. An example of this is a salaried employee who receives two thousand dollars bi-weekly, but also receives additional pay that is lower than the minimum wage for each hour worked over forty hours a week.
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 inquire@hunterpylelaw.com.
[1] 29 C.F.R. § 541.602(b)
Recent Arbitration Decisions: Wins for Employees and Employers
A Win for Employees:
In Sprunk v. Prisma LLC, 14 Cal. App. 5th 785 (2017), the court confirmed that an employer’s right to compel arbitration against its employees is not absolute. In a detailed decision from the Second Appellate District Court of Appeal, the court found that an employer had waived the right to compel arbitration. The employer in that case filed a motion to compel arbitration against the individual named plaintiff. Fearing that the trial court would order the parties to arbitrate on a class basis, the employer withdrew its motion to compel. The parties then proceeded to litigate the case for nearly three years. The court granted the employee’s motion for class certification, and soon thereafter the employer made a new motion to compel arbitration against all of the class members who had signed arbitration agreements. The trial judge denied the employer’s motion, finding that it had waived its right to compel arbitration based upon its delay in seeking arbitration of the employee’s individual claims and that the delay was both unreasonable and prejudicial.
California’s “Day of Rest” Requirements
In an important decision for California employees and employers, the California Supreme Court issued its opinion in Mendoza v. Nordstrom, 2 Cal. 5th 1074, 393 P.3d 375 (2017) clarifying the Labor Code’s “day of rest” requirements. The Court was addressing questions posed by the Ninth Circuit Court of Appeals regarding how to interpret California Labor Code sections 551 and 552. See Mendoza v. Nordstrom, Inc., 778 F.3d 834 (9th Cir. 2015). Labor Code section 551 states that “every person employed in any occupation of labor is entitled to one day’s rest therefrom in seven.” Labor Code section 552 prohibits employers from “causing their employees to work more than six days in seven.” However, Labor Code section 556 provides that employers do not have to provide a day of rest “when the total hours of employment do not exceed 30 hours in any week or six hours in any one day thereof.”
Rest Periods Must be Separately Compensated for Commissioned Employees
In Vaquero v. Stoneledge Furniture LLC (Feb. 28, 2017, B269657) __ Cal.App.4th __ (“Slip Op.”), the Court of Appeal explained that an employer’s obligation to separately compensate employees for rest periods extends to employees who are paid on a commission basis. This decision is in accord with other Court of Appeal decisions that require employers to separately compensate rest periods for employees who are paid on a piece-rate basis. (See Bluford v. Safeway Stores, Inc. (2013) 216 Cal.App.4th 864; Gonzalez v. Downtown L.A. Motors, LP (2013) 215 Cal.App.4th 36; see also Labor Code § 226.2.)
In Vaquero, the court analyzed IWC Wage Order No. 7, which applies to the Mercantile Industry, including retail and wholesale salespeople. Section 12 of Wage Order No. 7 says that employees must receive 10 minutes of rest time for every four hours worked, or major fraction thereof, which must be counted as hours worked for which there shall be no deduction from wages.
Rest Period Pay and Overtime Premiums for Piece-Rate Workers
A complicated and developing area of California wage and hour law involves how to calculate wages and premium pay for piece-rate workers. In this post, we will 
explain the calculations for rest period wages and overtime premiums for piece-rate workers.
Many California workers are compensated on what is known as a “piece-rate” basis. Piece-rate means that a worker’s pay is based on a specific amount paid for completing a particular task or making a particular piece of goods. This could include truck drivers who are paid based on the number or type of loads delivered, factory workers who are paid based on the number of widgets completed, or construction workers, such as plumbers or electricians, who are paid based on the number of installations they do.
Even though piece-rate workers are not paid by the hour, they are still entitled to the protections provided by the California Labor Code. These protections include overtime premium pay for more than eight hours of work in a day or 40 hours in a week, meal periods before the end of fifth hour of work, separate compensation for required rest periods, and wage statements showing, among other things, the number of pieces completed, the applicable piece rates, and overtime and rest period pay.
But if someone is paid by the piece, how is their hourly wage calculated for the purpose of determining the amount of wages for paid rest periods and overtime premiums?
Morris v. Ernst & Young -The Ninth Circuit Follows D.R. Horton
In an important decision for workers seeking to join together to enforce their employment rights, the Ninth Circuit Court of Appeals ruled in Morris v. Ernst & Young (https://cdn.ca9.uscourts.gov/datastore/opinions/2016/08/22/13-16599.pdf) that employers can not impose concerted action waivers in mandatory arbitration agreements. The Ninth Circuit held that employers violate Sections 7 and 8 of the National Labor Relations Act (“NLRA”) by requiring employees to waive their right to participate in “concerted activities” such as class and collective actions. With Morris, the Ninth Circuit joins the Seventh Circuit (Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. 2016)), which was the first federal Circuit Court to adopt the National Labor Relations Board (“NLRB”) position in D.R. Horton, Inc., 357 NLRB No. 184 (2012).
In Morris, employees filed a class and collective action alleging that their employer had misclassified certain employees as exempt from overtime in violation of the Fair Labor Standards Act (“FLSA”) and California labor laws. These employees were required to sign agreements that had a “concerted action wavier” that required them (1) to pursue legal claims against Ernst & Young exclusively through arbitration, and (2) to arbitrate as individuals in “separate proceedings.”
The Court explained that:
This case turns on a well-established principal: employees have the right to pursue work-related legal claims together. 29 U.S.C. § 157; Eastex, Inc. v. NLRB, 437 U.S. 556, 566 (1978). Concerted activity – the right of employees to act together – is the essential substantive right established by the NLRA. 29 U.S.C. § 157. Ernst & Young interfered with that right by requiring its employees to resolve all of their legal claims in “separate proceedings.” Accordingly the concerted action waiver violates the NLRA and cannot be enforced.
Although the Federal Arbitration Act (“FAA”) creates a “federal policy favoring arbitration,” it also has a “savings clause” that allows courts to refuse to enforce arbitration agreements that interfere with or defeat rights provided by other federal laws – federal rights such as the right to engage in concerted activity under the NLRA. The problem with Ernst & Young’s arbitration agreement was not that it prevented employees from proceeding with their claims in court, but that it forced workers to waive their right to pursue claims collectively under the NLRA or other federal laws, such as the FLSA. As Chief Judge Thomas explained:
The same infirmity would exist if the contract required disputes to be resolved through casting lots, coin toss, duel, trial by ordeal or any other dispute resolution mechanism, if the contract limited resolution to that mechanism and required separate individual proceedings.
Other circuit courts have taken a quite different position and have enforced employers’ concerted action waivers under the FAA. See Cellular Sales of Missouri, LLC v. N.L.R.B., 824 F.3d 772, 776 (8th Cir. June 2, 2016); Murphy Oil USA, Inc. v. N.L.R.B., 808 F.3d 1013 (5th Cir. 2015); Owen v. Bristol Care, Inc., 702 F.3d 1050, 1053-54 (8th Cir. 2013); D.R. Horton, Inc. v. NLRB, 737 F.3d 344, 361 (5th Cir. 2013); Sutherland v. Ernst & Young LLP, 726 F.3d 290, 297 n.8 (2d Cir. 2013).
The U.S. Supreme Court is likely to take up this important issue now that there is a split of opinion between the Circuit Courts.
Representative Evidence May Be Used to Prove Class Action Wage Claims
In a case of national importance, the U.S. Supreme Court ruled that workers could use representative or statistical evidence to prove their claims for overtime under the Fair Labor Standards Act (“FLSA”). Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036 (2016) (“Tyson Foods”). The case involved workers at a meat-processing plant in Iowa. They claimed that Tyson Foods did not pay them for the time they spent putting on and taking off (“donning and doffing”) protective equipment for their dangerous work, or for the time they spent walking to and from their workstations in the plant. At trial the workers used a report from an industrial relations expert to show the amount of time they spent donning and doffing. The expert had done videotaped observations to find out how long these activities usually took and then averaged the times. The average times were added to each employee’s timesheets to determine which employees worked more than 40 hours per week if their donning and doffing time was taken into account. The trial court accepted this evidence and the jury awarded the workers $2.9 million in unpaid wages. (more…)
A Bright Spot for Workers in Tuesday’s Dismal Election Results
Despite the lingering outrage and disapproval many of us have regarding the Republican victory at the polls last Tuesday, there were some major wins for workers across California and the country which should be embraced and not overlooked.
Raising Minimum Wages:
Starting local, both Oakland and San Francisco voted to raise their local minimum wages. Oakland’s minimum wage will go up to $12.25 next year and San Francisco is now on track to gradually increase its minimum wage to $15 by 2015. (more…)
Unpaid TV Interns Settle Large Class Action Against NBCUniversal
Last year, a federal judge in New York ruled that Fox Searchlight Pictures violated minimum wage laws by not paying interns that worked on the set of the movie “Black Swan.” In holding that employers could not simply avail themselves of free labor by calling employees “interns,” this case opened the pathway for other intern cases against entertainment industry giants.
In the latest victory, a group of former interns reached a 6.4 million dollar settlement with NBCUniversal this week, representing the largest settlement yet in this new streak of cases. While the original complaint involved New York interns, the case grew to include plaintiffs from other states. This recent settlement makes clear that companies need to change the blanket exploitation of interns across industries and across the country, or pay the significant price that inevitably come with the growth of these cases.