California Supreme Court Upholds Voluntary Employee Incentive Compensation Plan

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On November 2, 2009, the California Supreme Court handed down its decision in Schachter v. Citigroup, Inc. At issue was Citigroup's voluntary employee incentive compensation plan that provided employees with shares of restricted company stock at a reduced price in lieu of a portion of the employee's annual cash compensation. Under the Plan, the employees voluntarily agreed that, should they resign or be terminated for cause before their restricted shares of stock vest, they would forfeit the stock and the portion of cash compensation they directed be paid in the form of the restricted stock.

The Supreme Court ruled that the Plan's forfeiture provision did not violate California Labor Code sections which require that employees be paid all earned, unpaid wages on termination or resignation and prohibit agreements that purport to circumvent that requirement. The Court concluded that the forfeiture provision did not run afoul of the Labor Code because no earned, unpaid wages remained outstanding on termination according to the terms of the Plan.

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