In a win for California employers, the California Court of Appeal held that stock options are not wages.
A stock option is a contractual right to buy company stock at a certain price regardless of whether the stock price increases. If the value of the stock increases, the option is more attractive since the person can buy the stock at lower price and immediately sell the stock at a higher price. For example, if an employee receives a stock option at $1 and the price increases to $2, and the employee exercises the option by buying the stock, the employee essentially doubled their earnings (by buying a $2 stock for $1). Conversely, Labor Code section 200, which defines “wages,” requires that “all amounts” paid as wages be “fixed or ascertained.”
In the instant case, stock options were given to the employee, and the value of the stock increased. But before the employee exercised the options (i.e., before he bought the higher-priced stock at the lower-option price), he was terminated. The company terminated the employee’s stock options upon the employee’s separation. The employee sued claiming, in part, he was deprived of “wages” in the form of stock options when the company extinguished his options when he was terminated. The Court of Appeal disagreed, ruling that stock options are not wages because their value is contingent on external factors and speculative—that is, stock options are not amounts that are fixed or ascertained to become “wages” as defined by the Labor Code.
Takeaway: California employers may lawfully terminate stock options at the time of separation without fear of waiting time penalties.
Notably, this holding does not change the rule that vested restricted stock/units cannot be forfeited upon separation.
This post provides general information and does not constitute legal advice to any person with respect to any circumstance. This post does not create an attorney-client relationship with any person.
For more information on this topic, please contact Steven P. Gallagher at stevengallagher@foxrothschild.com or a member of the firm’s Labor & Employment Department.