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Under California’s Broad Definition of “Wages,” Executive-Level Employees May Be Able to Pursue Labor Code Wage Claims to Recover Unpaid Stock Grants, Bonuses, and Other Forms of Compensation

Posted August 25th, 2021 by Andrew Melzer in Wages and Overtime Law.

It should be well understood that an employee, including an executive, deprived of compensation promised by the employer and earned by the employee has a potential cause of action for breach of contract. But did you know that such an employee may also have a wage payment claim under applicable labor laws, particularly the California Labor Code?

The consequences are significant and should empower individuals to seek recourse for withheld compensation.

While federal wage and hour protections are generally limited to minimum wage and overtime, many state counterparts sweep more broadly. For example, employees may be entitled by statute to their promised wages even if there is no minimum wage or overtime violation. They are able to pursue statutory claims for the withholding, denial, or delay in payment of wages earned and due and thereby recover the full compensation owed to them.

In California, for instance, the state’s wage payment provisions (Labor Code §§ 200, et seq.) require employers to pay wages in timely fashion and prohibit them from withholding any wage due to the employee, in whole or in part. Except in narrow circumstances, an employer cannot deduct from an employee’s wages or recoup those wages that have already been paid. And, when an employee leaves the job, the employer must immediately fork over any unpaid amounts.

But what does this have to do with executive compensation packages—or other forms of incentive pay? One might think that the term “wages” covers only one’s regular paycheck—the hourly pay or weekly salary received on a periodic basis. Not so. California broadly defines “wages” to include “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.” Labor Code § 200(a).[1]

Consistent with this definition, California courts have interpreted “wages” expansively. As they have distilled: “[A] wage is anything ‘promised as part of the compensation for employment’… ‘[W]ages’ also include those benefits to which an employee is entitled as a part of his or her compensation, including money, room, board, clothing, vacation pay, and sick pay.’” Naranjo v. Spectrum Sec. Servs., Inc., 40 Cal. App. 5th 444, 464 (2019); see also DLSE Manual § 2.4, https://www.dir.ca.gov/dlse/dlsemanual/dlse_enfcmanual.pdf. Consequently, “wages” encompasses executive compensation and other forms of incentive pay that laypeople might not ordinarily think of when they hear the term. See, e.g., Davis v. Farmers Ins. Exch., 245 Cal. App. 4th 1302, 1331 & n.20 (2016) (Labor Code’s wage payment provisions are applicable to “highly-compensated executives”; “wages” do not just include hourly pay or salaries, “but also bonuses, profit-sharing plans, and commissions”); On-Line Power, Inc. v. Mazur, 149 Cal. App. 4th 1079, 1085-86 (2007)  (executive salaries); Ware v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 24 Cal. App. 3d 35, 44 (1972), aff’d, 414 U.S. 117 (1973) (profit-sharing). This specifically includes stock awards, enabling employees to pursue a wage claim when the employer fails to honor its obligation to disburse a promised stock grant. See, e.g., Schachter v. Citigroup, Inc., 47 Cal.4th 610, 619 (2019) (compensation in the form of shares of restricted stock constituted “wages”); Bernstein v. Vocus, Inc., No. 14–cv–01561, 2014 WL 3673307, at *5 (N.D. Cal. July 23, 2014) (under Schachter, wages include “[i]ncentive compensation, such as bonuses and profit-sharing plans” and “shares of restricted stock”; thus, “Plaintiff’s allegations that Defendants failed to pay him salary, bonus, and stock is sufficient to state a claim under Labor Code section 203.”).[2]

So why does it matter? How does this add anything to a breach of contract remedy?

First, Labor Code violations typically carry civil penalties. If an employer repeatedly violates the law, these penalties can add up.

Second, and perhaps more importantly, an employee who prevails on a wage payment claim is entitled to reasonable attorney’s fees and costs. Labor Code § 218.5.[3] (Ordinarily, in a simple breach of contract action, fee-shifting is not available unless specified by the contract at issue. See Cal. Civ. Code § 1717.) This is based largely on a recognition that employees should not have to lay out substantial expenditures to recover compensation that should have been paid in the first place, thereby forfeiting a portion of the pay to which they are entitled. Instead, employees should recoup the lost wages in full—and the employer, whose conduct in flouting its statutory payment obligations precipitated the need for legal action, should foot the lawyer’s bill. This enables a make-whole remedy and properly allocates the burdens and costs of enforcement.

Notably, employees do not have to frame and plead the claims as a Labor Code wage payment action in order to avail themselves of the fee-shifting regime of § 218.5. Under that provision, what matters is substance, not labels. It expressly applies “[i]n any action brought for the nonpayment of wages, fringe benefits, or health and welfare or pension fund contributions.” Labor Code § 218.5. This means that fee shifting is available under § 218.5 when an employee recovers unpaid wages or benefits, even if the claim was styled solely as a breach of contract matter or succeeds only on a common law contractual theory. See, e.g., Clark v. United Emergency Animal Clinic, Inc., 123 Fed. Appx. 736, 738 (9th Cir. 2004); Milian v. Jet Source, Inc., 2012 WL 183132, at *7 (Cal. App. Jan. 24, 2012) (unpublished, non-citable). An employee need only request attorney’s fees and costs in the complaint in accordance with § 218.5(a).[4]

The caveat is that in order for bonuses, stock grants, and similar forms of incentive pay to become wages due, the employee must satisfy all applicable conditions for earning them. See, e.g., Neisendorf v. Levi Strauss & Co., 143 Cal. App. 4th 509, 522 (2006) (“[O]nce a bonus has been promised as part of the compensation for service, and the employee fulfills all the agreed-to conditions, the promised bonus is considered wages that must be paid.”); Sciborski v. Pac. Bell Directory, 205 Cal. App. 4th 1152, 1167 (2012) (advances on commissions: “once the express contractual conditions are satisfied, the commission is considered a wage and an employer cannot recoup the commission once it has been paid to the employee”); Schachter, 47 Cal. 4th at 621 (“Only when an employee satisfies the condition(s) precedent to receiving incentive compensation, which often includes remaining employed for a particular period of time, can that employee be said to have earned the incentive compensation (thereby necessitating payment upon resignation or termination).”). Thus, if a stock grant vests over time as the employee works for the company, with a certain amount earned each year, only the vested portion is generally recoverable.[5]

In summary, professional and executive-level employees who are denied their rightful compensation—including items such as bonuses, profit-sharing, and stock grants—are not limited to common law breach of contract remedies. Instead, they may pursue wage payment claims and thereby recover their reasonable attorney’s fees and costs on top of the actual lost compensation. Such employees are entitled to strong make-whole remedies when cheated by their employers.

One way in which this often comes into play in the situation of startup companies, where the primary form of compensation used to attract talent is not salary but stock in the new venture. If the employer disregards its promises and the employee is left holding the bag, applicable wage and hour laws and remedies are a vital tool to hold the company accountable.

Footnotes

[1] In turn, “labor” “includes labor, work, or service whether rendered or performed under contract, subcontract, partnership, station plan, or other agreement if the labor to be paid for is performed personally by the person demanding payment.” Labor Code § 200(b).
[2] Even severance or dismissal pay has been treated as “wages” under the Labor Code, despite the fact that it can arguably be regarded not as compensation for labor performed but as recognition for being prevented from working going forward or as consideration for the release of claims. E.g. Willig v. Exiqon, Inc., 2012 WL 10375, at *12-14 (C.D. Cal. Jan. 3, 2012) (collecting cases); Kelly v. Worth Holdings, 2017 WL 4156186, at *7 (N.D. Cal. Sept. 18, 2017); see also Miranda v. U.S. Security Assocs., Inc., 2019 WL 1960351, at *12-14 (N.D. Cal. 2019).
[3] Hence, in accordance with the precedents set forth in n.2, Labor Code fee-shifting may apply to claims for unpaid severance benefits. See Winterrowd v. Am. Gen. Annuity Ins. Co., 2004 WL 7333894, at *1 (C.D. Cal. Oct. 20, 2004); see also Winterrowd v. Am. Gen. Annuity Ins. Co., 565 F.3d 815 (9th Cir. 2009).
[4] To avoid any issues regarding adequate notice, it is preferable that the employee seek fees and costs in connection with the claim for unpaid compensation as well as part of a general prayer for relief. Cf. Shames v. Util. Consumers’ Action Network, 13 Cal. App. 5th 29 (2017) (denying fee-shifting under § 218.5 where request was expressly and specifically limited to a separate, unsuccessful claim).
[5] However, termination without cause during the vesting period may potentially give rise to a claim for breach of the implied contractual covenant of good faith and fair dealing or entitle the employee to seek a pro rata share of a partially-earned bonus. See, e.g., Schachter, 47 Cal. 4th at 622.

Andrew Melzer is a partner in the New York office of Sanford Heisler Sharp. Mr. Melzer is Co-Chair of the Firm’s wage and hour practice and has helped return millions of dollars of lost wages to employees in presuit negotiations, active litigation, and trials.
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