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OK to tie incentives to continued employment

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in Employee Benefits Program,Human Resources

The Supreme Court of California has ruled that employers are free to develop incentive payment plans that reward loyalty by requiring employees to stay for a period of time before earning the full benefit.

Recent case: David Schachter worked for Citigroup and chose to participate in a voluntary employee incentive compensation plan that provided employees with shares of restricted company stock at a reduced price in lieu of a portion of his annual cash compensation.

Employees agreed that if they resigned or were terminated for cause before the stock vested, they would forfeit the stock and the portion of cash compensation they directed to be paid in the form of restricted stock. Employees had to work an additional two years before they gained control of the stock.

Schachter quit before the stock vested. He sued, alleging that Citigroup owed him the cash he would have received if he hadn’t participated in the plan. He cited the California Labor Code, which requires employers to pay all earned wages when employees are terminated or resign.

The Supreme Court of California disagreed with his argument. It reasoned that because employers are free to reduce wages for at-will employees, the effect of signing up for the incentive plan was to cut the employee’s wages. It also reasoned that the parties then contracted to provide the stock if all the conditions in the agreement were met. Schachter broke his end of the bargain by quitting and wasn’t entitled to the benefit he would have received had he continued to work for the company. (Schachter v. Citigroup, No. S161385, Supreme Court of California, 2009)

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