Employers May Not Have to Compensate Employees for Incentive Based Compensation Upon Termination

Generally, when an employee quits or is fired, the employer must immediately pay all earned and accrued compensation, including wages, commissions, vacation pay and productivity-based bonuses. However, an employer need not pay amounts that have not yet been earned, such as commissions or bonuses where the employee has not satisfied the conditions necessary to earn the commission or bonus.

Schachter v. Citigroup, Inc.
In a recent case, an employer offered a voluntary stock purchase plan to its employees as an incentive for the employees to work efficiently and stay with the company. Under the plan, employees could designate a percentage of their salary to be used to purchase company stock. If the employee remained with the company for two years following purchase of the stock, title to the shares vested in the employee. On the other hand, if the employee quit or was fired for cause before the end of the two-year period, the employee forfeited the shares and the wages used to purchase the shares. If the employee was fired without cause, the employee still forfeited the stock but received, without interest, a cash payment equal to the amount the employee had invested in the stock.

The plaintiff was an employee who signed up for the stock purchase plan but voluntarily quit less than two years after he purchased the stock, thereby forfeiting all his stock and the wages he used to purchase the stock. He sued his employer in a class action lawsuit, alleging the employer failed to pay earned wages. The employee argued that, since he had used earned wages to buy the stock and since he forfeited those wages when he quit less than two years later, he had not really been paid the wages at all.

The California Supreme Court rejected that argument, explaining that eligibility to receive incentive based compensation is determined by the specific terms of the plan. Because incentive based compensation rewards future, as opposed to past, conduct, it is not “earned (and the employer has no obligation to pay) until the conditions set forth in the plan have been met. Since the employees in the class action did not continue their employment for the full two years after they voluntarily purchased stock through the company incentive plan, they never met the conditions set forth in the plan and they forfeited the stock and the wages used to purchase the stock.

Lessons for Employers
Incentive based compensation is not earned unless and until the terms of the incentive plan have been satisfied. Accordingly, it is very important that the terms of your incentive-based plans be clear as to any conditions that must be met to earn the compensation. Regardless of the terms of your plan, however, you cannot fire an employee without cause simply to prevent the employee from earning the incentive based compensation. An incentive based plan constitutes a contract and all parties have an obligation of good faith and fair dealing.