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California's high court backs restricted-stock pay program

November 3, 2009 |  7:00 am

A program that lets employees receive part of their pay in restricted stock doesn’t violate California labor laws, even if a worker can lose the stock by leaving the company before the shares vest, the state Supreme Court ruled.

The unanimous decision came Monday in a lawsuit filed by David B. Schachter, who worked as a stockbroker for Smith Barney Inc. from April 1992 to March 1996.

Schachter and other key employees in the company had the option of receiving a portion of their pay in restricted company stock at a reduced price. The voluntary plan required employees to agree that they would lose the stock -- and the cash they gave up by entering the plan -- if they resigned or were fired before the stock vested in two years, the court said.

Schachter resigned and lost stock that had not vested. He brought a class action lawsuit in 1998, arguing that the plan violated several sections of California’s Labor Code.

Among the sections he cited was a requirement that employers must pay departing employees all earned wages.

Justice Carlos R. Moreno, writing for the high court, said Schacter chose to enter the plan and knew the risks as well as the potential reward. “Here, Schachter’s actions -- not the company’s -- resulted in the loss of Schachter’s contingent incentive compensation," Moreno wrote.

Smith Barney became a unit of Citigroup Inc. in 1998 and this year was placed in a joint venture between Morgan Stanley and Citigroup.

The U.S. Chamber of Commerce and the Financial Markets Assn. sided with Citigroup in the case.

The attorneys who argued the case could not be reached for comment.

-- Maura Dolan