Page 6 – Adishian Law

Today the Division of Labor Standards Enforcement (“DLSE”) published a template that employers can use in order to comply with the new notice requirements set forth in Labor Code section 2810.5. A Word version can be downloaded here and a PDF version can be downloaded here. www.dir.ca.gov/DLSE

All California employers are required to provide a notice to all employees hired beginning on January 1, 2012 that complies with the requirements of section 2810.5. The new law required the Labor Commissioner to publish a template for employers to use in order to comply with the new law. For more information regarding the notice, and the new law, see my previous post.

I’ve only had a chance to do a quick review of the template, but one area of new information that the DLSE is apparently requiring on the notice is whether the “employment agreement” is oral or written in the wage information section of the template. The new Labor Code section 2810.5 did not require this to be on the notice to the employee, but the law does provide that there may be “[o]ther information added by the Labor Commissioner as material and necessary.” I am wondering if the fact that all employers are required to provide this information on the form necessary means that the “employment agreement” is therefore always going to be written.

In this article we review an unpaid bonus in the context of an MBO plan. An unpaid bonus claim is straightforward. The Company promised the employee a bonus for hitting certain targets. The employee hit the targets. The Company failed to pay, resulting in a claim for unpaid bonus. The unpaid bonus can run from low thousands to hundreds of thousands of dollars based on employee role and company size.

What is an MBO Compensation Plan?

Also known as a “bonus plan,” “quota plan,” “incentive compensation plan,” “performance based compensation plan” and an array of other terms, “MBO” literally means management by objective, and in practice refers to any compensation plan where total compensation is determined based on a “pre-set” formula tied to volume, gross margin, revenue or another objective metric or metrics. MBOs are commonly used for the employees working in sales, business development or the executive suite.

Everybody Wins, Right?

Employers like MBO plans because if the employee does not perform, then typically no additional compensation is due under the MBO plan, which helps the Employer match revenue and expenses. Employees love MBO plans because there is theoretically no limit on how much money they can make. These plans appeal to the enterprising, self-starter who wants to work hard, and get a clear, direct reward for his or her performance.

Where It Goes Wrong

It all seems so easy, how can there be any problems? Issues arise when the performance period (whether quarter or year) comes to a close, performance has been delivered and it is time to measure performance and deliver on payment promises. For the employee, there is an obvious motivation to get as many transactions as possible to count towards their totals. For the employer, there is an opposing motivation to lower it payment obligations either by (1) aggressively applying the MBO by using any ambiguities to disqualify deals or (2) retro-actively revising the MBO outright (when management wishes to revise the MBO plan retroactively for any number of reasons — these revisions only mean one thing, compensation paid to the employees covered by the MBO plans, in general and in specific, is going DOWN.).

This situation occurs frequently across companies of all shapes and sizes and can quickly cause the employment relationship to deteriorate. In many cases, the employee will claim that the employer has received all the benefits (i.e. new revenue), and is now failing to deliver on it payment promises. Likewise, in such cases the employer will claim that the employee is counting improper deals, claiming credit for the performance of other employees and/or even engaging in unethical behavior!

If you find that your compensation plan has been retroactively revised, or if your employer has failed to pay bonuses or other compensation that is owed to you, we recommend that you consult with an attorney immediately.

About Adishian Law Group, P.C.

Adishian Law Group is a California law firm with a statewide practice in the areas of Corporate law, Employment law, Real Estate law and Mediation Services. Adishianlaw.com is one of the oldest continually operating law firm websites on the Internet. The firm serves its clientele via three offices located in the major business hubs of El Segundo, Palo Alto and San Francisco. As of March 2013, Adishian Law Group, P.C. has represented individual and corporate clients located across 20 California counties, 4 States outside of California and 9 foreign countries — in over 340 legal matters.

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In this article we tackle the question: “Are stock options wages under California law?”

The Definition of Wages in California

Under California Labor Code §200 wages are defined 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.” Further, California courts have specifically held that a “bonus” constitutes wages. See Ralphs Grocery Co. v. Sup. Ct. (Swanson) (2003) 112 Cal. 4th1090, 1103, 5 Cal. Rptr. 3d 687, 697 International Business Machines Corp v Bajorek. Pursuant to California Labor Code §201 et. seq., if an employer discharges an employee, the wages earned and unpaid at the time of discharge are due and payable immediately. The California Labor Code goes on to provide for waiting time penalties, interest and attorneys’ fees should an employer fail to timely page wages in whole or in part.

Traditional Rule: The “Fixed or Ascertainable” Test

In 1999, stock options were held to not fall within Labor Code § 200 because they are not “amounts” of money, and their value cannot be ‘fixed or ascertainable.’ Int’l Bus. Machines Corp. v. Bajorek (191 F3d 1033, 1039-1040). The Court in IBM wrote:

“The statute does not apply because its words read literally and in light of its purposes do not apply — stock options are not “wages.” Wages are defined by the statute as “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.” *fn17 Stock options are not “amounts.” They are not money at all. They are contractual rights to buy shares of stock. . . . The amount of money for which the shares can be sold on the market varies unpredictably from time to time, so it is not “fixed or ascertainable” by any method of calculation when the agreements are made or exercised. . . . they ordinarily do not give rise to an expectation of a calculable sum of money. *fn18. The value of the stock awarded in options may be as much affected by the fortuities of stock market behavior as by the profitability of the company.”

Does the IBM decision still make sense?

Int’l Bus. Machines Corp. v. Bajorek was decided in 1999, three years before Sarbanes-Oxley and about six years before US GAAP adopted the standard practice of “expensing” the value of stock options.

If stock options can in fact be “expensed” — then it must be that Companies are capable of assigning options a “fixed or ascertainable” value (either through Black-Scholes, the binomial model or some other methodology). Thus, if stock options are “fixed or ascertainable”, then it would seem to follow naturally that they are wages and subject to all the protections afforded to employees under the California Labor Code.

Examining the contrary position, saying that stock options are “fixed or ascertainable” for financial reporting purposes but not “fixed or ascertainable” for the purposes of calculating wages under law would seem to contort reason. In fact, to our understanding, that is the very purpose of “expensing” options — so that the shareholders know how much the Company is paying in wages via stock options!

Implications for Employees with Stock Option Compensation

It is well settled that California public policy requires the prompt payment of wages. With the development of significant secondary markets for securities in privately held Companies, we believe that the recognition of stock options as wages has potentially significant impact for owners and employees in start-up companies in Silicon Valley and elsewhere where compensation packages are typically well-below market in salary and heavily weighted with stock options. We also believe that this issue is significant for Senior Executives of publicly-traded Company whose compensation consists of significant stock option grants. Some questions to consider:

What if your stock options are vested but unexercised and you are terminated?
What if you are terminated just prior to your first block of stock options vesting (e.g. cliff vesting)
What if you are terminated just prior to additional stock options becoming vested?
What if your vested stock options expire after your termination?

What if we substitute the words “earned wages” for “stock options,” in the preceding questions? Does your answer change?

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California is home to over 35,000,000 people. With all those real estate transactions happening in the State, it has become common for an allegation of a “failure to disclose” to arise after escrow has closed on a residential sale (e.g. condo or single family residence). This article does not address any failures to disclose in commercial transactions.

What should you do if you believe a Seller has “failed to disclose” a material item?

California courts have answered this question by empowering a the Buyer with a common sense choice, called an “election of remedies” — the Buyer can (1) file a Complaint for Rescission or (2) Affirm the Contract and Sue for Damages. In English, Option 1 means that a Buyer can ask a Court to order the Seller to take the property back and repay the Buyer (with certain credits and offsets for the time period the property was owned by the Buyer), such that both parties are returned to their prior positions before the sale. Option 2, means that a Buyer can simply elect to keep the property and sue the Seller for damages (i.e. money). (The calculation of damages will be the subject of another post).

Liability v. Damages

The law makes a fundamental distinction between liability and damages. Liability means that a party is legally responsible for the “damages” caused by his wrongful act (i.e. he/she broke the law). Damages is a legal attempt to quantify the harm so that a Court can order the party liable to pay money.

In some failure to disclose cases, there may be liability but no damages, and in such cases the Courts want the parties to move on with their lives, even where one party clearly failed to disclose something that they should have disclosed. In such cases, the rule boils down to “no harm, no foul” (or “he / she lied, but so what”).

In other failure to disclose cases, there can often be SUBSTANTIAL AMOUNTS of money at stake, climbing into the HUNDREDS OF THOUSANDS or even MILLIONS!

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Selling a minority interest in a privately held business in California must be handled thoughtfully. First, if you are able to sell a minority interest in a privately held business for a profit (whether small or substantial) you are already on a good path. This article addresses some considerations for an individual minority owner who is also an employee.

The good news is that you are getting paid for your hard work and getting a return on your investment. These are the rewards that capitalism provides. The bad news is that your Company may try to limit your ability to own and operate a similar business for a period of years or within a specific geographic region through a non-compete agreement.

You may say, “Wait, I read ‘Non-Competition Clauses In California: It’s No Contest after Edwards,’ which says non-compete agreements are void in California.” They are ….for pure employees. However, there are narrow exceptions under 16601, 16602 and 16602.5 which provide that a seller of “substantially all” of his/her/its assets, goodwill or interest in a business “may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold, or that of the business entity, division, or subsidiary has been carried on, so long as the buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carries on a like business therein.”

Here, there are elements of both the employee relationship and the owner relationship. Despite being an “owner” many “owner-employees” are not financially independent such that they can afford to not work for an extended period of time, even with a substantial payout from the sale of their shares — taxes, mortgages, school tuition and debt incurred during the formation and growth of the business all add up quickly. Therefore, the owner-employee must tread carefully so as to not restrict his or her future ability to earn a living or maintain his or her lifestyle when agreeing to sell his or her shares.

On the one hand the owner-employee is often not required to agree to any and every restriction, on the other hand the employer is often not required to repurchase the shares. The “may“ language will naturally result in a negotiation of the future restrictions on the activity of the owner-employee, which will often become a material business point affecting the purchase price paid for to the owner-employee for the shares or whether the sale will even be consummated at all.

Adishian Law Group, P.C. assists owners of privately held companies in the negotiation and sale of their shares or membership interests to maximize the value of their ownership interest while allowing them reasonable freedom to pursue their next entrepreneurial dream or investment. If you are contemplating the sale of your interest in a corporation, limited liability company or partnership, we recommend that you consult and attorney before concluding the purchase and sale agreements.

About Adishian Law Group, P.C.

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Selling a your minority interest in a privately held business in California must be handled thoughtfully. First, if you are able to sell a minority interest in a privately held business for a profit (whether small or substantial) you are already on a good path. This article addresses some considerations for an individual minority owner only (e.g. not an owner-employee).

You may say, “Wait, I read ‘Non-Competition Clauses In California: It’s No Contest after Edwards,’ which says non-compete agreements are void in California.” They are ….for employees.

However, there are narrow exceptions under 16601, 16602 and 16602.5 which provide that a seller of “substantially all” of his/her/its assets, goodwill or interest in a business “may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold, or that of the business entity, division, or subsidiary has been carried on, so long as the buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carries on a like business therein.”

Due to the “may“ language this will naturally result in a negotiation of the future restrictions on the activity of the seller, which will often become a material business point affecting the pruchase price paid for the Seller’s shares or whether the sale will even be consummated.

About Adishian Law Group, P.C.

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The concept of ownership is deeply woven into the American Dream — e.g. own a home, own public stock, own bonds, own a business — so deeply woven in fact that sometimes “ownership” becomes the goal regardless of the consequences attendant to that “ownership.” Yes, when done properly, with due attention to the risks, rewards and ROI (return on investment), ownership can create equity expansion and increase net worth like few other opportunities in our economy.

However, poorly thought out investments in privately held Companies can lead to “dead money”, where the only “return” is pride of ownership and you cannot get your money out. That is, you get to tell your friends and family that you are an “owner of this Company” but in fact you see no financial benefit to this ownership at all! Even worse, such investments can result in a complete loss of the capital invested. Either way, the money is effectively gone, and you are unable to use it in another productive investment. Bad result.

Some points to consider before investing in a privately held company:

Will I ever see a return on my investment?
How will I see that return? (Dividends, interest, appreciation?)
How likely is it that I will actually see that return?
Will I ever get my original investment back?
Can I sell my stock to somebody if I want/need my money (or some of it) back?
At what price can I sell my stock?
How long will that take?
There are many other issues to consider as well.

Adishian Law Group, P.C. assists investors in privately held companies in maximizing the value of their ownership interest and minimizing the risk of capital loss or “dead money.” We assist with the “capital allocation decisions” for both majority and minority shareholder positions, as well as subsequent ongoing management of these investments. If you are contemplating an investment in a privately held company, or you are already a minority investor, we would be happy to talk with you about your options for increasing the value of your shares.

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In this article we revisit the topic of California non-competition agreements (also referred to as California non-compete agreements).

In the recent Silguero case, the California Court of Appeal for the Second District was presented with a twist on a recurring issue….that is, the enforceability of non-compete agreements in California. (See this blog’s earlier post, California Non-Compete Agreements).

Summary Facts:

In Silguero, the Plaintiff was employed as a sales rep for Company A. During her employment with Company A, Silguero was required to sign an agreement which prohibited her “from all sales activities for 18 months following either her departure or termination.” Silguero was eventually terminated from Company A, and she subsequently found employment with Company B. Thereafter, Company A contacted Company B and informed Company B that Silguero had signed a confidentiality/noncompete agreement with Company A, which prohibited Sugiura from all sales activities for 18 months following her departure from Company A. As a result of this communication from Company A., Company B terminated Silguero. Silguero sued Company B under various theories, including a Tameny claim (termination in violation of California public policy). The lower court granted Company B’s demurrer without leave to amend and Silguero appealed.

Holding:

The Second District reversed and remanded as to the Tameny claims, holding that Silguero had a viable Tameny claim against a subsequent employer based on public policy violation of California BPC 16600.

We’ve seen this fact pattern prior to the Silguero ruling, and we believe that it is not an uncommon practice in California.

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EL SEGUNDO, CA (October 1, 2010)—”We believe that social media is one of the fastest growing methods by which people connect with professional service providers,” says Chris Adishian, President of the Adishian Law Group headquarted in El Segundo, CA. “We look at Twitter as a tool that allows us to better serve our clients,” he explains.

Like most industries, the legal industry is changing ever faster. Adishian Law Group embraces this rate of change and makes strategic use of the latest technology in all aspects of its practice. States Adishian, “In his iconic book, Good

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to Great, author Jim Collins reinforces the point that technology accelerates momentum. The Adishian Law Group applies Collins’ premise to its firm’s operations: The right technology applied properly will help our firm serve our clients even better. Social media is one of those technologies.

“Whether delivering top level legal services for our clients or making the latest legal developments and resources available to the community at large, our firm embraces application of the latest technology to traditional law firm functions,” continues Adishian. “Our clients appreciate knowing that when they hire us, they are getting a firm operating on the leading edge.”

Twitter allows the Adishian Law Group to raise awareness about relevant legal issues to its clients and the community at large on a continuous basis without being intrusive. This distribution channel is expanding the firm’s reach in its primary practice areas—Corporate, Employment, Real Estate and Arbitration/Mediation—creating new relationships, and reinforcing its brand as the law firm to call when you need legal services in California.

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California overtime law is an area of constant confusion, tension and struggle with employers and employees.

Legislation which became effective on January 1, 2000 implemented significant changes to California’s labor laws. One major impact of this legislation is that California has since become a “daily overtime” state. What is the difference between a “daily” overtime paradigm and a “weekly” overtime paradigm?

Weekly v. Daily Overtime

In much of the U.S. an employee who works more than eight hours per day but less than forty hours per week is entitled to just their standard rate of pay (i.e. “straight” time). But in California, all non-exempt (i.e. “hourly”) employees who work in excess of eight hours per day must be compensated for their excess hours at one-and-a-half (1.5x) times their normal rate of pay — even if the employee works LESS than 40 hours that week. Moreover, employees who work in excess of twelve hours per day be compensated at twice (2x) their standard rate of pay for each additional hour worked.

Example: To illustrate the difference in these two approaches, consider an employee who works ten hours per day, four days per week at a straight rate of $10/hour.

Under California’s daily overtime law, this employee would be paid her standard $10/hour rate for the first eight hours worked each day, but would be paid $15/hour for each additional hour worked that same day. Total earnings would be: $460 = $320 (4 * $80 per day) + 120 (4 * $30 per day).

Under a weekly overtime law, this employee would be paid her standard $10/hour rate for all 40 hours. Total earnings would be: $400 = (4 * $100 per day).

Somewhat predictably, management/ownership tends to favor the weekly overtime approach, and labor/employees tend to favor the weekly approach.

Daily overtime works in concert with Weekly overtime

Of course, the daily overtime legislation does not affect the “weekly overtime” provisions which are foundational principles of labor law nationwide. Under California’s weekly overtime laws, any employee who works either (1) in excess of forty hours per week, or (2) more than six days per week, is entitled to overtime compensation. Such an employee will receive one-and-a-half times their normal pay for each hour worked in excess of forty hours, or each hour worked on the seventh day, respectively. Additionally, on the seventh day of work in a single week, each hour worked in excess of eight hours requires compensation at double the ordinary rate of pay.

If you are an hourly employee in California, and work more than eight hours per day, forty hours per week, or six days per week, you have the right to overtime and double time rates of compensation for those additional hours. If you believe you are not being compensated in accordance with California’s overtime laws, please contact our firm for a free consultation.

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