Tag: Stock Options

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.

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.”

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!

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?