The Court’s ruling endorses employee incentive pay plans which condition compensation on the happening of certain events.
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California Supreme Court
Rounds Out 2009
With Two Employment Law Decisions
By Christopher W. Olmsted
The California Supreme Court rounded out 2009 with two important employment law decisions. In a case titled Schacter v. Citigroup, the Court considered whether California law permits an employer to design an incentive pay plan calling for forfeiture of pay for employees who quit or are fired for misconduct before an established date. In Roby v. McKesson, the Court scrutinized the fine line between workplace discrimination and harassment.
Incentive Pay Forfeiture
Schachter v. Citigroup
David Schachter was hired as a stockbroker for what is now Citigroup. As part of his compensation, he chose to participate in the company’s employee stock purchase plan. The plan allowed him to divert 5% of his earnings to pay for company stock at below market prices.
The plan provided that if an employee remained in the company's employ for the two years following the purchase of restricted stock, title to the shares vested fully with the employee, free of any restrictions. However, if an employee voluntarily terminated employment or was terminated for cause before the end of the two-year period, the employee forfeited his or her restricted stock as well as the percentage of annual income designated by the employee to be paid as shares of restricted stock.
Mr. Schachter quit his job before two years, and the company said he forfeited his stock. Unhappy with the loss of these earnings, Mr. Schachter filed a class action lawsuit.
The broker alleged that forfeiture provisions of employer's voluntary incentive compensation plan violated state labor law and amounted to conversion of wages.
The California Supreme Court rejected Schacter’s claims. The stock compensation qualified as “wages,” but the wages were not earned. “Schachter necessarily agreed his compensation would consist of cash payments and a retention-based conditional interest in the shares, with the latter being earned only if he remained with [the company] for two years,” wrote the court. “He elected not to remain for the designated period.... Accordingly, Schachter did not earn--and thus had no right to receive either the restricted stock or the funds used to purchase it.”
The Court rejected the broker’s argument that he was entitled to a pro-rata share of the stock, in a manner analogous to vacation pay. The Court noted, however, that had the company terminated his employment in order to prevent his stock from vesting—an unfair act of bad faith--it could have been liable for at least a pro rata share of the stock.
The Court’s ruling endorses employee incentive pay plans which condition compensation on the happening of certain events, such as length of employment, and which allow for forfeiture when those conditions are not met.
Such plans should be carefully drafted. It is particularly important to define precisely when and how the incentive pay is “earned,” and also expressly state that the pay can be forfeited before it is earned. Employers should also consider restricting forfeiture to circumstances where the employee quits or is terminated for cause, in order to avoid allegations of termination to avoid payment of compensation.
Harassment and Discrimination
Roby v. McKesson HBOC
A November 2009 California Supreme Court case entitled Roby v. McKesson HBOC blurs the line between employment discrimination and harassment.
Charlene Roby was a long term employee with an excellent performance record until she developed a panic disorder. When Roby had a panic attack, she would experience physical symptoms such as difficulty breathing, uncontrollable shaking, and scratching or picking at her arms until they bled. Moreover, the medications she was taking for her condition caused her to develop an unpleasant body odor.
A new supervisor, Schoener, became openly critical and rude towards Roby. She made comments about her body odor, gave everyone but her small gifts on some occasions, and made disparaging remarks about her "no-brainer" job. She made Roby cover phones during the Christmas party, "snubbed" her at department meetings and did not return Roby's "good morning" greetings.
Roby was frequently absent due to her panic disorder, and McKesson disciplined her, and then terminated her. Other employees with medical problems were treated more leniently.
Roby sued for disability discrimination and harassment under the Fair Employment and Housing Act. The jury awarded her over $6 million in compensatory damages and $15 million in punitive damages. The trial court reduced the compensatory damages to $3.5 million.
Among other issues raised on appeal, the employer argued that there was insufficient evidence to support a harassment verdict. The company argued that the personnel decisions such as job assignments, ignoring her at staff meetings, or performance reprimands were personnel decisions and not, by definition, harassment. The other alleged misconduct was argued to be insufficient to establish harassment.
The California Supreme Court disagreed, finding that the evidence as a whole supported a finding of harassment. In so doing, the court examined the legal definition of harassment and discrimination.
Discrimination: Discrimination refers to bias in the exercise of official actions on behalf of the employer, such as hiring, firing, failing to promote, adverse job assignment, significant change in compensation or benefits, or official disciplinary action.
Harassment: Harassment refers to bias that is expressed or communicated through interpersonal relations in the workplace. It focuses on situations in which the social environment of the workplace becomes intolerable because the harassment (whether verbal, physical, or visual) communicates an offensive message to the harassed employee.
The Court noted that although discrimination and harassment are separate wrongs, they are sometimes closely interrelated, and even overlapping, particularly with regard to proof. “Some official employment actions done in furtherance of a supervisor's managerial role can also have a secondary effect of communicating a hostile message,” wrote the Court. “This occurs when the actions establish a widespread pattern of bias.”
Here, the discrimination and harassment overlapped. The Court evaluated the evidence and noted that while some of the supervisor’s actions were official employment actions rather than hostile social interactions in the workplace, the official actions contributed to the hostile environment. These actions included Schoener's shunning of Roby during staff meetings, Schoener's belittling of Roby's job, and Schoener's reprimands of Roby in front of Roby's coworkers. Moreover, Schoner’s discriminatory personnel decisions revealed her bias against Roby. Therefore it was reasonable to conclude that her comments and behavior were not merely rude, but harassment motivated by discriminatory animus.
The Court’s decision broadens the evidence relevant in litigated harassment cases, potentially raising the bar for the defense of employers. On a practical level, this means that employers must redouble efforts to keep supervisors focused on strictly objective business criteria—and not personal likes and dislikes--when making management decisions.
Download entire January 2010 Legal Update in PDF format.
This article is intended as a brief overview of the law and are not intended to substitute as legal advice. Any questions or concerns regarding any statute or case law should be addressed to a licensed attorney. Copyright © 2010 by Barker Olmsted & Barnier, APLC. San Diego, California. All rights reserved.
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