Stock Options Are Not “Wages” in California

Stock Options Are Not “Wages” in California

In startup businesses, it’s not uncommon for employees to accept less cash compensation in exchange for stock options — the option to buy the company stock at a predetermined exercise price. In the future, if the stock’s value exceeds the exercise price, the individual can buy the stock at the lower price for a profitable investment. Often, employees hope the startup company will undergo an initial public offering (IPO), which would allow the employees to sell their stock on the open market at a substantial profit.

But if a company gives stock options in exchange for less cash compensation, do those options qualify as “wages” under California law? No, a California Court of Appeal recently held that stock options do not constitute wages under the California Labor Code (Shah v. Skillz, Inc., No A165372 (April 8, 2024)).

In 2015, Skillz, a mobile gaming company, hired Shah. In exchange for less cash compensation, Shah accepted Skillz stock options on a vesting schedule, the terms of which were governed by a contract. If terminated without cause, Shah would have three months to exercise any vested options; if terminated for cause, his options would expire on his termination date.

In January 2018, Shah spoke with the Skillz founders about leaving the company unless he received a promotion and higher compensation. Around the same time, Shah forwarded an email containing confidential business information from his work account to his personal email account.

Given Shah’s talk of leaving the company, Skillz suspected him of engaging in conduct harmful to the company’s interest. When Skillz investigated, it learned about the confidential information email and, subsequently, terminated Shah for cause for violating company policy on confidential information and theft. Therefore, Shah could not exercise his stock options, of which roughly 60,000 had vested.

Shah brought a lawsuit with multiple causes of action, mainly centered around breach of contract. He also asserted wrongful termination and retaliation claims based on the premise that stock options are “wages” under the California Labor Code. The trial court determined that stock options were not wages and dismissed those claims before trial. The jury ultimately found in favor of Shah on his breach of contract claim and awarded him $11.5 million dollars in damages for his lost options, which was ultimately reduced to roughly $4.3 million.

On appeal, Shah argued, among other things, that the stock options were “wages,” and the Court of Appeal should remand the wrongful termination and retaliation claims for a new trial so he can pursue punitive damages and attorneys’ fees.

California Labor Code section 200 defines wages 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 (emphasis added).” The court agreed with Skillz that stock options are not wages because they’re not “amounts” under the Labor Code. They’re not money at all; they’re contractual rights to buy stock shares. The court concurred with the Ninth Circuit Court of Appeals, which had considered the issue, noting that the amount of money for which shares can be sold on the market varies unpredictably from time to time, so it is not “fixed or ascertainable.”

Shah pointed to a California Supreme Court case (Schachter v. Citigroup, Inc. 47 Cal.4th 610 (2009)) that stated the receipt of restricted stock shares constituted wages, but the Court of Appeal distinguished the two cases. Restricted stock shares have an ascertainable value and are immediately issued to the employee. As the court writes, “By contrast, stock options merely grant the holder a contractual right to buy shares of stock at a later date at an agreed upon exercise price.”

Because stock options are not wages, the court affirmed the trial court’s dismissal of Shah’s wrongful termination and retaliation claims.  

James W. Ward, Employment Law Subject Matter Expert/Legal Writer and Editor

CalChamber members can read more about Wages and Salaries in the HR Library. Not a member? Learn more about how HRCalifornia can help you.

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