Stock Options Not Wages Under California Labor Code

Takeaway: Stock options are not wages under the California Labor Code because they are not amounts of money—rather, they are contractual rights to buy shares of stock, and their value is not fixed or ascertainable.

A former employee who alleged that he was fired from his employment so he would not be able to exercise his stock options could not pursue wrongful termination or retaliation claims because stock options are not wages under the California Labor Code, a California appeals court ruled.

In 2015, the employee began working for the employer, a mobile gaming company in Silicon Valley. The company provides an online platform where users can play video games and compete with others on their mobile devices.

The employee accepted less cash compensation in exchange for options to buy the company’s stock at a predetermined price. A contract between the parties provided a vesting schedule governing when the options could be exercised. If the employee was terminated without cause, he would have three months to exercise any vested options; if he was terminated for cause, his options would expire on his termination date.

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

The company suspected the employee of engaging in conduct harmful to the company’s interest. When the company investigated, it learned about the confidential information email and subsequently terminated the employee for cause for violating company policy on confidential information and theft. The employee, therefore, could not exercise his stock options, of which about 60,000 had vested.

The company had an initial public offering (IPO) in December 2020. But because the employee had lost all of his stock options when the employer terminated him for cause in 2018, he could not exercise his options and sell the stock he would have acquired upon doing so at a huge profit after the IPO, as did other former and current company employees.

The employee sued the employer for breach of contract, alleging that the employer did not have cause to terminate him and wrongfully prevented him from exercising the stock options he had earned as a company employee.

He also brought claims for wrongful termination and retaliation based on the proposition that stock options are “wages” under the California Labor Code. If the options were part of the employee’s earned compensation, then they were wrongfully withheld when the company terminated his employment, in violation of the law, the employee said.

The trial court determined that stock options are not wages and dismissed the wrongful termination and retaliation claims before trial. The jury ultimately found in favor of the employee on his breach-of-contract claim and awarded him $11.5 million in damages for his lost options, which was ultimately reduced to $4.3 million.

Both parties appealed. On appeal, the employee argued, among other things, that the stock options were “wages” and that the appellate court should remand the wrongful termination and retaliation claims for a new trial so he could pursue punitive damages and attorney’s fees, which were not available on the breach-of-contract claim.

California Labor Code’s Definition of Wages

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.”

The California Court of Appeal agreed with the employer that stock options are not wages because they are not “amounts” under the Labor Code. They are not money at all. They are contractual rights to buy shares of stock, the appeals court said. 

The state appeals court agreed with the 9th U.S. 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 and so it is not “fixed or ascertainable.”

Unlike direct forms of compensation such as hourly wages or salaries, which are payable for work performed, stock options are contingent on both the company’s performance and the employee’s adherence to the terms of the option grant, including remaining employed until the options vest, the court said.

The employee pointed to a California Supreme Court case (Schachter v. Citigroup Inc.), which found that the receipt of restricted stock shares constituted wages. The appeals court, however, distinguished between the two cases, noting that restricted stock shares have an ascertainable value and are immediately issued to the employee.

“By contrast,” the court said, “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 appeals court affirmed the trial court’s dismissal of the employee’s wrongful termination and retaliation claims. The court affirmed the jury verdict on the breach-of-contract claim but adjusted the damages awarded upward to a total of $6.7 million.

Shah v. Skillz Inc., Calif. Ct. App., No. A165372 (April 8, 2024).

Joanne Deschenaux, J.D., is a freelance writer in Annapolis, Md.