Don’t be Dazzled by Handsome Stock Options – They Aren’t “Wages” Under the California Labor Code, Making Contracts Key!

stock options aren't wages

Many companies use stock options to lure in top talent at lower upfront compensation. And the thought of making millions if the company takes off can be an amazing incentive for that talent to be loyal to the company and work hard towards its success. However, many employers cut such talent right before vesting to make sure they can’t benefit from a transaction, such as an initial public offering (IPO). This is what happened in Shah v. Skillz Inc., 101 Cal. App. 5th 285 (2024). The plaintiff employee filed a lawsuit against the defendant company for breach of contract, alleging that the company did not have cause to terminate his employment and prevent him from exercising his lucrative stock options. The employee also brought causes of action for breach of the implied covenant of good faith and fair dealing, wrongful termination, retaliation, and conversion. While the employee was “at-will,” termination for cause was key here because the stock agreement allowed him three months to exercise his vested options if he was not terminated for cause, while the agreement prohibited from exercising any options if he was terminated for cause.

A jury awarded the employee $11.5 million for the lost stock options and the employer filed a motion for judgment notwithstanding the verdict. The trial court denied that motion, conditioned on the employee’s acceptance of a remittitur (a legal ruling lowering the amount of damages awarded by a jury in a civil case) in the amount of $4,358,358. The employee accepted the remittitur and the court entered judgment for the employee. Both the employee and employer then appealed, and the Court of Appeal found the following:

1)      Under California and Delaware law, the employee’s damages were properly measured after the date of breach following the IPO, making the remittitur a few million dollars short based on a Performance Grant.

2)      The operative pleadings gave the company proper notice that the employee sought damages for the loss of the performance stock options he was granted in 2016.

3)      Stock options are not wages under the California Labor Code, thus the employee could not recover his costs and attorney’s fees in bringing the lawsuit. 

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