Does Broker Compensation Plan Violate State Law?
The New Jersey Supreme Court will decide whether the forfeiture provision in Smith Barney’s incentive compensation plan violates New Jersey’s wage-and-hour law. A class action brought by two Smith Barney brokers, Melvin Rosen and James Fox, alleges that the plan penalizes participants who leave the company before they are vested in violation of the public policy underlying the state’s wage-and-hour law.
In 1989, Smith Barney Inc. instituted the plan because of high stockbroker turnover. Brokers could elect to have part of their compensation diverted to purchase restricted shares of stock in Smith Barney's parent company, Citigroup Inc., at a price 25% below market price. These purchases, however, did not fully vest for two years. Participants could not sell their shares before they vested though they could receive dividends and exercise voting rights. Employees who resigned or who were let go prior to vesting forfeited their unvested stock. Class plaintiffs Rosen and Fox forfeited unvested stock under the plan when they resigned.
The trial judge ruled in favor of plaintiffs on a summary judgment motion and held that the forfeiture of earned income invested in this plan “contradicted public policy, which requires that employees receive their earned compensation.” New Jersey’s intermediate appellate court, however, reversed the decision last year. That Court held that the plan did not violate New Jersey’s Wage-and-Hour Law because all terms were disclosed in writing prior to enrollment, participation is optional the risk of forfeiture was clearly disclosed, and the investment plan provides immediate beneficial tax treatment and stockowner benefits.
One judge dissented and called the plan "a restrictive covenant of the broadest type imaginable" because it was created to prevent brokers not only from defecting to competitors but also from leaving the company at all. The dissent further noted, “if such a [forfeiture] provision had been in the form of a restrictive covenant, it would never pass the reasonableness test set by earlier court decisions.”
Oral argument was held before the New Jersey Supreme Court on March 26, 2008. Plaintiffs’ counsel argued that earnings are sacrosanct and that the forfeiture provision renders the statute in violation of the law. He also argued that the wage-and-hour law made a non-complying plan null and void even if the employee joined voluntarily. Counsel for Smith Barney argued that the employee participants were sophisticated people who voluntarily joined the plan. He also noted that 15 courts around the country have upheld the plan.
Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing individuals in securities employment related litigation and arbitration. Page Perry’s attorneys have an active practice in representing individuals in employment disputes with brokerage firms. For further information, please contact us.
