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California law is clear that an employee who is involuntarily terminated for a lawful reason cannot recover an unearned bonus, an unearned commission or unvested stock options. But, a growing body of case law allows an employee who was improperly terminated to recover options, bonuses and commissions that she would have received but for her unlawful termination. These remedies can be of great value to a terminated employee who received a large stock option grant that remains unvested or who was issued an offer letter that specifies a large commission target or annual bonus. They should be used as leverage in separation negotiations and, if necessary, subsequent litigation.

Legal Authority: Transpacific, Hill, Kelly

In 1979, the California Court of Appeals held: “the law does not support a forfeiture where the employees were terminated through no fault of their own after having substantially performed the services entitling them to a bonus.” DLSE v. Transpacific Transportation Company, 88 Cal.App.3d 823, 830 (1979). As a result, the Court of Appeals upheld an order requiring that an employer pay a bonus to employees who were terminated a few weeks prior to the date they would have received the bonus if they had remained employed.

Three years later, the Court of Appeals concluded that “estoppel by conduct is a proper theory upon which to find entitlement to a bonus.” Hill v. Kaiser, 130 Cal.App.3d 188, 191 (1982). In Hill Kaiser was estopped to argue a bonus was purely discretionary and did not need to be paid based on its prior conduct which induced the employee to remain with the company. Id. at 197.

In 2005, this line of argument received another boost when the Court of Appeals wrote that “should the plaintiff establish that she was unlawfully terminated, she could assert that that termination excused fulfillment of the condition of [continued employment], and rendered the bonus payable upon termination.” Kelly v. Inc., 38 Cal. Rptr. 3d 240, 252 (2005). In Kelly, the court’s conclusion that wrongful termination excused an employee from having to remain employed until a particular date specified in the bonus agreement allowed the employee to proceeded against her employer on two causes of action: (i) breach of contract/violation of Labor Code Sections 201 and 2926 and (ii) wrongful termination in violation of public policy.

This is a potentially powerful theory when read in conjunction with an earlier Court of Appeals decision: Newberger v. Rifkind, 28 Cal. App. 3d 1070 (1972). Newberger makes clear that an implied contract, supported by consideration, exists when an employee is granted stock options and remains employed in order to continue vesting in them. Thus, neither an option grant nor a commission or bonus plan may be dismissed as a unilateral contract an employer need not honor. Recent case law confirms this theory is viable if the promise is sufficiently definite. Moncada v. West Coast Quartz Corp., 221 Cal. App. 4th 768, 797 (2013).

Relevance To Separation Entitlements And Causes Of Action In Litigation

These cases provide very powerful ammunition to employees who are either negotiating for additional severance or engaged in litigation with their employer.

First, Kelly and Newberger provide an employee who was wrongfully terminated with a legal basis to become fully vested in any options that were previously granted. The employee was contractually promised the continued vesting stated in the option grant if she remained employed and she did continue to work for her employer in reliance on that agreement. The obligation that the employee remain employed for the entire “continuous service” period was excused by the employer’s act of terminating the employee wrongfully. This same argument applies to any promised annual or periodic bonuses or commissions.

Second, the logic of Transpacific Transportation Company that an employee cannot be compelled to forfeit a benefit after that employee has substantially performed the services required to receive it may have significant implications in the context of corporate changes of control.

To take one example, assume the assets of an employee’s company are acquired prior to her equity becoming fully-vested and, following the acquisition, all employees of the company are lawfully terminated or agree to transfer to the buyer of the assets. In that case, there is a clear argument that the employee should be treated as having fully-vested in her equity since the successful asset sale led to a change of control and wind down of the employer. This quite clearly indicates the employee “substantially performed” whatever services were required of her.

A similar argument could be made if the transaction were structured as a merger or stock sale but is, in essence, an acqui-hire where the target company is wound down after the closing date and the former employees are integrated into totally unrelated roles in a new company. And a similar argument can be made that an employee should be paid an annual bonus or commission if she’s terminated prior to the end of the year but the company nevertheless hits whatever targets were stated in the bonus or commission agreement.

Legal Assistance

Please contact Sebastian Miller Law to discuss how these cases could apply to your situation and be of use in negotiating to secure an appropriate separation agreement or litigating to secure earned benefits and contractual entitlements.

Disclaimer: All materials have been prepared for general information purposes only to permit you to learn more about Sebastian Miller Law, P.C, its services and experience. The information presented is not legal advice, is not to be acted on as such, may not be current and is subject to change without notice.