The SJC recently held that the forfeiture provision of an employee stock plan, which required the surrender of all unvested company stock upon voluntary or involuntary termination of employment, did not violate the Massachusetts Payment of Wages Act (Wage Act), Massachusetts General Laws ch. 149, § 148. The SJC reached this conclusion in Weems v. Citigroup, Inc. after determining that the restricted stock made available to employees through the plan were not wages under the Wage Act.

The employee stock plan at issue consisted of three different programs: “bonus,” “branch manager,” and “payroll.” Under the bonus and branch manager programs, certain employees were eligible for an award of restricted stock as a discretionary bonus. Under the payroll program, employees could elect to use a portion of their salaries to purchase restricted stock at a 25 percent discount. The stock acquired through all three programs was subject to a defined vesting period and to a forfeiture provision triggered by the employee’s termination prior to vesting.

The plaintiffs, who voluntarily terminated their employment with Citigroup prior to the end of the applicable vesting periods, and thus forfeited their unvested stock, filed suit in the U.S. District Court for the District of Massachusetts, alleging that the forfeiture provision violated the Wage Act by requiring employees to forfeit a portion of their earned wages. The District Court asked the SJC to clarify whether the restricted stock constituted wages within the meaning of the Wage Act.

The SJC concluded that it did not. As to the bonus and branch manager programs, the Court noted that an award of restricted stock was discretionary, Citigroup was not obligated to award any stock under the plan, and employees were on notice that the awards were subject to the vesting period. The SJC therefore concluded that the restricted stock under these programs was outside of the scope of the Wage Act.

The SJC also held that the payroll program was a bona fide employee stock purchase plan under Massachusetts General Laws ch. 154, § 8, which explicitly excludes from coverage of the Wage Act certain deductions from wages made by an employer at an employee’s request, including deductions for the purchase of stock pursuant to an employee stock purchase plan. In reaching this conclusion, the Court assumed that, contrary to the plaintiffs’ allegations, participation in the program was truly voluntary and benefits under the plan were not illusory.

The SJC’s decision provides some guidance to employers offering employee stock plans, including those with forfeiture provisions. The decision suggests that bona fide employee stock purchase plans do not fall within the scope of the Wage Act provided they entail truly voluntary participation and non-illusory benefits to participants. The decision also confirms that discretionary bonus payments are outside the scope of the statute. In light of the now-mandatory treble damages under the Wage Act, employers should review their employee stock plans to ensure that the plans do not require employees to forfeit any earned wages.