A salesman for a Maryland company left employment just before
his stock options vested. Was he entitled to them as wages?
What happened. Catalyst Health Solutions hired “Mark” as vice president of sales in February
2004. His compensation included an annual base salary of $135,000, a monthly
car allowance, and 40,000 options to acquire company stock at a set price.
According to the letter of employment, 25 percent of the option award would
vest 12 months after the initial vesting date, and the remaining 75 percent
would vest in three equal annual installments each year thereafter.
Installments would not be exercisable if Mark terminated his employment before
the vesting date.
Several weeks later, Mark’s compensation package was revised
to give him a $200,000 loan to help him move and an additional 35,000 stock
options. Five months later, Mark’s compensation was revised again to increase
his salary, give him a larger loan, and grant him another 40,000 stock options
if the company reached its sales objectives called “stretch goals.” He was soon
granted these options.
In November 2005, Mark and the company agreed to a revision
of the vesting schedule of his 115,000 stock options so that he could pay off
his relocation loan to Catalyst. The company agreed to accelerate the vesting
of his options so that he could exercise 55,000 options by December 28. After
this transaction took place, Mark had enough money to pay off the outstanding
$266,000 on his relocation loan, netted another $100,000 after taxes, and kept
60,000 stock options that were now set to vest on April 16, 2006.
In February 2006, Mark accepted a job with one of Catalyst’s
competitors and tendered his resignation. He terminated his employment with
Catalyst on April 5. Two weeks later he attempted to exercise his remaining
60,000 stock options, but he was unable to do so because Catalyst had put a
block on his brokerage account. Catalyst filed a complaint in the Montgomery
Circuit Court asking it to find that Mark had no claim for the stock options
that vested when he ended his employment. The trial court found that Mark’s
options should have been considered as wages earned during employment. It
awarded Mark nearly $850,000, the value of the options if they had been
exercised. Catalyst appealed.
What the court said. The question before the Court of Appeals was whether unvested stock options can
be considered “wages” under Maryland law. The Maryland Wage Payment and
Collection Law, Sections 3-501 to 3-509 of the Labor Employment Article, states
that “each employer shall pay an employee … all wages due for work that the
employee performed before the termination of employment, on or before the day
on which the employee would have been paid the wages if the employment had not
been terminated.” “Wages” include all compensation due to an employee,
including bonuses, commissions, fringe benefits, or other remuneration promised
Employees, however, must fulfill all conditions they have
agreed to with their employers in order to be eligible for compensation. For
example, in Whiting-Turner v. Fitzpatrick (2001), a Maryland court found that a profit-sharing bonus was not part of an
employee’s compensation because he had not met the required condition of 2
years of employment and therefore had not earned the bonus at the time of his
termination. Catalyst argued that Mark had not met the terms of his agreement
because he was not still employed at the time his options would have vested.
The trial court had determined that the options were granted
for goals already achieved, but the Court of Appeals disagreed. The options
were not wages due to Mark for work he had already performed. Mark had been
promised the right to exercise stock option grants upon meeting the condition
of being employed on the vesting date. Because he was not employed on that
date, he did not meet the conditions necessary for his stock options to vest.
The court reversed the earlier decision and found that Mark was not entitled to
exercise those options. Catalyst Health Solutions v. Magill, Court of Appeals of Maryland, No. 80, September Term
Point to remember: Stock options are not wages, and clearly written contracts always help resolve
situations like this.