Judge Says CAP Plan Violates Wage Laws

Opponents of Salomon Smith Barney's CAP plan, a deferred compensation plan that requires employees to contribute wages through payroll deductions to purchase restricted shares of company stock, have been shot down repeatedly in their attempts to fight the policy on the grounds that it is an illegal withholding of wages. Now they might have caught a break. Judge Patrick McGann, circuit court judge

Opponents of Salomon Smith Barney's CAP plan, a deferred compensation plan that requires employees to contribute wages through payroll deductions to purchase restricted shares of company stock, have been shot down repeatedly in their attempts to fight the policy on the grounds that it is an illegal withholding of wages. Now they might have caught a break.

Judge Patrick McGann, circuit court judge in Cook County, Ill., ruled in mid-November against the plan in Kim v. Citigroup, saying it violated the Illinois Wage Payment Act. His ruling essentially says that it goes against the law saying wages cannot be paid in a form other than dollars. The ruling was submitted in a preliminary hearing denying Smith Barney's motion to dismiss the case (the case itself is pending).

The ruling is significant in that Illinois' wage laws are not considered appreciably different than those of other states, so this ruling could open doors to other suits across the country. A transcript of the hearing shows that Judge McGann ultimately concludes, “as the restricted stock Kim received represented a portion of his cash compensation, that compensation was the earned benefit that cannot be forfeited.” This ruling does not decide the case — it simply denies the motion to dismiss the case entirely.

“The plan says exactly what the law says it can't say,” says Bradley Nelson, the attorney representing Alon Kim, a broker who worked for Smith Barney for seven years before leaving to go to UBS PaineWebber. “As a legal matter, it's pretty clear that it can't be done, and the judge ruled that way. When an employee leaves, you can't forfeit his wages.”

In a statement, a Citigroup spokeswoman says the firm “disagrees with the ruling” and is considering its options.

Judge McGann, however, limited his ruling to the value of Kim's wages that were paid in the form of restricted stock, but not the value of the stock on that date or any appreciated value.

The court also dismissed most of Kim's eight claims, some without prejudice (meaning they can be re-filed). He allowed Kim's claim of “unjust enrichment” by Citigroup through the CAP plan to stand, however.

Smith Barney's CAP plan has been under fire for a while. It works like this: a certain amount is deducted from each employee's paycheck and put into restricted stock at a discount rate. After two years, the deductions turn into Citigroup common shares. The plan is designed to discourage employees from leaving.

Here's the catch: when the employee leaves voluntarily or is fired with cause, those wages are forfeited, according to Smith Barney. So if an employee leaves after, say, 25 years, monies from those last two years are forfeited (in certain cases, retirement not being one of them).

Former Smith Barney brokers claim that millions of dollars of the firm's stock are forfeited each year by reps. Suits have been filed in various states, including California, New York, Florida, New Jersey, Massachusetts and Connecticut. These suits have generally been of a class-action nature; many are in pretrial stages, while earlier suits have been scuttled early on.

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