California Employment Law Blog

Clarifying Compensation: Why Stock Options Aren't Wages According to Shah v. Skillz, Inc.

Posted by Timothy B. Del Castillo | Apr 10, 2024 | 0 Comments

In the recent case of Gautam Shah v. Skillz Inc. (2024), a significant issue at stake was the classification of stock options as "wages" under the California Labor Code. This topic is of particular interest in the technology and startup sectors, where stock options are often a crucial component of employee compensation packages. These options provide employees with the right to purchase company stock at a predetermined price, potentially allowing them to share in the company's future growth and success. However, the speculative nature of stock options—hinging on both the company's performance and the employee's continued employment—brings complexities, especially when disputes over termination and compensation arise.

Shah joined Skillz Inc., a mobile gaming company, in 2015, accepting lower cash compensation in exchange for stock options, betting on the company's future success. However, his career took an unexpected turn when Skillz Inc. terminated him in 2018, rendering his stock options void. Following Skillz's Initial Public Offering (IPO) in 2020, the value of these stock options soared, with Shah unable to exercise them. Shah then sued Skillz, Inc., arguing that these options were part of his earned compensation, wrongfully withheld when Skillz Inc. terminated his employment.

The distinction is critical: if stock options are deemed wages, terminating employees without properly compensating them for these options could violate California's stringent labor laws, designed to protect employees' rights to their earned wages.

On appeal, the Court tackled this issue head-on, ultimately concluding that stock options do not constitute wages under the California Labor Code. This decision hinged on the nature of stock options themselves—conditional, future benefits that employees have the opportunity to earn and exercise under specific terms set forth by their employment contracts. Unlike direct forms of compensation such as hourly wages or salaries, which are payable for work performed, stock options are contingent on both the company's performance and the employee's adherence to the terms of the option grant, including remaining employed until the options vest.

The Court of Appeal's analysis clarified that stock options are a form of compensation distinct from wages, governed by the contractual agreements between employers and employees. This determination aligns with the broader understanding of stock options as part of a comprehensive compensation strategy, designed to align employees' interests with the long-term success of the company, rather than immediate compensation for labor performed.

Both employers and employees should take note of this ruling as they navigate the complexities of compensation in the employment relationship. Employers should review their compensation practices and agreements to ensure they are in compliance with legal standards and clearly communicate the terms of stock option grants to their employees. Employees, armed with this knowledge, should seek to understand the full scope of their compensation packages, including the potential risks and rewards associated with stock options.

About the Author

Timothy B. Del Castillo

Tim Del Castillo is Founding Partner of Castle Law: California Employment Counsel, PC.


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