Usually. California requires employers to pay all earned wages at termination, and a private agreement can’t override that rule. But the Supreme Court of California held in Schachter v. Citigroup that restricted stock that hadn’t vested under the plan’s terms wasn’t an earned, unpaid wage, so forfeiting it didn’t violate the Labor Code. That holding protects most standard vesting schedules. The risk lies in plan language that ties equity to work already done, or that turns pay already earned into stock an employee can lose.
What do California’s final pay laws require?
Payment of everything earned. When an employer discharges an employee, Labor Code section 201 makes wages earned and unpaid at that time due immediately, and section 202 sets the timing when an employee quits. Those rules can’t be bargained away. Section 219 says no provision of that article “can in any way be contravened or set aside by a private agreement, whether written, oral, or implied.”
An employee who loses unvested equity at termination often frames the claim around those statutes. The argument goes like this: the shares were part of pay, pay must be delivered at termination, and a plan that takes the shares away is a private agreement that sets the law aside. Plaintiffs add waiting time penalties and, more and more often, PAGA claims.
What did Schachter v. Citigroup decide?
That the forfeiture was lawful because nothing earned remained unpaid. In Schachter v. Citigroup, Inc. (2009), employees could elect to receive part of their annual compensation as restricted stock, bought at a discount, that vested after two years. An employee who resigned or was fired for cause before vesting forfeited the stock and the share of pay used to buy it.
The Supreme Court framed the question as whether the forfeiture provision violated sections 201, 202, and 219. Its answer: “We conclude the forfeiture provision does not run afoul of the Labor Code because no earned, unpaid wages remain outstanding upon termination according to the terms of the incentive plan.”
The court also pointed to the employee’s own election. By the plan’s terms and his concession, “he is not entitled to those unvested shares of restricted stock.” The court described the restricted stock arrangement as a choice the employee knew “carried risk as well as the potential for reward.”
Does Schachter protect every equity plan?
No. The holding rests on the plan’s terms. Equity that hasn’t vested under conditions written in simple terms, like continued employment through a vesting date, usually isn’t an earned wage at termination. Equity tied to work already performed, or described as earned compensation for a past period, invites a different result.
Three plan features draw the most litigation. The first is a forfeiture provision buried in a document the employee never received or signed. The second is language calling an award a bonus “earned” for a completed year and then conditioning delivery on later employment. The third is an arrangement that takes cash the employee has already earned and converts it into forfeitable stock without a real election. Each one gives a plaintiff an argument that a wage was earned before termination and taken away after.
Stock options raise the same question with a different instrument. An unvested option is usually treated like unvested stock. A vested option that expires a short time after termination is generally governed by the plan’s exercise window, and the claim, if any, tends to sound in contract, not wage law.
| Plan feature | Typical wage-law risk | What the plan language should show |
|---|---|---|
| Time-based vesting with continued service condition | Low, under Schachter | Vesting conditions stated in simple terms, with signed acceptance |
| Award called a bonus “earned” for a past year | Higher; argued as an earned wage | Award framed as an incentive for future service |
| Cash pay converted to restricted stock | Depends on whether the election was voluntary | A real, documented employee election |
| Acceleration on termination without cause | Low if followed | Clear definitions of cause and good reason |
Why does the employee’s election matter?
Because Schachter leaned on it. The employees there chose how much of their pay to take as discounted restricted stock, knowing the shares could be lost if they left early. That choice made it harder to say the company had taken earned cash and kept it.
Plans that don’t offer a choice aren’t automatically unlawful. Most RSU grants are awarded on top of salary, with no election at all, and they fit the Schachter reasoning even more comfortably because no cash pay was ever diverted. The harder case is the plan that requires part of an earned bonus to be paid in forfeitable stock, with no option to take cash. A plaintiff will argue that the bonus was earned when the performance period ended, and that the plan set aside the final pay laws by private agreement.
The defense in that situation usually depends on when the bonus was earned under the plan’s own terms. If the plan says the award isn’t earned until a later service date, the argument tracks Schachter closely and is often strong. If the plan calls the bonus earned at year end and only delays delivery, the employer has a weaker position, and that should shape early settlement value.
How do employers defend an equity forfeiture claim?
By starting with the documents. The grant agreement, the plan, any award notice, and the employee’s acceptance record usually decide the case. If those show a vesting condition that wasn’t met, Schachter is the core of a demurrer or summary judgment motion. If they’re inconsistent, the case often turns into a contract dispute over what the employee was promised.
Cause definitions matter too. Many plans accelerate vesting, or extend exercise windows, when an employee is terminated without cause. An employer that labels a termination “for cause” to avoid acceleration should expect the cause finding itself to be litigated, sometimes alongside a wrongful termination claim. The firm’s post on California final paycheck and waiting time penalties covers the cash side of the same termination.
Steps when a departing employee disputes forfeited equity
- Preserve the plan, the grant agreement, award notices, acceptance records, and emails and texts discussing the employee’s equity, along with the payroll records for the final period.
- Calendar the deadline on any demand, Labor Commissioner claim, or lawsuit, and check the plan for an arbitration clause and the EPLI policy for notice terms.
- Identify who decided whether the termination was for cause and who administered the equity plan, and avoid any statement that ties the forfeiture to the employee’s complaints.
- Pull the vesting schedule, the exact termination date, and the plan definitions of cause, good reason, and vesting service.
- Ask counsel to review the claim before responding, offering to accelerate vesting, or negotiating a release.
Equity disputes often arrive with executive wrongful termination claims. The firm’s page on employment defense attorneys in California describes how those cases are defended.
Equity forfeiture questions from employers
Are RSUs wages under California law?
Sometimes. Courts have treated stock delivered as compensation for work as a form of wages. The more important question is usually whether the RSUs were earned and unpaid at termination. Under Schachter, equity that hadn’t vested under the plan’s terms wasn’t an earned, unpaid wage, so the final pay statutes didn’t require delivering it. Plan wording drives the answer in each case.
Can a plan forfeit vested shares if the employee joins a competitor?
That raises a different problem. California’s ban on noncompete agreements, Business and Professions Code section 16600, is often used to attack provisions that claw back vested equity or forfeit it for competing. Recent amendments strengthened that ban. A plan with a competition-based forfeiture for California employees should be reviewed by counsel before anyone relies on it.
Do waiting time penalties apply to unvested equity?
Not if nothing was earned and unpaid. Waiting time penalties under Labor Code section 203 attach to wages that weren’t paid on time at termination. If the equity hadn’t vested, there’s no late payment to penalize. If the employee proves the award was earned, penalties can follow, which is why the vesting language matters so much.
Should our equity plan include an arbitration clause?
Many employers include one, and it may move individual disputes to arbitration. It doesn’t decide the merits. Enforceability depends on how the clause was presented and accepted and whether it meets California’s standards for employment arbitration. Federal rules on sexual harassment and assault claims can also limit arbitration. A plan arbitration clause should match the company’s other employment agreements.
If a former employee says you took earned equity
If your company has received a demand claiming that unvested stock or options were wages it had to pay at termination, the plan and the grant agreement usually decide whether the claim survives. Rosenberger + Kawabata represents employers defending employment lawsuits and claims through its business litigation practice, including claims involving equity compensation and final pay. Contact Rosenberger + Kawabata online for a confidential consultation, or call (310) 894-6921.
Sources
The statutes are Labor Code section 201, Labor Code section 202, and Labor Code section 219. The case is Schachter v. Citigroup, Inc. (2009) 47 Cal.4th 610.
This post is general information about California and federal employment law as of November 7, 2026. It is not legal advice, and reading it does not create an attorney-client relationship. Employment statutes, regulations, and court decisions change often, and the outcome of any claim depends on its facts. Past results do not guarantee future outcomes.