Employers who conduct business in Maryland recently received good news when the Maryland court of appeals overturned the lower court decision in Catalyst Health Solutions, Inc. v. Magill (pdf) and held that unvested stock options are not wages under the Maryland Wage Payment and Collection law. The court reasoned that the unvested stock options at issue were not wages because the employee “did not fulfill the continued service condition,” as set forth in the stock option agreement.

Catalyst, like many employers, offers stock options to certain employees and officers to increase “proprietary interest” in the company’s business. In this case, Mr. Magill received several stock options with different vesting schedules.

In February 2006, Mr. Magill accepted employment with a competitor of Catalyst and tendered his resignation. However, Mr. Magill continued to work for several weeks while the parties were negotiating a severance package. After negotiations failed, Catalyst terminated Mr. Magill’s employment 11 days before 60,000 stock options were scheduled to vest.

After the parties filed cross-motions for summary judgment, the circuit court held that the unvested stock options were wages because they were given to Mr. Magill in exchange for meeting his quota. Accordingly, the circuit court held that the unvested stock options were remuneration in exchange for work already performed and ordered Catalyst to pay Mr. Magill $849,262.50, which was the value of his stock.

The court of appeals disagreed, concluding that Catalyst only promised Mr. Magill the “right to exercise” the stock options after meeting the service conditions of being employed on the vesting dates. Because he did not meet the conditions for his stock options to vest, the court concluded that the unvested stock options were not wages under the Maryland Wage Payment and Collection Law.

This entry was written by Steven Kaplan.