Lleytons succeeds in getting Supreme Court to recognise Stock Options constitute an element for the computation of the substitute readmission compensation

Lleytons, a firm specialized in International Private Law, provided legal assistance to an employee of a Spanish subsidiary of a multinational corporation located in United States who was dismissed unfairly.

The company had, as part of the variable remuneration paid to its employees subject to the achievement of specific objectives, a Stock Options Plan (composed of Stocks Options and Restricted Stock Units (RSUs)), which could be exercised by the employee at the time of its maturation. The company did not recognise as part of the compensation paid to the worker neither the Stock Options nor medical and life insurance and the retirement plan to which the employee was entitled.

I

The objectives to be attained

The employee sought the recognition of life and medical insurance as well as the retirement plan and benefits obtained from the sale of RSUs and Stocks Options – despite the non-maturing effect caused by the unfair dismissal – as an element for the calculation of the substitutive indemnity for the non-reinstatement.

II

The approach

In the lawsuit, the applicant claimed that the substitutive indemnity in lieu of reinstatement for unfair dismissal should necessarily include the Stock Options acquired by the employee during the labour relationship, and the company could not avail itself of a unfair dismissal to deprive the worker of the opportunity to exercise the options on shares to which he would have been entitled at the time of their maturation, given that if the dismissal had not taken place, the labour contract would have continued indefinitely. Likewise, it was required the admission of the wage nature of the life and medical insurance as well as the retirement plan and the profits obtained by the sale of RSUs and Stocks Options, whose amount should be included in the calculation of the substitutive indemnity. The first instance ruling upheld the claimant’s right to indemnity.

However, the defendant appealed upon the second instance court and ultimately in cassation with the Supreme Court, based on the alleged contradiction between the ruling and others delivered by the Labour Chamber of the Supreme Court, but had them rejected.

III

The results

It was obtained, on the basis of the case’s evidence, the recognition of the wage nature of the previous concepts. Likewise, it was admitted that the profit obtained as a result of the Stock Options’ exercise shall be computed for the purpose of payment of substitutive indemnity for the unfair dismissal. The Supreme Court considered that the options for the purchase of shares have a wage nature in terms of the difference between the stock market price at the time of its acquisition and the price of exercising the right agreed, rewarding the work carried out by the employee. In this way, the benefits should be distributed proportionately to that period if it is more than one year, in accordance with the period of time being remunerated.

Therefore, it was established that, while it is not possible to apply a single comprehensive treatment of all situations that may occur in the context of the subscription of option plans on shares, it is possible to indicate that even if the term for exercising it constitute the prerequisite or an essential element of the legal transaction, in any case the subjective element – being an employee of the company – relies upon the voluntariness of the worker himself.Thus, while the materialization of the law will only be possible at the time the term is fulfilled, if before that happens the company dismisses wrongfully or unfairly the employee and therefore prevents the exercise of the right to the option without a fair contractual cause, which amounts to a breach of the article 1256 CC and “inshort, the employee unfairly dismissed can retain his right to the exercise of the option of purchase of shares“.

Finally, the High Court also decided that life insurance is part – as an additional item – of the wage of the employee, including accident insurance premia, determining that they are salary in kind, based on the below considerations:

a) The insurance payment derives from the existence of the employment relationship and is a counterpart to the obligations of the employee.

b) The aforementioned insurance does not constitute one of the cases of exclusion of paragraph 2 of the aforementioned article 26 ET, since even if it was to accept its nature of improvement of the Social Welfare, even in that assumption “what could be excluded from the concept of salary would be, in accordance with the legal standard, the obtaining of the further benefits or compensations arising from that benefit of contractual origin, because the aforementioned articlespecifically refers to them”.

c) This conclusion is confirmed by the tax category of the insurance as a remuneration in kind, only excluding – for tax purposes – the premiums or portion relating to occupational accident or civil liability of the employee and coverage of disease, when they do not exceed 500 EUR annually (art. 42.2, 35/2006 Act).

In conclusion, the Supreme Court in its ruling confirms the validity of the statement of article 26.1 ET, which contains a general rule whereby “shall be considered as a salary the entirety of the economic rewards of employees, in cash or in kind, in the context of an employment relationship, whether they pay the actual work, whatever the form of remuneration, or the rest periods computed as work“.

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