Deferred Compensation Plan Lawful Under State Wage and Hour Law Despite Forfeiture Provision

Rosen v. Smith Barney, Inc., A-49-07, (N.J. June 25, 2008) — A voluntary deferred compensation plan, in which employees’ contributions from their wages were invested in company stock purchased at a discount, does not violate the State Wage and Hour Law’s restriction on deductions from employees’ wages, despite the fact that the plan provided for a forfeiture of unvested stock interests if the employees terminated their employment during the two year vesting period after the stock purchase.  The New Jersey Supreme Court rejected the employees’ argument that the withholdings from their wages to invest in the incentive compensation plan were prohibited by law, noting that the Wage and Hour law expressly permits voluntary deductions “from wages to purchase securities of the employing corporation.” Additionally, the Court noted that in order to qualify for favorable tax treatment under the Internal Revenue Code, an employee’s interest in the plan must be subject to a substantial risk of forfeiture, and thus the forfeiture for termination provision was a lawful mechanism to provide tax deferred benefits to participants.

Note: This article was published in the July 2008 issue of the New Jersey eAuthority.