In Arzola v. Name Intelligence, Inc. (pdf), the Washington Court of Appeals concluded that payments due to employees under a stock right cancellation agreement did not constitute “wages” as that term is used in Washington’s wage-withholding statute (RCW 49.52.070) because the payments were not for the employees’ services but rather for relinquishment of shares.  It so held even though the underlying stock was expressly provided to the employees based on job performance.  The court’s holding allows employers to convert consideration paid to employees in lieu of cash wages into a separate and distinct contractual right and thereby avoid liability under the wage-withholding statute.

BACKGROUND

The plaintiffs in this matter were employed by Name Intelligence.  As part of their offers of employment, each plaintiff received an initial allotment of shares of Name Intelligence and was promised additional allotments for each year that they received an average or above average performance rating. 

In 2008, the president of Name Intelligence decided to sell the company.  As part of that sale, Name Intelligence was to receive three cash payments from the purchaser and was required, as a condition of the sale, to buy back all of the stock rights that it had given to its employees.  To that end, each employee was asked to sign, and did sign, a stock right cancellation agreement.  Each of those agreements stated that the employee would receive three cash payments, based on their stock ownership, due on the same dates as Name Intelligence was to receive its payments from the purchaser.

Name Intelligence made the first payment to its employees.  That payment appeared on the employees’ W-2 forms as wages, and the employees paid both federal income tax and Medicare tax on the full amount of the payment.  Before the remaining payments were due, a dispute arose between Name Intelligence and the purchaser.  Name Intelligence ultimately made the second payment when ordered to do so by the superior court.  As to the third payment, Name Intelligence eventually made that payment as well but subtracted 2.5% to reflect the reduced payment that it ultimately received from the purchaser of the company and a share of the attorney fees and costs incurred by Name Intelligence in resolving that dispute.

Addressing the dispositive issue on appeal, the superior court found that the amounts due and owing to the employees pursuant to the stock right cancellation agreements constituted “wages” as that term is used in Washington’s wage-withholding statute.  It further found that Name Intelligence had willfully withheld such wages and therefore awarded double damages, attorney fees, and litigation costs under RCW 49.52.070.  Name Intelligence appealed.

The Court of Appeals reversed.

ANALYSIS

• Statutory interpretation is a question of law that the Court of Appeals reviews de novo.
• Because RCW 49.52.070 does not define the term “wages,” courts are to give the term its “plain and ordinary meaning.”
• Washington courts have defined the term “wages” by reference to the American Heritage Dictionary of the English Language, which defines the term as “payment for labor or services to a worker, especially remuneration on an hourly, daily, or weekly basis.” 
• Applying these legal principles, the Court of Appeals held that“[t]he monies paid for the cancellation of the stock rights cannot be said to transform into wages, simply because the existence of either the stock or the [stock right cancellation agreement] is a byproduct of the employment relationship.”
• The Court of Appeals also rejected the plaintiffs’ argument that Name Intelligence had effectively conceded that the payments were wages when it included the first payment on the employees’ W-2 forms, ruling instead that this fact was “irrelevant” because “[n]othing in the record allows us to determine whether the tax code was properly applied.” 

Based on this analysis, the Court of Appeals concluded that the plaintiffs were not entitled to double damages, attorney fees, or litigation costs under RCW 49.52.070 and reversed the superior court’s ruling allowing such recovery.