A New Jersey Appellate Court ruled in favor of Smith Barney’s deferred compensation plan on June 15, reversing a lower court’s decision that said the firm’s Capital Appreciation Plan (CAP) violated New Jersey wage laws. The decision is another notch in Smith Barney’s belt, whose CAP plan has often been the target of broker lawsuits, though the firm rarely loses.
However, Bruce Nagel, the plaintiffs attorney in the class action lawsuit, and a partner in law firm Nagel Rice in Roseland, New Jersey, isn’t throwing in the towel just yet. Nagel plans to appeal the case to New Jersey State Supreme Court where he’s “extremely confident” the case will be resolved in favor of the brokers and the class they represent. He says the class recovery being sought is $10 million.
The CAP plan, like most deferred compensation plans, is a retention tool designed to encourage brokers to stay with the firm through monetary incentives. If a broker withdraws his contributions before they’ve vested he generally loses any matching contributions made by the firm. However, if a participant in the CAP plan leaves the firm he loses all unvested contributions to his CAP plan, both his and the firm’s. As a result, many brokers have argued in court that the money Smith Barney has taken is in fact theirs. This ruling affirms once again, that it is not: “This ruling was a particularly painful blow to those advocating that the CAP program is an illegal forfeiture of wages,” says securities industry attorney, Bill Singer.
The decision reverses a Superior Court’s decision from November that called the CAP plan “invalid on its face” and a clear violation of New Jersey wage and hour laws that protect employees from entering into private agreements that may result in the forfeiture of wages. The Appellate court emphasized both plaintiffs (two former Smith Barney reps, one now at Merrill Lynch the other Raymond James) voluntarily elected to participate in the CAP program, and therefore understood the terms, including the forfeiture and vesting provisions, and believed it was an attractive savings vehicle.
“The Appellate Division ultimately weighed ‘public policy’ concerns against the right to contract, and came down on the side of freedom to negotiate terms in a contract,” Singer says. He says the Appellate Division also placed emphasis on other key points including that forfeiture clauses are drastic remedies but not necessarily impermissible and that all other jurisdictions considering the CAP forfeiture clause have upheld the practice. Furthermore he says the courts emphasized the point that the “enforceability” of a forfeiture provision will be judged by “reasonableness,” which was satisfied here, as parties have a legal right to bind themselves to privately negotiated contracts.