Almost 200 current and former Uber employees have sued the company, accusing it of losing a “risky bet” that left them saddled with millions of dollars in added tax liability after the company’s flotation last year.
The complaint, submitted to the California superior court on Thursday, alleges Uber knowingly, and without proper permission, put employees at risk of larger tax bills in the event that Uber’s stock price went down in the months after its IPO – as it did.
Uber has said the claims “are simply without merit”.
As is typical at Silicon Valley companies, where employees are wooed with stock benefits in addition to salary, several thousand Uber employees stood to win big when the company went public, an event that meant the restricted stock units (RSUs) they held would finally turn into shares that could be sold, once a six-month lock-up period had passed.
Initially, the complaint says, employees’ stock was set to be issued at the end of that lock-up period. But on May 6th, 2019, days before Uber’s blockbuster flotation, staff with RSUs received a company memo explaining the issuance of stock would be “accelerated” to the date of the IPO.
Best interests
The memo described the change as being “in the best interests of the RSU holders, as well as in the best interests of the company”. It meant Uber could lock in the amount of tax it had to pay on behalf of its employees – an investor-pleasing move that removed a level of uncertainty in Uber’s future financial performance.
For the employees, however, it meant the income tax they would themselves need to pay on the shares would be calculated based on the IPO price, rather than at the moment at which employees could actually sell their stock. In that period, the value of the shares dropped by 40 per cent.
“The acceleration benefited Uber by eliminating the risk that the share price could rise over the next six months requiring Uber to book a greater compensation expense and ultimately post inferior financial results,” the lawsuit argues. “But the acceleration risked dramatically increasing – and ultimately dramatically increased – the plaintiffs’ income tax liability.”
The 190 past and present employees involved in the lawsuit lost a combined amount in the “general order of $8 million”, it claims. The decision to move forward the stock issuance was not done with the proper consent of those employees, the suit says.
Complaint
The lawsuit is not a class action, explained Ray Gallo, the employees' lawyer, who said he expected Uber to invoke an arbitration clause in the employees' contracts.
"The complaint rightly focuses on the main issue," said Bobby Bartlett, University of California, Berkeley law professor, "which is whether [Uber] had the contractual authority to modify the 'issuance of shares' provision without the consent of each RSU holder".
Had Uber’s share price gone up, employees would have benefited by having to pay tax on the lower amount – a possibility mentioned in the company’s May 6th memo.
“But that was at best a highly uncertain and risky bet at the time of the acceleration,” the lawsuit says. “The acceleration created the possibility that a plaintiff could owe more in income tax than he or she could realise from the sale of his or her RSU shares.”
The memo did describe several of the downsides, and said employees were “strongly encouraged” to seek guidance from external tax advisers.
– Copyright The Financial Times Limited 2020