SAN FRANCISCO (CN) – A new federal class action claims Uber lured hundreds of high-tech workers with false promises of more valuable stock options before quickly breaking that pledge for its own financial benefit.
Lead plaintiff Lenza H. McElrath III, a senior software engineer from Washington state, sued the ride-hail giant in federal court on Monday, claiming the company cheated employees out of the higher-value stock options they were promised.
McElrath says he was recruited by Uber in September 2014 and chose to relocate and work for ride-hail giant over a competing tech firm based on the company’s promises of more valuable stock options.
The 22-page complaint claims Uber “devised a fraudulent scheme to recruit highly sought software engineers” in order to “fuel its meteoric rise.”
Founded in 2009, Uber has grown exponentially over the last three years, increasing its work force from 600 employees at the end of 2013 to more than 6,700 today. That figure does not include drivers, which the company classifies as independent contractors.
Uber is now valued at $60 billion, according to the complaint.
McElrath says Uber promised recruits incentive stock options, or ISOs, which are more valuable than non-qualified stock options because they are not taxed as earnings at the time they are exercised.
Standardized employment contracts promised the new hires “an incentive stock option to the maximum extent allowed by the tax code” and specified a four-year exercisability schedule.
But instead of keeping its promise, McElrath says Uber imposed a six-month exercisability schedule, which disqualified all options above $100,000 from the more favorable ISO tax treatment.
The tax on exercising non-qualified stock options can amount to hundreds of thousands of dollars and “impede an employee’s ability to exercise the option depending on whether he or she has the financial resources to pay the tax,” according to the suit.
McElrath says Uber had a strong incentive to deprive employees of the promised ISOs because it receives “a large payroll tax deduction,” which it would not otherwise obtain.
When an employee leaves Uber, he or she is required to exercise any vested options within 30 days or forfeit the compensation, according to the suit.
Because exercising the non-qualified stock options require employees to pay huge tax bills that some can’t afford, McElrath says many employees end up forfeiting the stock options when they leave the company.
“By converting equity compensation from the promised ISOs to NSOs, Uber has ensured that many employees will not receive their earned compensation when they leave the company and thereby Uber avoids having to pay millions of dollars in compensation,” the complaint states.
McElrath says he discovered in April 2015, months after he relocated to join Uber, that the company converted most of his stock options to non-qualified and refused to recognize several option exercises he made, saying the “trading window” was closed even though his employment contract entitled him to a four-year schedule to exercise his options.
The software engineer accuses of Uber of breach of contract, bad faith, false promise, intentional misrepresentation and violations of California business and labor laws.
McElrath seeks to certify three classes of employees who were promised ISOs but had their options converted to NSOs; prevented from exercising stock options due to shorter trading windows; and who relocated their residence to work for Uber based on the alleged false promises.
He also seeks an injunction, damages and disgorgement of all tax savings Uber gained though the alleged fraudulent scheme. He is represented by Scott Erlewine of Phillips, Erlewine, Given & Carlin of San Francisco.
In an email, Uber spokesman Matt Kallman said the company wants “our employees to have a real stake in Uber’s success, and we’re proud to offer equity compensation in service of that goal. Whereas our stock incentive plans are designed to work for all employees, we believe Mr. McElrath has misinterpreted his stock option agreement to benefit himself and his particular tax situation.”