As Uber rails against California state law to avoid making its drivers employees, trouble’s brewing on both sides of its nefarious business. On Thursday, 190 current and former employees sued the company over how it handled their shares ahead of the IPO.
This suit only represents a small fraction of the estimated 15,000 employees and contractors affected by Uber’s decision to accelerate the issuing of shares. This locked employees’ shares at the opening price of $45 each for six months before they could access them. By then, the stock plummeted 40 percent, but employees’ taxes remained tied to the original share price. That meant that the company which many of them had sunk sleepless nights into not only didn't deliver on its promises but saddled them with a substantially inflated tax bill.
Covering its bases — Restricted stock units (RSUs) are a common millennial perk at tech startups which woos recruits without these lean companies providing pesky things like market wages and benefits. Instead, employees take a risk on the company in the hope that when the company goes public and these units vest, they’ll come out on top.
This lawsuit alleges that Uber breached its RSU agreements by accelerating the issue date of stocks in order for the stock to appear more stable. Were the agreements upheld, employees would have received the stocks at their $27 share price six months into the IPO. The move also protected Uber if the stock had soared above $45 because the shares would be stalled out at that price. In a statement to the Financial Times, Uber said the claims were “simply without merit.” Instead, as is Uber's modus operandi, it looks like the company was protecting itself and shifting the risk of a lack-luster listing to its staff.
The consequences — The plaintiffs in this case, not counting the thousands of affected employees, were left responsible for a total additional $9 million worth of tax responsibilities for money they don’t have. If this sounds like rich people crying over spilled gold, it’s not.
Ray Gallo, one of the plaintiff’s attorneys, put forth a hypothetical of how this agreement breach plays out for an employee with 40,000 RSUs:
“Uber issues her shares at the $45 IPO price, a face value of $1.8 million — enough for a modest retirement … Because this is an outright grant, the entire proceeds are taxed as ordinary income. Applying a combined California and Federal tax rate of 52.65 percent (a likely marginal not average rate), she owes $947,700 in income tax. Uber withheld the minimum 37 percent of the shares against taxes, in effect selling those shares for her at the IPO price, so she received only 25,200 shares but the withholding covered $666,000 of her taxes, leaving her owing $281,700. By the time she could sell them six months post-IPO, however, her 25,200 shares were only worth $27 each.
If she sold her remaining 25,200 shares at that $27 price to cover her tax obligations and diversify her holdings (a sensible strategy), she would net $680,400. After paying the $281,700 in remaining tax, she would have just $398,700 of her $1.8 million left after taxes.”
These are tough times, so it’s hard to empathize with someone only making $400,000 off of stocks, but try to think about it as someone getting cheated out of hundreds of thousands of dollars. When you start stewing on that, you’ll understand why, since news of the lawsuit broke, the plaintiff count has risen to more than 270 people.