CA law provides for at will employment but if the original option was not contingent on specific performance beyond what is needed to continue as an employee, and they are willing for the employee to continue working there provided they surrender their stock they may be in more of a gray area. It's in the nature of a targeted pay cut but it doesn't seem to involve a demotion or change in position, they are effectively approach certain employees and telling them, "we are paying you too much, accept a reduction in your total compensation or we will terminate you."