Privacy, Business and Law

On May 3, 2000, the House unanimously approved legislation amending the Fair Labor Standards Act (“FLSA”) to ensure that employee stock option profits are not included in the regular rates of pay for purposes of overtime calculations.

The Worker Opportunity Act, recognized as “very important” and “relatively noncontroversial,” by the Senate leadership, bypassed committee markup and proceeded on a fast track directly to the Senate floor, with the help of the bill’s sponsor, Republican Representative Cass Ballenger of North Carolina.

All this activity stems from an opinion letter issued on February 12, 1999 by the Department of Labor’s (“DOL”) which stated that a company’s proposed employee stock option program was not a gift, special occasion bonus, a bona fide profit sharing plan, discretionary bonus, or any other type of compensation that could legitimately be excluded under the FLSA in calculating an employee’s regular rate of pay. By negative implication, the opinion letter seemed to suggest that the value of an employee’s stock option should be factored into his or her regular pay rate when determining overtime pay. The opinion letter prompted concern among employer groups nationwide that the excessively complicated calculations involved in determining overtime pay based on stock options would discourage companies from granting stock options to non-exempt employees covered by the FLSA, and these groups immediately called for a rescission of the opinion letter.

The legislation amends the FLSA by exempting from regular rates of an employee’s pay, under certain circumstances, “any value or income derived from employer-provided grants or rights provided pursuant to a stock option, stock appreciation right, or bona fide employee stock purchase program.” The proposed exemption would apply so long as: employee participation is voluntary; the terms of the plan are disclosed to the employee; there is a minimum six-month vesting period mandating a delay between the grant of the option and its exercise by the employee; and, if offered at a discount, the stock option or appreciation right does not exceed 15 percent of fair market value at the time of the grant.

The bill would provide retroactive protections from overtime liability for those employers who, at the time the measure is enacted, have outstanding stock options, stock appreciation rights, or shares under stock purchase plans qualifying for the new exclusion. It also would shield employers from liability, for one year after the bill’s effective date, for income linked to stock option grants or stock appreciation rights that require modification through shareholder approval.

Although the bill’s language, which draws a distinction between vesting and exercisability, seems to suggest that immediately exercisable options are not exempt from overtime calculations, we believe that the Department of Labor will interpret the legislation to include immediately exercisable options in the exemption, so long as the other requirements are met because the stock options cannot be considered “earned” and includable in overtime under the FLSA until they vest. However, to avoid running the risk of having stock options included in the calculation of overtime, for options granted after July 1, 2000, employers should prohibit exercise within 6 months of the date of the grant if the optionee is non-exempt and the prohibition is necessary to exempt the option from overtime calculation. We anticipate clarification on this issue either through legislation or DOL interpretation, and will keep you updated on the developments.