On May 18, 2000, President Clinton signed into law the Worker Economic Opportunity Act, P.L. 106-202 (the "Act"). The Act amends the Fair Labor Standards Act ("FLSA") to clarify the circumstances under which value and income derived from employee stock options must be included in the employee's regular rate of pay for the purpose of calculating overtime compensation under the FLSA. The Act excludes such value and income from the regular rate of pay in most cases.
The legislation was enacted in response to a January 11, 2000 opinion letter by the United States Department of Labor ("DOL"). That letter stated that, under certain circumstances, income and profits received by an employee from exercising stock options may need to be included in the employee's regular rate for the purpose of calculating overtime pay. (see February 2000 Saul Ewing Employment Law Alert). The DOL, however, offered no guidance for determining when such profit must be taken into account for overtime pay calculation purposes.
Proceeds from the Exercise of Stock Options Are, in Most Cases, Not Included in the Employee's Regular Rate of Pay for Purposes of Calculating the Overtime Rate of Pay
The FLSA requires employers to pay a non-exempt employee one and one-half times his/her hourly rate of pay for any hours over 40 worked by the employee in a given week. Under the FLSA, the employee's "regular rate," from which the overtime rate is calculated, includes "all remuneration for employment paid to, or on behalf of, the employee," but excludes gifts, and special occasion bonuses, discretionary bonuses bona fide profit sharing plan benefits. The Act amended Section 7(e) of the FLSA by adding to the list of Exclusions from Regular Rate of Pay "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" that satisfies the following conditions:
- The employer must communicate the terms of the grant to participating employees either at the beginning of the employee's participation in the program or at the time of the grant;
- The grant cannot be exercisable for a period of at least 6 months after the time of grant (with certain exceptions), and the exercise price must be at least 85 percent of the fair market value of the stock at the time of grant;
- The exercise of the grant must be voluntary;
- When employer-provided grants are based on performance, the employer's determinations with regard to the award of or amount of the grant must be (i) made based on previously established performance criteria (which may include hours of work, efficiency, or productivity) of any business unit consisting of at least 10 employees or of a facility, except that, any determinations may be based on length of service or minimum schedule of hours or days of work; or (ii) made based upon the past performance (which may include any criteria) of one or more employees in a given period so long as the determination is in the sole discretion of the employer and not pursuant to any prior contract.
Employers Who Did Not Include Stock Options in Their Employees' Regular Rate of Pay Prior Will Not, in Most Circumstances, Be Held Liable for Back Overtime Pay
Although the effective date of the Act is August 16, 2000, the Act provides that employers will not be held liable "for any failure to include in an employee's regular rate . . . any income or value derived from employer-provided grants or rights obtained pursuant to any stock option, stock appreciation right, or employee stock purchase program" if one of the following conditions is met:
- the grants or rights were obtained before August 16, 2000;
- the grants or rights were obtained before August 16, 2001, so long as the program was in existence on May 18, 2000 and will require shareholder approval to modify such program to comply with the Act; or
- the program is provided under a collective bargaining agreement that is in effect on August 16, 2000.
Thus, employers with plans predating the Act will not be required to pay back overtime pay to their non-exempt employees who profited from participation in their stock option plans. Since the non-liability provision of the Act states that it applies to any stock option, stock appreciation right, or employee stock purchase program, an employer with a pre-Act program is excused from liability for failing to include the proceeds from the exercise of stock options in the employee's of pay even if the pre-Act plan does not satisfy the criteria established by the Act.
An employer that includes stock options in the compensation packages of non-exempt employees should exercise caution and review its employee stock option plan to ensure that such plan satisfies the criteria set forth in the Act, so that the value and income derived from the exercise of stock options pursuant to the employer's plan do not get included in the employee's regular rate of pay.
Saul Ewing's Labor and Employment Department and its Employee Benefits Group work closely with Saul Ewing's clients in reviewing and developing employee stock option plans to ensure compliance with the FLSA and other applicable laws. For further information, please contact Harriet E. Cooperman, Chair, Labor and Employment Department by telephone at 410-332-8974 or by E-mail at hcooperman@saul.com.