Resolving a recent controversy created by a Department of Labor (DOL) opinion letter, President Clinton signed into law the Worker Economic Opportunity Act (the "Act") on May 18, 2000. The Act amends the federal Fair Labor Standards Act (FLSA) to exclude certain stock option, stock appreciation and stock purchase profits from the calculation of overtime pay for non-exempt employees.
The controversy arose in late 1999 when the DOL released a previously unpublished advisory letter in which a DOL representative concluded that employers would be required to include stock option profits in an employee's "regular rate" of pay for purposes of calculating overtime compensation. Under the FLSA, non-exempt workers must receive overtime pay, at one and one-half times the employee's regular rate, for all hours worked over 40 in a given workweek. An employee's regular rate includes his or her base pay as well as supplemental payments such as performance-based bonuses, commissions and shift differentials. However, the FLSA excludes from the regular rate certain supplemental payments, including discretionary bonuses, gifts, profit-sharing plans, thrift-savings plans and life, and health and accident insurance plans.
The DOL opinion letter advised that stock option profits would not be excepted from a non-exempt employee's regular rate of pay and, therefore, must be included to calculate the employee's overtime pay. The DOL directed the employer to allocate retroactively the profit over the period of time in which it was earned (i.e., the period from the date the employee had the right to exercise the options to the date of exercise), recalculate the employee's regular rate of pay and provide the employee with supplemental overtime compensation. Despite an immediate uproar from management representatives as well as employee-rights advocates, the DOL refused to rescind this interpretation.
In response to this outcry, Congress and the DOL worked together to draft legislation addressing the issue. The Act excludes the value of any income or profit from a stock option, stock appreciation right or stock purchase plan from a non-exempt employee's regular rate of pay for purposes of calculating overtime compensation, under certain circumstances.
The major provisions of the Act include the following:
Covered Plans and Programs
The Act covers qualified and non-qualified stock option programs and stock appreciation programs, and "bona fide" stock purchase programs. Bona fide stock purchase programs are those that are qualified under or closely resemble the criteria in section 423 of the Internal Revenue Code. While the Act is silent regarding direct employee grants of stock, the DOL has indicated that it will consider such stock grants excluded.
Employee participation in a covered plan or program must be voluntary and the employer must communicate the material terms and conditions of the plan or program to the employee.
Criteria for Stock Option and Stock Appreciation Programs
Such programs must have a minimum six-month vesting or holding period (except vesting due to death, retirement, change of control or other recognized exception) prior to exercise. The exercise price of any option or right of appreciation must be at least 85 percent of the fair market value of the stock at the time of the grant.
Performance-based Grants or Rights
An employer may grant options or appreciation rights based on the individual past performance of one or more employees (i.e., following an employee's annual performance review) if the grant is within the sole discretion of the employer and is not pursuant to any contract. An employer only may grant options or appreciation rights based on previously established performance criteria applicable to a facility, or a business unit or group consisting of at least 10 employees.
The Act applies retroactively to protect employers from overtime pay liability based on previously issued and/or currently outstanding grants or rights. It also shelters plans and programs implemented pursuant to collective bargaining agreements in effect as of the Act's effective date. Employers are protected from liability for grants or rights issued within one year after the effective date pursuant to current plans or programs that must be modified by shareholder approval.
The Act becomes effective on August 16, 2000, 90 days after enactment.
This new legislation ensures that employers retain flexibility in compensating their non-exempt employees and allows those employees to participate in equity ownership programs sponsored by their employers. The Act appears to cover most forms of stock option, stock appreciation right and stock purchase plan programs. Companies also are protected with respect to prior issuances of equity grants or rights.
The 90-day period before the effective date gives employers the opportunity to complete pending grants before August 16, 2000. In addition, employers should review their equity plans to determine whether the terms and conditions of such plans must be modified to conform to the provisions of Act. If modifications are needed, the employer has until August 16, 2001 to make such amendments in order to prevent future liability for overtime compensation under those plans and programs.