Overtime Pay re Stock Options

MUST STOCK OPTIONS BE INCLUDED
IN OVERTIME PAY?

According to a letter from the U.S. Department of Labor ("DOL") issued last year, employers that offer stock options to non-exempt employees must include profits from those options in the calculation of base pay and overtime. While the decision is only binding upon the specific company that requested the opinion, the letter provides a valuable lesson for all companies offering stock options or considering offering stock options. The decision is also up for review by the Department, but as of the date this newsletter was sent to the publisher, the DOL has not yet offered further insight.

With the boom of the stock market in recent years, more and more companies are offering stock options as incentives to "rank and file" workers such as secretaries and salespersons. The DOL stated in its letter that absent an exception such as a gift, profit sharing, or discretionary bonus, the value of any stock option must be calculated into the employee’s regular rate of pay under the Fair Labor Standards Act:

The employee’s profit . . . must be allocated over the period of time in which it was earned, ending with the workweek in which the option was exercised and going back to the date of the employee’s right to purchase the shares.

This means that employers must take the amount of gain from the stock options as of the exercise date, determine the overtime hours for the period the employee held the options, and calculate any increased back pay and overtime owed. The profit may not be allocated over more than the previous two years due to the federal statute of limitations. As such, many years of gain will be expected to be concentrated into the two-year statute of limitations period.

While we wait with bated breath to see if the Department of Labor overturns its letter, employers may want to rethink whether stock option offers to non-exempt employees are a valuable employee benefit or a potential administrative and costly nightmare.

For more information regarding this topic, feel free to contact Wessels Pautsch & Sherman P.C. at (414) 291-0600.