The controlling federal law with respect to the classification of employees is the Fair Labor Standards Act (FLSA). Among other things, FLSA sets the standards for minimum wage and overtime pay. DOL administers and enforces the FLSA.

Employers usually have a number of employees who are exempt from certain provisions of the FLSA. These are usually, but not always, "white collar" employees. Consequently, executives are exempt from the overtime pay requirement, but most nonprofessional employees are "nonexempt" and therefore covered by the FLSA provisions.

Were the DOL opinion to be valid and not changed, companies would be required to recalculate nonexempt employees' overtime pay for the proceeding two years, or the holding period of the options, whichever is less. Although the opinion letter dealt only with stock options, the implications were that Stock Appreciation Rights (SARs) and Employee Stock Purchase Plans (ESPPs) were also in jeopardy with respect to nonexempt employees. Apparently DOL felt compelled to issue this advisory opinion because they could not find a specific exemption from the definition of wages for any of these equity vehicles in the FLSA.

Technically, the advisory opinion applies only to the company that received it, based on their particular fact pattern. However, it would be imprudent for an employer to grant new stock options currently to nonexempt employees without a clear understanding of the consequences.

Current Activities
As a result of efforts by several employers, associations and coalitions, identical bills have been introduced in both the House (H.R. 4182) and Senate (S. 2323) to amend Section 7(e) of FLSA. The new law has been titled the Worker Economic Opportunity Act, and it is intended to allow nonexempt employees to continue to share in workplace benefits that involve their employers stock.

There has been bipartisan support for the legislation, which as of the time this article was written has passed the Senate on a vote of 95 to 0. It should be considered in the House soon after its recess ends on May 2nd.

At a Capitol Hill press conference on March 29, 2000, Secretary of Labor Alexis Herman stood with several Democratic and Republican Senators and Representatives, and stated that she would urge the President to quickly sign the bill when passed. Each speaker at the press conference extolled the benefits of employee ownership in the new economy, and the necessity for all employees to have the right to be included in equity plans.

Summary of the Worker Economic Opportunity Act
The Act clearly excludes from nonexempt employees' regular rate of pay, for the purposes of calculating overtime pay, income derived from stock option programs, SARs, and ESPPs. Direct stock grants are not specifically covered in this legislation but DOL has agreed to formally clarify its position that stock awards are already excluded from overtime pay calculations under the current law.

Under the Act, stock compensation programs must be voluntary and employees must be able to opt out if they prefer not to participate. In addition, employers must communicate the terms and conditions of the programs to eligible employees.

DOL has made clear their feeling that employee education is important. Employees must be given every opportunity to understand the benefit they have been given from their employers.

The following standards must be met for stock option or SAR plans to qualify for the exemption:

• Minimum Vesting Period - six months.
  
• Discounts -- may not exceed 15% of the fair market value at the time of the grant.
  
• Performance-Based Grants or Rights -- An employer may make discretionary grants based on individual past performance of one or more employees. Grants based on past performance would include granting nonexempt employees options following annual performance reviews. Employers may make grants that are based upon the achievement of previously established performance criteria for an individual facility that includes ten or more people, but may not make a grant to an individual based upon previously established performance criteria for that employee.

Employee Stock Purchase Plans are exempt as long as they are "bona fide" plans. This would include plans qualified under Section 423 of the Internal Revenue Code or plans whose parameters are close to Section 423, but still not qualified.

The legislation is proposed to take effect 90 days after enactment. It will hold harmless from back overtime pay deficiencies of employers who have plans in effect as of the date of the legislation. If the employer has a stock program that can only be modified through shareholder approval, they will have protection for an additional year. There will also be an extended effective date for plans that are subject to collective bargaining agreements.

Most plans will probably already be in substantial compliance with the new law. However, a company that has an equity plan covering nonexempt employees should monitor this legislation closely and consult with legal advisors regarding appropriate amendments (if any) to be made.