HR Management & Compliance

Wage And Hour: Department Of Labor Says Retroactive Overtime Calculations Required When Stock Options Exercised

In an advisory opinion that could give employers headaches, the U.S. Department of Labor says you may have to include stock option profits in an hourly worker’s base pay and retroactively calculate their overtime using the new pay rate. Although it’s unclear just how far-reaching this opinion will be, it raises some complicated issues that could make you rethink how stock options are granted to hourly employees.

Employer Questions Stock Options

The controversy stems from an employer’s inquiry to the DOL asking whether stock option profits need to be included in an employee’s regular rate of pay for overtime purposes. As a general rule, discretionary bonuses and profit-sharing payments are treated as gifts that do not have to be included in a worker’s base pay-as long as they are not linked to the time a worker has been employed, hours worked, production or efficiency.

The HR Management & Compliance Report: How To Comply with California Wage & Hour Law, explains everything you need to know to stay in compliance with the state’s complex and ever-changing rules, laws, and regulations in this area. Coverage on bonuses, meal and rest breaks, overtime, alternative workweeks, final paychecks, and more.

Retroactive Overtime

Howard Waddell, acting assistant secretary for public affairs in the Labor Department’s Wage and Hour Division in Washington, D.C., told CEA that the government understood the employer’s plan as requiring employees to work for the company for at least three months to be eligible for stock options. That means the options were not a discretionary bonus or gift, because they were based on longevity. Consequently, the profits had to be included in the employee’s base pay.

Calculating Back Overtime

The back overtime owed would be determined by adding the prorated profit to the employee’s base pay for hours worked from the time they could purchase shares until the date the options were exercised-going back as far as two years. Then, you’d refigure the overtime rate for that time period and pay the difference.

Dilemma For Employers

Dean Fryer, spokesperson for the California Department of Industrial Relations, said that California law does not require employers to include stock option profits in a worker’s base pay. He told CEA that the state might reconsider its position if the DOL issues a formal regulation that applies to all employers.

This presents a dilemma for employers because when California and federal laws conflict, you have to follow whichever is more favorable to the worker. Even though this letter applies only to a specific case and is not a formal regulation, opinion letters tend to reflect the DOL’s thinking about the interpretation of federal law. So, if a complaint was made to the DOL by one of your employees, the agency might take the same position as expressed in this opinion letter. Because a mistake in this unclear area of the law could be costly, the best approach is to get an expert to review your situation to determine what you need to do.

Leave a Reply

Your email address will not be published. Required fields are marked *