Companies that grant stock options to workers who are eligible for overtime may have to include the option profits in the workers' wage base and increase their overtime pay, according to a Labor Department advisory.
The advisory, an opinion letter by Labor's Wage and Hour Division, would have the effect of making stock-option programs for lower-paid workers much more expensive and complex for employers.
The opinion letter is the second in two weeks from the department to cause a controversy after becoming public. An earlier advisory from Occupational Safety and Health Administration concluded that employers are responsible for the workplace safety of telecommuters working at home. That ruling was quickly withdrawn after a storm of protests.
Advisory letters, while they address a specific case, are viewed by business as representing the department's interpretation of labor law.
No senior Labor Department officials were available to discuss the latest issue yesterday, but a department source said, "Most likely we are going to reconsider this."
The overtime letter, written last month, concluded that the federal Fair Labor Standards Act requires inclusion of stock options in workers' base pay.
Because overtime is calculated as a multiple of base pay, such as 150 percent, or "time and a half," the ruling would force employers to determine gains realized when workers exercised options to figure out an employee's base pay. The employer also would have to track how many hours of overtime the employee worked, use the recalculated base pay to figure the overtime owed for those hours, and then pay that additional amount.
Employers are increasingly turning to broad-based stock options as part of overall compensation, and some were startled by the ruling. They fear not only that their own compensation programs will become more expensive and unwieldy, but also that such benefits to rank-and-file workers will be curtailed.
One employer group, LPA Inc., formerly known as the Labor Policy Association, sent a letter to Labor Secretary Alexis M. Herman yesterday asking that the ruling be withdrawn. The Association of Private Pension and Welfare Plans, another employer group, has been in talks with the department and is considering asking for withdrawal.
"The content of the letter gives us very serious concern," said APPWP Vice President James Delaplane.
In addition to the overtime costs, the ruling appears to entail "very substantial administrative complexity," including tracking when employees exercise options and how much money they get, Delaplane said.
"The ruling is basically a big shock to employers who have broad-based stock-option plans and include hourly employees" in them, said Roberta Fox, a compensation expert with Hewitt Associates, a benefits consulting firm based in Lincolnshire, Ill.
I. Michael Kerr, administrator of the Wage and Hour Division, wrote LPA President Jeffrey C. McGuiness that the advisory letter addressed specific facts and "there are circumstances under which stock option programs would not need to be included when calculating overtime."
The Labor Department "does not wish to discourage the use of stock option plans," he said.
The Labor source noted that the department must follow the law, which was written long before companies began offering options to rank-and-file workers. Thus, it is not clear how much flexibility the department has on the issue.
Because the ruling applies only to nonprofessionals, it likely would not affect the options being handed out to technology workers, though it could cover options given to support staff and other hourly employees at high-tech companies. Many of the companies most concerned are old-line corporations that have begun including stock options in their pay systems.
If the ruling remains in effect, Fox said, broad-based stock-option programs would become very expensive. Because the amount of overtime pay would be based on the profit the worker realized on the option, the extra payment could become quite large for workers who held the option for as long as possible--something companies usually encourage.
In addition, the calculations involved are "ridiculous," she said. The ruling requires employers to include all overtime worked as far back as 104 months before the date the options are exercised. "I won't say it's impossible, but to me that's administratively pretty difficult," she said.
The most likely response from employers would be to exclude hourly workers from stock-option plans, Fox said. Right now, most are taking a wait-and-see attitude, she said.
The key issue is what the Fair Labor Standards Act requires to be included in base pay. The law has a number of exclusions, for such things as bonuses, profit sharing and health plans, but the opinion letter said stock options do not qualify for any of them.
Fox and several others said they think options do qualify for exclusion, and perhaps further review by the department would conclude that, solving the problem. Otherwise, she said, "I would expect to see a huge lobbying effort" in Congress.