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Do Restricted Stock & Units Increase Overtime Pay?

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December 03, 2019 | Barbara Baksa

Do Restricted Stock & Units Increase Overtime Pay?

As explained in a blog commentary by Victor Flores at Baker McKenzie, companies may need to evaluate whether the value of full-value awards must be part of any overtime wages payable to nonexempt employees (“Are You Including the Value of Broad-Based Equity Awards in Overtime Payment Calculations?”).

What the Heck?

Nonexempt employees receive overtime pay if they work more than 40 hours per week. An employee’s overtime rate is 1.5 times his/her regular rate of pay (often referred to as “time and a half”). 40 hours, 1.5 times—that all seems pretty straightforward. Where this calculation gets trickier however is in determining the employee’s regular rate of pay, especially if the employee receives equity awards, bonuses, and similar benefits in addition to an hourly wage.

Are Equity Awards Considered Part of an Employee’s Regular Rate of Pay?

The answer for stock options, SARs, and ESPPs is clearly no, provided these arrangements meet certain conditions (including, among other restrictions, that the exercise price not be less than 85% of the FMV on the date of grant and, for options and SARs, that the rights are not exercisable for at least six months after grant). This exception was codified under the Worker Economic Opportunity Act, signed into law by President Clinton in 2000.

Unfortunately, back in the pre-123(R), halcyon days of 2000, few companies were granting full value awards on a widespread basis. As a result, the exception focuses only on stock options, SARs, and ESPPs (and it’s a little surprising anyone thought to include SARs), leaving the treatment of full value awards in question. If full value awards have to be considered part of employees’ regular rates of pay for overtime purposes, that could significantly increase the amount of overtime they are entitled to.

Why Bring This Up Now?

Well, earlier this year, the Department of Labor proposed a rule to clarify the forms of payment employers must include in employee wages when calculating overtime pay. While the proposed rule focuses primarily on perks, benefits, or other miscellaneous items, Flores notes in his blog that the DOL is “curiously silent on the excludability of RSUs.”

The DOL indicates that their reason for proposing the rule is that the current rules were implemented more than 60 years ago and that workplaces and compensation practices have changed considerably since then. Given this, Flores notes that:

It would have been appropriate for the proposed rule to have addressed RSUs given that RSUs were not a prevalent form of equity awards when the regular rate regulations were first adopted. While the preamble to the proposed rule did not mention RSUs, it did remind us that options, stock appreciation rights (SARs) and stock purchase rights could be designed to be excluded from the calculation of overtime payments.

The Sound of Silence

It is not clear what the DOL’s silence means. Perhaps they believe that the current exemption for stock options, etc., is sufficient to cover full value awards. Perhaps they simply aren’t aware of the prevalence of full value awards in today’s compensation packages. Perhaps they think full value awards should be included in overtime payments.

I don’t have an answer for you. All I can suggest is that if you are granting full value awards to nonexempt employees, this might be a good topic to discuss with your legal advisors.

- Barbara

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