On May 18, 2000, President Clinton signed the Worker Economic Opportunity Act, P.L. 106-202. The Act makes stock options more readily available to hourly workers by exempting employees’ profits on stock options, stock appreciation rights, and employee stock purchase plans from the employees’ "regular rate" of pay under the Fair Labor Standards Act.
This reverses a Labor Department opinion that had held that stock option profits had to be counted as wages when calculating overtime pay.
Beginning August 16, grants must meet several requirements to be excluded from the employee’s "regular rate." First, the terms of the grant must be explained to the employee no later than the grant date. Second, grants of stock options or stock appreciation rights cannot be exercisable for at least six months from the date of grant (except in the event of death, disability, retirement or change in control). Third, the exercise price of a stock option or stock appreciation right must be at least 85% of fair market value on the date of grant. Fourth, the exercise of the grant must be purely voluntary. Fifth, performance-based grants must be based either on past performance or pre-established performance criteria for a group of ten or more employees.
The Act does not permit grants to be conditioned on future performance of an individual. Discretionary grants, and grants based on length of service or a minimum schedule of days or hours worked are also permitted. The Act purports to exempt all grants made before its effective date.
Stock options, stock appreciation rights, and bona fide employee stock purchase plans (such as a section 423 plan) are covered by the Act. The Act does not exempt other equity compensation devices, such as restricted stock, phantom stock, or partnership equity devices.
Employers should review their stock plans for compliance with these new rules.
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