DOL Suggests Options May Be Subject to Overtime Rules

An opinion letter released December 23rd by the Wage and Hour Division of the U.S. Department of Labor (DOL) concludes that option gains need to be counted as compensation for the purpose of overtime pay. The effect of the ruling would be that a "non-exempt" employee's base pay would be increased by the spread on an option. Required overtime pay would have to be paid on this higher basis. Non-exempt employees are those not exempt from the wages and hour laws that require hourly employees to be paid overtime for work over 40 hours a week. The letter states that when an employee exercises an option, the extra pay would have to be retroactively attributed to the previous weeks the employee worked from the time the option was granted to the time the option was exercised, but only for a period of up to 104 weeks. This means the entire option spread would be attributed to the previous two years work (or less if the option was exercised less then two years from grant).

For instance, assume an employee making $10 per hour for a 40 hour week exercises an option that, pro-rated over the prior 104 weeks, adds $2 per hour to pay. For weeks that employee exceeded 40 hours per week, and was due 1.5 times pay for additional hours, the employee would have to be paid 1.5 times $12/hour, not 1.5 times $10/hour.

Opinion letters are limited to the specific facts and circumstances and do not have the force of regulations. In this case, the options were granted as a one-time discretionary grant to all employees. The company contended this qualified as a discretionary bonus not subject to the wage and hours rules, but the DOL disagreed. If the opinion letter becomes Department of Labor policy, company managers and consultants working in the broad option area agree it would significantly reduce the use of broad-based option programs for non-exempt employees. Companies now would face complex administrative problems, higher labor costs, and considerable uncertainty in project what their future costs would be. The ruling is expected to generate considerable controversy and comment.