Valuing Employee Stock Today Act Exempts RSUs from Overtime Pay Calculations
Representatives Ryan Mackenzie (D-PA) and Tim Walberg (R-MI) have introduced the Valuing Employee Stock Today Act, H.R. 8660. The law would amend the Fair Labor Standards Act of 1938 (29 U.S.C. 207(e)) by adding restricted stock units to an existing exemption for “any value or income derived from employer-provided grants or rights provided pursuant to a stock option, stock appreciation right, or bona fide employee stock purchase program from the determination of an employee’s regular rate for purposes of calculating such employee’s overtime compensation.” The purpose of the exemption is to ensure that restricted stock units (RSUs) are not subject to overtime pay calculations.
As it stands, if the employee is a nonexempt worker (and thus eligible for overtime pay) and receives an RSU, the RSU is not excluded from overtime pay, so the company must pay more overtime when the employee realizes income from the RSU. This law would make the law more consistent and encourage companies to grant RSUs to non-exempt employees without fear of ballooning their overtime pay when such employees receive compensation from RSUs.
The original exemption was added to the Fair Labor Standards Act by the Worker Economic Opportunity Act of 2000 (Public Law 106–202). At the time that law was written, RSUs were not common. Most companies used stock options for equity compensation. That changed when, a few years after the Worker Economic Opportunity Act of 2000 was enacted, accounting standards required that companies show a current income charge for stock options. Until that time, companies could act as if issuing options did not incur a compensation cost. Companies then started to shift to RSUs. With an RSU, an employee is granted the right to the full value of stock provided that the employee meets the restriction requirement, commonly based on years of service but sometimes on a combination of years of service and some performance goal. Once the restriction lapses, the employee gets the actual shares. At that time, the employee pays ordinary income tax on the award, and the employer takes a tax deduction.
If you are interested in learning more about various forms of equity compensation, particularly for closely held companies, see our book The Decision-Maker's Guide to Equity Compensation. For detailed coverage of restricted stock and RSUs, see chapter 3 of our book Equity Alternatives: Phantom Stock, SARs, Restricted Stock, Performance Awards, and More.