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The Employee Ownership Update

Corey Rosen

February 2, 2000

(Corey Rosen)

Flak Flies on DOL Position on Options and Overtime

The Department of Labor's opinion letter stating that a company had to count the spread on option exercises by hourly workers as wages subject to overtime pay has resulted in a predictable flurry of criticism. House Majority Leader Dick Armey (R-TX) and Representative John Boehner (R-OH), chair of the House Education and Labor Committee on Employer-Employee Relations, have both written letters to the Department saying that its position on this issue was bad policy. Privately, employer groups have met with DOL officials expressing the same view. Meanwhile, the DOL has launched a detailed investigation of the issue, and the NCEO has been working with them to provide background material.

Labor Secretary Alexis Hermann has stressed that the opinion letter applies only to the particular facts and circumstances of the case; it does not represent DOL policy. Some lawyers have also argued that with proper drafting, plans can avoid coming under the direction of the opinion letter.

For more details on this issue, see my previous column.

FASB Sets Deadline for Issuance of Options Accounting Guidance

The Financial Accounting Standards Board has said that it will issue final guidance on employee stock option accounting rules March 31. The guidance will not be subject to comments. The details of the project have already been widely discussed as FASB has issued interim reports on its progress, so no surprises are expected.

ESOPs Can Work in Small Companies Too

A common misperception about employee stock ownership plans (ESOPs) is that they only work for larger employers. Rules of thumb vary; some practitioners say $1 million in revenues; some say 20 or 30 employees are needed before an ESOP makes sense. Some smaller employers have set up ESOPs quite successfully, however. For instance, Lightworks Optical in Irvine, CA has just 14 employees. It paid between $30,000 and $40,000 to establish its ESOP in legal, valuation, administrative, and accounting costs. The plan, designed primarily as an incentive and reward, provides that the company will contribute new shares of stock to employees. Other plans in small companies have bought out owners. Packaging Consultants in New Bedford, MA set up a leveraged ESOP to buy out its owners when it only had eight employees.

While the costs are substantial for setting up an ESOP (Lightworks had a typical experience), companies need to compare these costs with the often very substantial tax benefits ESOPs offer, as well as the often high costs of selling stock to other buyers.

For more details, see our Interactive Introduction to ESOPs on this site.

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