The Employee Ownership Update
March 1, 2000
Pressure Builds on Labor Department to Change Stance on Options and Overtime PayBipartisan legislation has been introduced in the House of Representatives to clarify that stock option awards should not be taken into account when calculating overtime pay. The Stock Options Preservation Act, still being drafted, will be introduced by Randy Cunningham (R-CA), Jim Moran (D-VA) and others. It will state that any spread realized on the exercise of employee options will not be subject to overtime rules under the Fair Labor Standards Act. A recent Department of Labor Opinion Letter stated that a company would have to consider these awards under the Act. The Department has since been at pains to point out that opinion letters are not policy and apply only to the facts and circumstances of the particular company to which the letter applies. The Department's Office of the Chief Economist has also launched an investigation into the issue. On March 2, the Subcommittee on Workforce Protection of the House Committee on Education and the Workforce held a hearing on the subject.
Administration, Congress Moving Closer on ESOP S Corporation ReformThe Clinton Administration has proposed a new version of its ESOP S corporation reform legislation that would require ESOPs in these companies to pay unrelated business income tax (UBIT) on its pro-rata share of corporate profits if more than 10% of the allocations in the plan went either to highly compensated employees (as defined by the law) or 2% shareholders. UBIT would also be required if more than 10% of the ownership in the company is represented by synthetic equity (options, phantom stock, etc.). "Highly compensated" means an employee who (a) was a 5% or more owner at any time during the year or the preceding year; or (b) had compensation in excess of $80,000 (indexed to 1997 dollars) in the preceding year or, if the employer elects, was in the top 20% of employees ranked on the basis of compensation. The Administration's proposal would thus cover many existing S corporation ESOPs.
At Congressional hearings, however, the Administration said that it was willing to work with Congress this issue. The current Congressional sentiment is for a much less restrictive rule, but also one that aims to curb S corporation ESOPs that are not primarily benefiting everyday employees. This suggests that some compromise may be forthcoming.