- The Washington Times - Thursday, January 13, 2000

Employers are reconsidering stock options as a way to attract employees after the Labor Department said a company must figure the lucrative benefits into workers’ overtime pay rates.

The higher base pay and the time-consuming task of calculating how much money would be added to each employee’s base pay are making employers think twice about offering the options to hourly employees.

“Companies will no longer provide that type of compensation,” said Tim Bartl, assistant general counsel for LPA Inc., which represents 250 senior human resource executives of large companies. “It forces them to redesign their compensation programs and redesign their strategy.”

In a letter to a corporate lawyer inquiring about an unidentified company’s stock option plan, the Labor Department said the company had to calculate hourly overtime pay based on stock options as well as hourly wages.

While Labor officials said the letter addressed a specific situation, human resource groups say many companies have similar setups.

Stock options, which are the right to buy a specified number of the company’s shares at a specific price during a certain time period, have become a popular way to attract and keep employees.

“It becomes a very attractive recruiting tool for firms who are not yet public,” said Joe DeGioia, president of JDG Associates Ltd., a Rockville, Md.-based recruitment firm for high-tech and biotechnology companies. “It’s an allure for candidates.”

High-tech companies, especially start-ups that have the potential of going public, increasingly are using stock option benefits. The Washington area has more than 3,000 technology companies.

If a candidate has a choice of employers, he will choose the company that offers stock options, Mr. DeGioia said.

Stock options have become the most common long-term incentive plan offered by employers, according to the 1999 Strategic Compensation Survey by the Society of Human Resource Management and Arthur Andersen.

More than half of the 783 companies surveyed offer some type of stock option benefit, while 31 percent are considering offering the benefit to employees.

Deron Zeppelin, the human resource society’s director of governmental affairs, said those companies are bound to reconsider in light of the Labor Department’s letter.

The Fair Labor Standards Act, which was created in 1938 to protect employees from unfair practices, does not address stock options because the benefit is so new.

“The law was not written to accommodate [stock options],” Mr. Bartl said. “As a result, you get wacky interpretations.”

The Labor Department wrote its letter in response to a lawyer’s questions about a hypothetical stock-option plan that allowed workers to buy 100 shares of their company’s stock at a certain price during a five-year period.

The department’s Wage and Hour Division concluded that, under that scenario, the company must consider the stock options as part of the employee’s regular base pay.

For example, if an employee exercised his stock option three months into the program and earned $1,750, that profit would be attributed to the previous 13 workweeks.

Labor Department officials say the “opinion letter,” written in February and published at the end of last year, responds specifically to that company and “was not intended to suggest that all stock option programs would be treated in the same manner,” according to a Jan. 11 letter from T. Michael Kerr, the administrator of the Wage and Hour Division, to Jeffrey C. McGuiness, president of LPA.

The Labor Department sends similar letters to employers who are seeking assistance in how to comply with labor law, no matter what the company asks.

But Mr. Bartl said the letters are “a clear indication of how the Wage and Hour division interpret the law and interpret the regulations they wrote to implement that law.”

However, Daniel Corley, an official with Baltimore’s AXA Advisors, a financial services provider, said the issue would not affect many high-tech firms. He has found that companies offer stock options to salaried employees, who cannot earn overtime pay.

Nonetheless, officials from LPA and the Labor Department have agreed to meet to discuss the issue.

“It would make sense for them to reconsider it,” Mr. Bartl said.

That’s exactly what the Labor Department did last week when it came under fire after issuing a department advisory in November that said employers were responsible for the safety of people working from home. Labor Secretary Alexis M. Herman quickly withdrew the advisory after criticism from businesses and lawmakers.

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