[Pages H2437-H2449]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
WORKER ECONOMIC OPPORTUNITY ACT
Mr. GOODLING. Mr. Speaker, I move to suspend the rules and pass the
Senate bill (S. 2323) to amend the Fair Labor Standards Act of 1938 to
clarify the treatment of stock options under the Act.
The Clerk read as follows:
S. 2323
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Worker Economic Opportunity
Act''.
SEC. 2. AMENDMENTS TO THE FAIR LABOR STANDARDS ACT OF 1938.
(a) Exclusion From Regular Rate.--Section 7(e) of the Fair
Labor Standards Act of 1938 (29 U.S.C. 207(e)) is amended--
(1) in paragraph (6), by striking ``or'' at the end;
(2) in paragraph (7), by striking the period and inserting
``; or''; and
(3) by adding at the end the following:
``(8) 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 which is not otherwise excludable under any of
paragraphs (1) through (7) if--
``(A) grants are made pursuant to a program, the terms and
conditions of which are communicated to participating
employees either at the beginning of the employee's
participation in the program or at the time of the grant;
``(B) in the case of stock options and stock appreciation
rights, the grant or right cannot be exercisable for a period
of at least 6 months after the time of grant (except that
grants or rights may become exercisable because of an
employee's death, disability, retirement, or a change in
corporate ownership, or other circumstances permitted by
regulation), and the exercise price is at least 85 percent of
the fair market value of the stock at the time of grant;
``(C) exercise of any grant or right is voluntary; and
``(D) any determinations regarding the award of, and the
amount of, employer-provided grants or rights that are based
on performance are--
``(i) made based upon meeting previously established
performance criteria (which may include hours of work,
efficiency, or productivity) of any business unit consisting
of at least 10 employees or of a facility, except that, any
determinations may be based on length of service or minimum
schedule of hours or days of work; or
``(ii) made based upon the past performance (which may
include any criteria) of one or more employees in a given
period so long as the determination is in the sole discretion
of the employer and not pursuant to any prior contract.''.
(b) Extra Compensation.--Section 7(h) of the Fair Labor
Standards Act of 1938 (29 U.S.C. 207(h)) is amended--
(1) by striking ``Extra'' and inserting the following:
``(2) Extra''; and
(2) by inserting after the subsection designation the
following:
``(1) Except as provided in paragraph (2), sums excluded
from the regular rate pursuant to subsection (e) shall not be
creditable toward wages required under section 6 or overtime
compensation required under this section.''.
(c) Effective Date.--The amendments made by this section
shall take effect on the date that is 90 days after the date
of enactment of this Act.
(d) Liability of Employers.--No employer shall be liable
under the Fair Labor Standards Act of 1938 for any failure to
include in an employee's regular rate (as defined for
purposes of such Act) any income or value derived from
employer-provided grants or rights obtained pursuant to any
stock option, stock appreciation right, or employee stock
purchase program if--
(1) the grants or rights were obtained before the effective
date described in subsection (c);
(2) the grants or rights were obtained within the 12-month
period beginning on the effective date described in
subsection (c), so long as such program was in existence on
the date of enactment of this Act and will require
shareholder approval to modify such program to comply with
section 7(e)(8) of the Fair Labor Standards Act of 1938 (as
added by the amendments made by subsection (a)); or
(3) such program is provided under a collective bargaining
agreement that is in effect on the effective date described
in subsection (c).
(e) Regulations.--The Secretary of Labor may promulgate
such regulations as may be necessary to carry out the
amendments made by this Act.
The SPEAKER pro tempore (Mr. Quinn). Pursuant to the rule, the
gentleman from Pennsylvania (Mr. Goodling) and the gentleman from New
York (Mr. Owens) each will control 20 minutes.
The Chair recognizes the gentleman from Pennsylvania (Mr. Goodling).
Mr. GOODLING. Mr. Speaker, I yield myself 2 minutes.
Mr. Speaker, I rise in strong support of S. 2323, the Worker Economic
Opportunity Act. The Department of Labor, in a recent opinion letter,
has jeopardized a successful and popular new trend in employment, and
they did it not because of any fault of theirs but because they
interpreted the Labor Standards Act of 1938, which is what I have said
over and over again, year after year, we are trying to run businesses,
labor and management, based on rules and regulations that were written
back in the 1930s, when it was a manufacturing economy only and men
only. We cannot do that in the 21st century.
Well, of course, if they had followed through, we would have
eliminated the very popular stock option for hourly employees.
I want to thank the gentleman from New York (Mr. Owens) and the
gentleman from Indiana (Mr. Roemer) and the gentleman from Wisconsin
(Mr. Kind), among others, for helping us develop the bipartisan
resolution. I want to certainly thank the gentleman from California
(Mr. Cunningham), who has worked tirelessly to help bring about this
resolution, as well as our subcommittee chair, the gentleman from North
Carolina (Mr. Ballenger).
The Worker Economic Opportunity Act reflects a consensus reached
among the bill's chief sponsors in the House and the Senate committees
of jurisdiction and the Department of Labor. The other body passed it
95 to nothing; and to further explain the consensus we have reached, I
am going to include into the Record a statement of legislative intent
which is substantially identical to what was the legislative intent
presented in the other body by Senators McConnell, Dodd, Jeffords, and
Enzi.
I urge my colleagues to vote for the Worker Economic Opportunity Act.
Statement of Legislative Intent Regarding S. 2323, the Worker Economic
Opportunity Act
i. introduction and purpose
The purpose of S. 2323, the Worker Economic Opportunity
Act, is to allow employees who are eligible for overtime pay
to continue to share in workplace benefits that involve their
employer's stock or similar equity-based benefits. More
working Americans are receiving stock options or
opportunities to purchase stock than ever before. The Worker
Economic Opportunity Act updates the Fair Labor Standards Act
to ensure that rank-and-file employees and management can
share in their employer's economic well being in the same
manner.
Employers have provided stock and equity-based benefits to
upper level management for decades. However, it is only
recently that employers have begun to offer these programs in
a broad-based manner to non-exempt employees. Historically,
most employees had little contact with employer-provided
equity devices outside of a 401(k) plan. But today, many
employers, from a broad cross-section of industry, have begun
offering their employees opportunities to purchase employer
stock at a modest discount, or have provided stock options to
rank and file employees; and they have even provided outright
grants of stock under certain circumstances.
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\1\Footnotes at end of article.
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The Federal Reserve Board of Governors recently estimated
that 17 percent of large firms have introduced a stock
options program and 37 percent have broadened eligibility for
their stock option programs in the last two years.\1\ The
Employment Policy Foundation estimates between 9.4 million
and 25.8 million workers receive benefits
[[Page H2438]]
through some type of equity participation program.\2\ The
trend is growing, and given the current state of the economy,
it is likely to continue.
The tremendous success of our economy over the last several
years has been largely attributed to the high technology
sector. One of the things that our technology companies have
succeeded at is creating an atmosphere in which all employees
share the same goal: the success of the company. By vesting
all employees in the success of the business, stock options
and other equity devices have become an important tool to
create businesses with unparalleled productivity. The Worker
Economic Opportunity Act will encourage more employers to
provide opportunities for equity participation to their
employees, further expanding the benefits that inure from
equity participation.
ii. background and need for legislation
A. Background on Stock Options and Related Devices
Employers use a variety of equity devices to share the
benefits of equity ownership with their employees. As the
employer's stock appreciates, these devices provide a tool to
attract and retain employees, an increasingly difficult task
during a time of record economic growth and low unemployment
in the United States. These programs also foster a broader
sense of commitment to a common goal--the maintenance and
improvement of the company's performance--among all employees
nationally and even internationally, and thus provide an
alignment between the interests of employees with the
interests of the company and it shareholders. They can also
reinforce the evolving employer-employee relationship, with
employees viewed as stakeholders.
Employer stock option and stock programs come in all
different types and formats. The Worker Economic Opportunity
Act focuses on the most common types: stock option, stock
appreciation right, and employee stock purchase programs.
Stock Option Programs. Stock options provide the right to
purchase the employer's securities for a fixed period of
time. Stock option programs vary greatly by employer.
However, two main types exist: nonqualified and qualified
option programs.\3\ Most programs are nonqualified stock
option programs, meaning that the structure of the program
does not protect the employee from being taxed at the time of
exercise. However, the mechanics of stock option programs are
very similar regardless of whether they are nonqualified or
qualified. Some of these characteristics are described below.
Grants. An employer grants to employees a certain number of
options to purchase shares of the employer's stock. The
exercise price may be around the fair market value of the
stock at the time of the grant, or it may be discounted below
fair market value to provide the employee an incentive to
participate in the option program.
Vesting. Most stock option programs have some sort of
requirement to wait some period after the grant to benefit
from the options, often called a vesting period. After the
period, employees typically may exercise their options by
exchanging the options for stock at the exercise price at any
time before the option expires, which is typically up to ten
years. In some cases, options may vest on a schedule, for
example, with a third of the options vesting each year over a
three-year period. In addition to vesting on a date certain,
some options may vest if the company hits a certain goal,
such as reaching a certain stock price for a certain number
of days. Some programs also provide for accelerated or
automatic vesting in certain circumstances such as when an
employee retires or dies before the vesting period has run,
where there is change in corporate control or when an
employee's employment is terminated.
Exercise. Under both qualified and nonqualified stock
option programs, an employee can exchange the options, along
with sufficient cash to pay the exercise price of the
options, for shares of stock. Because many rank-and-file
employees cannot afford to pay the cost of buying the stock
at the option price in cash, many employers have given their
employees the opportunity for ``cashless'' exercise, either
for cash or for stock, under nonqualified option plans. In a
cashless exercise for cash, an employee gives options to a
broker or program administrator, this party momentarily
``lends'' the employee the money to purchase the requisite
number of shares at the exercise price, and then immediately
sells the shares. The employee receives the
difference between the market price and the exercise price
of the stock (the profit), less transaction fees. In a
cashless exercise for stock, enough shares are sold to
cover the cost of buying the shares the employee will
retain. In either case, the employee is spared from having
to provide the initial cash to purchase the stock at the
option price.
An employee's options usually expire at the end of the
option period. An employee may forfeit the right to exercise
the options, in whole or in part, under certain
circumstances, including upon separation from the employer.
However, some programs allow the employee to exercise the
options (sometimes for a limited period of time) after they
leave employment with the employer.
Stock Appreciation Rights. Stock appreciation rights (SARs)
operate similarly to stock options. They are the rights to
receive the cash value of the appreciation on an underlying
stock or equity based security. The stock may be publicly
traded, privately held, or may be based on valued, but
unregistered, stock or stock equivalent. The rights are
issued at a fixed price for a fixed period of time and can be
issued at a discount, carry a vesting period, and are
exercisable over a period of time. SARs are often used when
an employer cannot issue stock because the stock is listed on
a foreign exchange, or regulatory or financial barriers make
stock grants impracticable.
Employee Stock Purchase Plans. Employee stock purchase
plans (ESPPs) give employees the opportunity to purchase
employer stock, usually at up to a 15 percent discount, by
either regularly or periodically paying the employer directly
or by having after-tax money withdrawn as a payroll
deduction. Like option programs, ESPPs can be qualified or
nonqualified.
Section 423 of the Internal Revenue Code \4\ sets forth the
factors for a qualified ESPP. The ability to participate must
be offered to all employees, and employees must voluntarily
choose whether to participate in the program. The employer
can offer its stock to employees at up to a 15 percent
discount off of the fair market value of the stock,
determined at the time the option to purchase stock is
granted or at the time the stock is actually purchased. The
employee is required to hold the stock for one or two years
after the option is granted to receive capital gains
treatment. If the employee sells the stock before the
requisite period, any gain made on the sale is treated as
ordinary income.
Nonqualified ESPPs are usually similar to qualified ESPPs,
but they lack one or more qualifying features. For example,
the plan may apply only to one segment of employees, or may
provide for a greater discount.
B. The Fair Labor Standards Act and Stock Options
The Fair Labor Standards Act of 1938 \5\ (FLSA) establishes
workplace protections including a minimum hourly wage and
overtime compensation for covered employees, record keeping
requirements and protections against child labor, among other
provisions. A cornerstone of the FLSA is the requirement that
an employer pay its nonexempt employees overtime for all
hours worked over 40 in a week at one and one-half times the
employee's regular rate of pay.\6\ The term ``regular rate''
is broadly defined in the statute to mean ``all remuneration
for employment paid to, or on behalf of, the employee.'' \7\
Section 207(e) of the statute excludes certain payments
from an employee's regular rate of pay to encourage employers
to provide them, without undermining employees' fundamental
right to overtime pay. Excluded payments include holiday
bonuses or gifts,\8\ discretionary bonuses,\9\ bona fide
profit sharing plans,\10\ bona fide thrift or saving
plans,\11\ and bona fide old-age, retirement, life, accident
or health or similar benefits plans.\12\ By excluding these
payments from the definition of ``regular rate,'' \13\
Congress recognized that certain kinds of benefits provided
to employees are not within the generally accepted meaning of
compensation for work performed.
Thus, by excluding these payments from the regular rate in
section 207(e) of the FLSA, Congress encouraged employers to
provide these payments and benefits to employees. The
encouragement has worked well--employees now expect to
receive from their employer at least some of these benefits
(i.e. healthcare), which today, on average, comprise almost
30 percent of employees' gross compensation.\14\ For similar
reasons, Congress decided that the value and income from
stock option, SAR and ESPP programs should also be excluded
from the regular rate, because they allow employees to share
in the future success of their companies.
C. The Department of Labor's Opinion Letter on Stock Options
The impetus behind the Worker Economic Opportunity Act is
the broad dissemination of a February 1999 advisory opinion
letter \15\ regarding stock options issued by the Department
of Labor's Wage and Hour Division, the agency charged with
the administration of the FLSA. The letter involved an
employer's stock option program wherein its employees would
be notified of the program three months before the options
were granted, and some rank-and-file employees employed by
the company on the grant date would receive options. The
options would have a two-year vesting period, with
accelerated vesting if certain events occurred. The employer
would also automatically exercise any unexercised options on
behalf of the employees the day before the program ended.\16\
The opinion letter indicated that the stock option program
did not meet any of the existing exemptions to the regular
rate under the FLSA, although it did not explain the reasons
in any detail. Later, the Administration's testimony before
the House Workforce Protections Subcommittee explained that
the stock option program did not meet the gift, discretionary
bonus, or profit sharing exceptions to the regular rate
because, among other reasons, it required employees to do
something as a condition of receiving the options--to remain
employed with the company for a period of time.\17\ Such a
condition is not allowed under the current regular rate
exclusions. The testimony also noted that the program was not
excludable under the thrift or savings plan exception because
[[Page H2439]]
the employees were only allowed to exercise their options
using a cashless method of exercise, and thus the employees
could not keep the stock as savings or an investment.\18\
The opinion letter stated that the employer would be
required to include any profits made from the exercise of the
options in the regular rate of pay of its nonexempt
employees. In particular, the profits would have to be
included in the employee's regular rate for the shorter of
the time between the grant date and the exercise date, or the
two years prior to exercise.\19\
Section 207(e)'s exclusions to the regular rate did not
clearly exempt the profits of stock options or similar equity
devices from the regular rate, and thus from the overtime
calculation. Thus, the Department of Labor's opinion letter
provided a permissible reading of the statute. A practical
effect of the Department of Labor's interpretation was stated
by J. Randall MacDonald, Executive Vice President of Human
Resources and Administration at GTE during a March 2, 2000
House Workforce Protections Subcommittee hearing on the
issue: ``[i]f the Fair Labor Standards Act is not corrected
to reverse this policy, we will no longer be able to offer
stock options to our nonexempt employees.'' \20\
As the contents of the letter became generally known in the
business community and on Capitol Hill, it became clear that
the letter raised an issue under the FLSA that previously had
not been contemplated. It further became clear that an
amendment to the FLSA would be needed to change the law
specifically to address stock options.
A legislative solution was not only supported by employers
at the House hearing, it was also supported by employees and
unions. Patricia Nazemetz, Vice President of Human Resources
for Xerox Corporation, read a letter from the Union of
Needlework, Industrial and Textile Employees (UNITE), the
union that represents many Xerox manufacturing and
distribution employees, in which the International Vice
President stated:
Xerox's UNITE chapter would strongly urge Congress to pass
legislation exempting stock options and other forms of stock
grants from the definition of the regular rate for the
purposes of calculating overtime. . . . It is only recently
that Xerox has made bargaining unit employees eligible to
receive both stock options and stock grants. Without a
clarification to the FLSA, we are afraid Xerox may not offer
stock options or other forms of stock grants to bargaining
unit employees in the future.\21\
At the House hearing, the Administration also acknowledged
that the problem needed to be fixed legislatively in a
flexible manner, ``Based on the information we have been able
to obtain, there appears to be wide variations in the scope,
nature and design of stock option programs. There is no one
common model for a program, suggesting the need for a
flexible approach. Given the wide variety and complexity of
programs, we believe that the best solution would be to
address this matter legislatively.'' \22\
The general agreement on the need to fix the problem among
these diverse interests led to the development of the Worker
Economic Opportunity Act.
iii. explanation of the bill and sponsors' views
Congress worked closely with the Department of Labor to
develop this important legislation. The sections below
reflect the discussions between the sponsors and the
Department of Labor during the development of the
legislation, and the sponsors' intent and their understanding
of the legislation.
A. Definition of Bona Fide ESPP
For the purposes of the Worker Economic Opportunity Act, a
bona fide employee stock purchase plan includes an ESPP that
is (1) a qualified ESPP under section 423 of the Internal
Revenue Code,\23\ or (2) a plan that meets the criteria
identified below.
1. Qualified Employee Stock Purchase Plans
Qualified ESPPs, known as section 423 plans, comprise the
overwhelming majority of stock purchase plans. Thus, the
intent of the legislation is to deem ``bona fide'' all plans
that meet the criteria of section 423.
2. Nonqualified Employee Stock Purchase Plans
As described above, section 423 plans are considered bona
fide ESPPs. Further, those ESPPs that do not meet the
criteria of section 423, but that meet the following criteria
also qualify as bona fide ESPPs:
(a) the plan allows employees, on a regular or periodic
basis, to voluntarily provide funds, or to elect to authorize
periodic payroll deductions, for the purchase at a future
time of shares of the employer's stock;
(b) the plan sets the purchase price of the stock as at
least 85% of the fair market value of the stock at the time
the option is granted or at the time the stock is purchased;
and,
(c) the plan does not permit a nonexempt employee to accrue
options to purchase stock at a rate which exceeds $25,000 of
fair market value of such stock (determined either at the
time the option is granted or the time the option is
exercised) for each calendar year.
The sponsors note that many new types of ESPPs are being
developed, particularly by companies outside the United
States, and that many of these companies may also intend to
apply them to their U.S.-based employees. These purchase
plans have several attributes which make them appear to be
more like savings plans than traditional U.S. stock purchase
plans, such as a period of payroll deductions of between
three and five years, or an employer provided ``match'' in
the form of stock or options to the employee.
Further many companies are developing plans that are
similar to section 423 plans. The sponsors believe that it is
in the best interests of employees for the Secretary of Labor
to review these and other new types of plans carefully in the
light of the purpose of the Worker Economic Opportunity Act--
to encourage employers to provide opportunities for equity
participation to employees--and to allow section 7(e), as
amended, to accommodate a wide variety of programs, where it
does not undermine employees' fundamental right to overtime
pay. It is the sponsors' vision that this entire law be
flexible and forward-looking and that the Department of labor
apply and interpret it consistently with this vision.
B. ``Value or Income'' Is Defined Broadly
The hallmark of the Worker Economic Opportunity Act is that
section 7(e)(8) provides that any value or income derived
from stock option, SAR or bona fide ESPP programs is excluded
from the regular rate of pay. For this reason, the phrase
``value or income'' is construed broadly to mean any value,
profit, gain, or other payment obtained, recognized or
realized as a result of, or in connection with, the
provision, award, grant, issuance, exercise or payment of
stock options, SARs, or stock issued or purchased pursuant to
a bona fide ESPP program established by the employer.
This broad definition means, for example, that any nominal
value that a stock option or stock appreciation right may
carry before it is exercised is excluded from the regular
rate. Similarly, the value of the stock or the income in the
form of cash is excluded after options are exercised, as is
the income earned from the stock in the form of dividends or
ultimately the gains earned, if any, on the sale of the
stock. The discount on stock option, SAR or stock purchase
under a ESPP program is likewise excludable.
C. The Act Preserves Programs Which Are Otherwise Excludable Under
Existing Regular Rate Exemptions
The Worker Economic Opportunity Act recognizes two ways
that employer equity programs may be excluded from the
regular rate. Such equity programs may be excluded if they
meet the existing exemptions to the regular rate pursuant to
Section 7(e)(1)-(7), which apply to contributions and sums
paid by employers regardless of whether such payments are
made in cash or in grants of stock or other equity based
vehicles, and provided such payment or grant is consistent
with the existing regulations promulgated under Section 7(e).
Employer equity plans also may be excluded under new section
7(e)(8) added by the Worker Economic Opportunity Act.
This is reaffirmed in new section 207(e)(8), which makes
clear that the enactment of section 7(e)(8) carries no
negative implication about the scope of the preceding
paragraphs of section (e). Rather, the sponsors understand
that some grants and rights that do not meet all the
requirements of section 7(e)(8) may continue to qualify for
exemption under an earlier exclusion. For example, programs
that grant options or SARs that do not have a vesting period
may be otherwise excludable from the regular rate if they
meet another section (7)(e) exclusion. This would be true
even if the option was granted at less than 85% of fair
market value. This language was not intended to prevent
grants or rights that meet some but not all of the
requirements of an earlier exemption in 7(e) from being
exempt under the newly created exemption.
D. Basic Communication to Employees Required Because it Helps Ensure a
Successful Program
For grants made under a stock option, SAR or bona fide ESPP
program to qualify for the exemption under new section
7(e)(8), their basic terms and conditions must be
communicated to participating employees either at the
beginning of the employee's participation in the program or
at the time of grant. This requirement was put into the
legislation to recognize that when employees understand the
mechanics and the implications of the equity devices they are
given, they can more fully participate in exercising
meaningful choices with respect to those devices. As
discussed below, this is a simple concept, it is not intended
to be a complicated or burdensome requirement.
1. Terms and Conditions To Be Communicated to Employees
Employers must communicate the material terms and
conditions of the stock option, stock appreciation right or
employee stock purchase program to employees to ensure that
they have sufficient information to decide whether to
participate in the program. With respect to options, these
terms include basic information on the number of options
granted, the number of shares granted per option, the
exercise price, the grant date or dates, the length of any
applicable vesting period(s) and the dates when the employees
will first be able to exercise options or rights, under what
conditions the options must be forfeited or surrendered, the
exercise methods an employee may use (such as cash for stock,
cashless for cash or stock, etc.), any restrictions on stock
purchased through options, and the duration of the option,
and what happens to unexercised options at the end of the
exercise period. Pending issuance of any regulations, an
employer who communicated the information in the
[[Page H2440]]
prior sentence is to be deemed to have communicated the terms
and conditions of the grant. Similar information should be
provided regarding SARs or ESPPs.
2. The Mode of Communications
The legislation does not specify any particular mode of
communication of relevant information, and no particular
method of communication is required, as long as the method
chosen reasonably communicates the information to employees
in a understandable fashion. For example, employers may
notify their employees of an option grant by letter, and
later provide a formal employee handbook, or other method
such as a link to a location on the company Intranet. Any
combination of communications is acceptable. The intent of
the legislation is to ensure that employees are provided the
basic information in a timely manner, not to mandate the
particular form of communication, nor to bar the use of new
forms of communication. Therefore, an employer should be able
to use current electronic communication methods, as well as
other forms of communication that develop later.
3. The Timing of Communications
The legislation specifies that the employer is to
communicate the terms and conditions of the stock option, SAR
and ESPP programs to employees at or before the beginning of
the employee's participation in the program or at the time
the employee receives a grant. It is acceptable, and perhaps
even likely, that the relevant information on a program will
be disseminated in a combination of communications over time.
This approach allows flexibility and acknowledges that types
of participation vary greatly between stock option and SAR
programs, on the one hand, and ESPPs on the other.
For example, under an ESPP, an employee may choose to begin
payroll deductions in January, but not actually have the
option to purchase stock until June. By contrast, with an
option or SAR program, employees are given the options or
rights at the outset, but those rights may not vest until
some year in the future.
The timing of the communication is flexible, because often
it is difficult to have materials ready for employees at the
beginning of a stock option or stock appreciation right
program, immediately following approval by the Board of
Directors, because of confidentiality requirements. Thus,
within a reasonable time following approval of a stock option
grant by the Board of Directors, the employer is required to
communicate basic information about the grant employees have
received. For example, an initial letter may notify the
employees that they have received a certain number of stock
options and provide the basic information about the program.
More detailed information about the program may precede or
follow the grant in formats such as an employee handbook,
options pamphlet, or an Intranet site that provides options
information.
E. Exercisability Criteria Applicable only to Stock Options and SARs
As discussed above, a common feature in grants of stock
options and SARs is a vesting or holding period, which under
current practice may be as short as a few months or as long
as a number of years. For a stock option of SAR to be
excluded from the regular rate pursuant to the Worker
Economic Opportunity Act, new section 7(e)(8) requires that
the grant or right generally cannot be exercisable for at
least six months after the date of grant.
For stock option grants that include a vesting requirement,
typically an option will become exercisable after the vesting
period ends. Some option grants vest gradually in accordance
with a schedule. For example, a portion of the employee's
options may vest after six months, with the remaining portion
vesting three months thereafter. Options may also vest in
connection with an event, such as the stock reaching a
certain price or the company attaining a performance target.
In addition, the sponsors recognize that a grant that is
vested may not be currently exercisable by the employee
because of an employer's requirement that the employee hold
the option for a minimum period prior to exercise. In other
words, there may be an additional period of time after the
vesting period during which the option remains
unexerciseable. An option or SAR may meet the exercisability
requirements of the bill without regard to the reason why the
right to exercise is delayed.
Further, if a single grant of options or SARs includes some
options exercisable after six months while others are
exercisable earlier, then those exercisable after the six
month period will meet the exercisability requirement even if
the others do not. The determination is made option by
option, SAR by SAR. In addition, if exercisability is tied to
an event, the determination of whether the six-month
requirement is met is based on when the event actually
occurs. Thus, for example, if an option is exercisable only
after an initial public offering (IPO) and the IPO occurs
seven months after grant, the option shall be deemed to have
met the provision's exercisability requirement.
However, section 7(e)(8)(B) specifically recognizes that
there are a number of special circumstances when it is
permissible for an employer to allow for earlier exercise to
occur (in less than 6 months) without loss of the exemption.
For example, an employer or plan may provide that a grant may
vest or otherwise become exercisable earlier than six months
because of an employee's disability, death, or retirement.
The sponsors encourage the Secretary to consider and evaluate
other changes in employees' status or circumstances.
Earlier exercise is also permitted in connection with a
change in corporate ownership. The term change in ownership
is intended to include events commonly considered changes in
ownership under general practice for options and SARs. For
example, the term would include the acquisition by a party of
a percentage of the stock of the corporation granting the
option or SAR, a significant change in the corporation's
board of directors within 24 months, the approval by the
shareholders of a plan or merger, and the disposition of
substantially all of the corporation's assets.
The sponsors believe it important to allow employers the
flexibility to construct plans that allow for these earlier
exercise situations. However, this section is not intended to
in any way require employers to include these or any other
early exercise circumstances in their plans.
F. Stock Option and SAR Programs may Be Awarded at Fair Market Value or
Discounted up to and Including 15%
Stock options and SARs generally are granted to employees
at around fair market value or at a discount. New section
7(e)(8)(B) recognizes that grants may be at a discount, but
that the discount cannot be more than a 15% discount off of
the fair market value of the stock (or in the case of stock
appreciation rights, the underlying stock, security or other
similar interest).
A reasonable valuation method must be used to determine
fair market value at the time of grant. For example, in the
case of a publicly traded stock, it would be reasonable to
determine fair market value based on averaging the high
and low trading price of the stock on the date of the
grant. Similarly, it would be reasonable to determine fair
market value as being equal to the average closing price
over a period of days ending with or ending shortly before
the grant date (or the average of the highs and lows on
each day). In the case of a non-publicly traded stock, any
reasonable valuation that is made in good faith and based
on reasonable valuation principles must be used.
The sponsors understand that the exercise price of stock
options and SARs is sometime adjusted in connection with
recapitalizations and other corporate events. Accounting and
other tax guidelines have been developed for making these
adjustments in a way that does not modify a participant's
profit opportunity. Any adjustment conforming with these
guidelines does not create an issue under the 15% limit on
discounts.
G. Employee Participation in Equity Programs Must Be Voluntary
New section (8)(C) of the Worker Economic Opportunity Act
states that the exercise of any grant or right must be
voluntary. Voluntary means that the employee may or may not
choose not to exercise his or her grants or rights at any
point during the stock option, stock appreciation right, or
employee stock purchase program, as long as that is in
accordance with the terms of the program. This is a simple
concept and it is not to be interpreted as placing any other
restrictions on such programs.
It is the intent of the sponsors that this provision does
not restrict the ability of an employer to automatically
exercise stock options or SARs for the employee at the
expiration of the grant or right. However, an employer may
not automatically exercise stock options or SARs for an
employee who has notified the employer that he or she does
not want the employer to exercise the options or rights on
his or her behalf.
Stock option, SARs and ESPP programs may qualify under new
section 7(e)(8) even though the employer chooses to require
employees to forfeit options, grants or rights in certain
employee separation situations.
H. Performance Based Programs
The purpose of new section 7(e)(8)(D) is to set out the
guidelines employers must follow in order to exclude from the
``regular rate' grants of stock options, SARs, or shares of
stock pursuant to an ESPP program based on performance. If
neither the decision of whether to grant nor the decision as
to the size of the grant is based on performance, the
provisions of in new section 7(e)(8)(D) do not apply. For
example, grants made to employees at the time of their hire,
and any value or income derived from these grants, may be
excluded provided they meet the requirements in new sections
7(e)(8)(A)-(C).
New section 8(D) is divided into two clauses. The first,
clause (i), deals with awards of options awarded based on
pre-established goals for future performance, and the second,
clause (ii), deal with grants that are awarded based on past
performance.
1. Goals for Future Performance
New section 7(e)(8)(D)(i) provides that employers may tie
grants to future performance so long as the determinations as
to whether to grant and the amount of grant are based on the
performance of either (i) any business unit consisting of at
least ten employees or (ii) a facility.
A business unit refers to all employees in a group
established for an identifiable business purpose. The
sponsors intend that employers should have considerable
flexibility in defining their business units. However, the
unit may not merely be a pretext for measuring the
performance of a single employee or small group of fewer than
ten employees. By way of example, a unit may include any of
the following: (i) a department,
[[Page H2441]]
such as the accounting or tax departments of a company, (ii)
a function, such as the accounts receivable function within a
company's accounting department, (iii) a position
classification, such as those call-center personnel who
handle initial contacts, (iv) a geographical segment of a
company's operations, such as delivery personnel in a
specified geographical area, (v) a subsidiary or operating
division of a company, (vi) a project team, such as the group
assigned to test software on various computer configurations
or to support a contract or a new business venture.
With respect to the requirement to have ten or more
employees in a unit, this determination is based on all of
the employees in the unit, not just those employees who are,
for example, non-exempt employees.
A facility includes any separate location where the
employer conducts its business. Two or more locations that
would each qualify as a facility may be treated as a single
facility. Performance measurement based on a particular
facility is permitted without regard to the number of
employees who are working at the facility. For example, a
facility would include any of the following: a separate
office location, each separate retail store operated by a
company, each separate restaurant operated by a company, a
plant, a warehouse, or a distribution center.
The definition of both a business unit and a facility are
intended to be flexible enough to adapt to future changes in
business operations. Therefore, the examples of business
units set forth above should be viewed with this in mind.
Options may be excluded from the regular rate in accordance
with new section 7(e)(8)(D)(i) under the following
circumstances:
Example 1--Employer announces that certain employees at the
Wichita, Kansas plant will receive 50 stock options if the
plant's production reaches a certain level by the end of the
year (note that in order to fit within this subsection, the
grant does not have to be made on a facility wide basis);
Example 2--Employer announces that it will grant employees
working on the AnyCo. account 50 stock options each if the
account brings in a certain amount of revenue by the end of
the year, provided that there are at least 10 employees on
the AnyCo. account.
Example 3--Employer announces that certain employees will
receive stock options if the company reaches specified goal.
New section 7(e)(8)(D)(i) also makes clear that otherwise
qualifying grants remain excludable from the regular rate if
they are based on an employees' length of service or minimum
schedule of hours or days of work. For example, an employer
may make grants only to employees: (i) who have a minimum
number of years of service, (ii) who have been employed for
at least \24\ a specified number of hours of service during
the previous twelve month period (or other period), (iii) who
are employed on the grant date (or a period ending on the
grant date), (iv) who are regular full-time employees (i.e.,
not part-time or seasonal), (v) who are permanent employees,
or (vi) who continue in service for a stated period after the
grant date (including any minimum required hours during this
period). Any or all of these conditions, and similar
conditions, are permissible.
2. Past Performance
New section 7(e)(8)(d)(ii) clarifies that employers may
make determinations as to existence and amount of grants or
rights based on past performance, so long as the
determination is in the sole discretion of the employer and
not pursuant to any prior contract. Thus, employers have
broad discretion to make grants as rewards for the past
performance of a group of employees, even if it is not a
facility or business unit, or even for an individual
employee. The determination may be based on any performance
criteria, including hours of work, efficiency or
productivity.
Under new section 7(e)(8)(D)(ii), employers may develop a
framework under which they will provide options in the
future, provided that to the extent the ultimate
determination as to the fact of and the amount of grants or
rights each employee will receive is based on past
performance, the employer does not contractually obligate
itself to provide the grant or rights to an employee. Thus,
new section 7(e)(8)(D)(ii) would allow an employer to
determine in advance that it will provide 100 stock options
to all employees who receive ``favorable'' ratings on their
performance evaluations at the end of the year, and it would
allow the employer to advise employees, in employee handbooks
or otherwise, of the possibility that favorable evaluations
may rewarded by option grants, so long as the employer does
not contractually obligate itself to provide the grants or in
any other way relinquish its discretion as to the existence
or amount of grants.
Similarly, the fact that an employer makes grants for
several years in a row based on favorable performance
evaluation ratings, even to the point where employees come to
expect them, does not mean in itself that the employer may be
deemed to have ``contractually obligated'' itself to provide
the rights.
Some examples of performance based grants that fit within
new 7(e)(8)(D)(ii) are as follows:
Example A: Company A awards stock options to encourage
employees to identify with the company and to be creative and
innovative in performing their jobs. Company A's employee
handbook includes the following: ``Company A's stock option
program is a long-term incentive used to recognize the
potential for, and provide an incentive for, anticipated
future performance. Stock option grants may be awarded to
employees at hire, on an annual basis, or both. All full-time
employees who have been employed for the appropriate service
time are eligible to be considered for annual stock option
grants.''
Company A provides stock options to most nonexempt
employees following their performance review. Each employee's
manager rates the employee during a review process, resulting
in a rating of from 1 to 5. The rating is based upon the
manager's objective and subjective analysis of the employee's
performance. The rating is then put into a formula to
determine the number of options an employee is eligible to
receive, based on the employee's level within the company,
the product line that the employee works on, and the value of
the product to the company's business. Employees are aware a
formula is used. The Company then informs the employee of the
number of options awarded to him or her.
Managers make it clear to employees that the options are
granted in recognition of prior performance with the
expectation of the employee's future performance, but no
contractual obligation is made to employees. This process is
repeated annually, with employees eligible for stock options
each year based on their annual performance review. Most
employees receive options annually based upon their
performance review rating and their level in the company.
Example B: Company B manages its program similarly to
company A, with some notable exceptions. Company B has a very
detailed performance management system, under which all
employees successfully meeting the expectations of their job
receive options. The employee's job expectations are more
clearly spelled out on an annual basis than under Company A's
plan. Once a year, the employee under goes a formal, written,
performance review with his or her manager. If work is
satisfactory, the employee receives a predetermined but
unannounced number of options. Unlike Company A, which
provides different amounts of options to employees based upon
a numeric performance rating, Company B provides the same
number of options to all employees who receive satisfactory
employment evaluations. Over 90 percent of Company B's
employees receive options annually, and in many years, this
percentage exceeds 95 percent.
In both Example A and Example B, the employers set up in
advance the formula under which option decisions are made;
however, the decisions as to whether an individual employee
would receive options and how many options he or she would
receive was made based on past performance at the end of the
performance period, but not pursuant to a prior contractual
obligation made to the employees. The fact that the employer
determines a formula or program in advance does not
disqualify these examples from new section 7(e)(8).
I. Extra Compensation
The Worker Economic Opportunity Act also amends section
7(h) of the FLSA (29 U.S.C. Sec. 207(h)) to ensure that the
income or value that results from a stock option, SAR or ESPP
program, and that is excluded from the regular rate by new
section 7(e)(8), cannot be credited by an employer toward
meeting its minimum wage obligations under section 6 of the
Act or overtime obligations under section 7 of the Act. The
language divides section 7(h) into two parts, 7(h)(1) and
7(h)(2). Section 7(h)(1) states that an employer may not
credit an amount, sum, or payment excluded from the regular
rate under existing sections 7(e)(1-7) or new section 7(e)(8)
towards an employers' minimum wage obligation under section 6
of the Act. When section 7(h)(1) is read together with
section 7(h)(2), it states that an employer may not credit an
amount excluded under existing sections 7(e)(1-4) or new
section 7(e)(8) toward overtime payments. However, consistent
with existing 7(h), extra compensation paid by an employer
under sections 7(e)(5-7) may be creditable towards an
employer's overtime obligations. This change shall take
effect on the effective date but will not affect any payments
that are not excluded by section 7(e) and thus are included
in the regular rate.
J. The Legislation Includes a Broad Pre-Effective Date Safe Harbor &
Transition Time
In drafting the Worker Economic Opportunity Act, the
sponsors hoped to create an exemption that would be broad
enough to capture the diverse range of broad-based stock
ownership programs that are currently being offered to non-
exempt employees across this nation. However, in order to
reach a consensus, the new exemption had to be tailored to
comport with the existing framework of the FLSA. The result
is a series of requirements that stock option, SAR and ESPP
programs must meet in order for the proceeds of those plans
to fit within the newly created exemption.
Because of the circumstances that give rise to this
legislation, the pre-effective date safe harbor is
intentionally broader than the new exemption. The sponsors
did not want to penalize those employers who have been
offering broad-based stock option, SAR and ESPP programs
simply because these programs would not meet all the new
requirements in section 7(e)(8). Thus, the safe harbor in
section 2(d) of the Act comprehensively protects
[[Page H2442]]
employers from any liability or other obligations under the
FLSA for failing to include any value or income derived from
stock option, SAR and ESPP programs in a non-exempt
employee's regular rate of pay. The safe harbor applies to
all grants or rights that were obtained under such programs
prior to the effective date, whether or not such programs fit
within the new requirements of section 7(e)(8). If a grant or
right was initially obtained prior to the effective date, it
is covered by the safe harbor even though it vested later or
was contingent on performance that would occur later. In
addition, normal adjustments to a pre-effective date grant or
right, such as those that are triggered by a
recapitalization, change of control or other corporate event,
will not take the grant or right outside the safe harbor.
On a prospective basis, the sponsors realized that many
employers would need time to evaluate their programs in light
of the new law and to make the changes necessary to ensure
that the programs will fit within the new section 7(e)(8)
exemption. Consequently, the sponsors adopted a broad
transition provision to apply to stock option, SAR and ESPP
programs without regard to whether or not they meet the
requirements for these plans set forth in the legislation.
Specifically, section 2(c) of the legislation contains a 90
day post enactment delayed effective date. The sponsors
believe that the vast majority of employers who offer stock
option, SAR and ESPP programs to non-exempt employees will be
able to use the transition period in section 2(d)(1) to
modify their programs to conform with the requirements of the
legislation.
In addition, the sponsors felt that there were two
circumstances where a further extension of this broad
transition relief was appropriate. First, the legislation
recognizes that some employers would need the consent of
their shareholders to change their plans. Section 2(d)(2)
provides an additional year of transition relief to any
employer with a program in place on the date this legislation
goes into effect that will require shareholder approval to
make the changes necessary to comply with the new
requirements of section 7(e)(8). Second, the legislation
extends the transition relief to cover situations wherein an
employers' obligations under a collective bargaining
agreement conflict with the requirements of this Act. Section
2(d)(3) eliminates any potential conflict by allowing
employers to fulfill their pre-existing contractual
obligations without fear of liability.
v. regulatory impact statement
The sponsors have determined that the bill would result in
some additional paperwork, time and costs to the Department
of Labor, which would be entrusted with implementation of the
Act. It is difficult to estimate the volume of additional
paperwork necessitated by the Act, but the sponsors do not
believe that it will be significant.
vi. section-by-section analysis
Sec. 2. (a) Amendments to the Fair Labor Standards Act--The
legislation amends Section 7(e) of the Fair Labor Standards
Act of 1938 (29 U.S.C.Sec. 207(e)) by creating a new
subsection, 7(e)(8), which will exclude from the definition
of the regular rate of pay any income or value nonexempt
employees derive from an employer stock option, stock
appreciation right, or bona fide employee stock purchase
program under certain circumstances. Specifically, the
legislation adds the following provisions to the end of
Section 7(e) of the Fair Labor Standards Act:
(8) The new exclusion provides that when an employer gives
its employees an opportunity to participate in a stock
option, stock appreciation right or a bona fide employee
stock purchase program (as explained in the Explanation of
the Bill and Sponsor's Views), any value or income received
by the employee as a result of the grants or rights provided
pursuant to the program that is not already excludable from
the regular rate of pay under sections 7(e)(1-7) of the Act
(29 U.S.C. Sec. 207(e)), will be excluded from the regular
rate of pay, provided the program meets the following
criteria--
(8)(A) The employer must provide employees who are
participating in the stock option, stock appreciation right
or bona fide employee stock purchase program with information
that explains the terms and conditions of the program. The
information must be provided at the time when the employee
begins participating in the program or at the time when the
employer grants the employees stock options or stock
appreciation rights.
(8)(B) As a general rule, the stock option or stock
appreciation right program must include at least a 6 month
vesting (or holding) period. That means that employees will
have to wait at least 6 months after they receive stock
options or a stock appreciation right before they are able to
exercise the right for stock or cash. However, in the event
that the employee dies, becomes disabled, or retires, or if
there is a change in corporate ownership that impacts the
employer's stock or in other circumstances set forth at a
later date by the Secretary in regulations, the employer has
the ability to allow its employees to exercise their stock
options or stock appreciation rights sooner. The employer may
offer stock options or stock appreciation rights to employees
at no more than a 15 percent discount off the fair market
value of the stock or the stock equivalent determined at the
time of the grant.
(8)(C) An employee's exercise of any grant or right must be
voluntary. This means that the employees must be able to
exercise their stock options, stock appreciation rights or
options to purchase stock under a bona fide employee stock
purchase program at any time permitted by the program or to
decline to exercise their rights. This requirement does not
preclude an employer from automatically exercising
outstanding stock options or stock appreciation rights at the
expiration date of the program.
(8)(D) If an employer's grants or rights under a stock
option or stock appreciation right program are based on
performance, the following criteria apply.
(1) If the grants or rights are given based on the
achievement of previously established criteria, the criteria
must be limited to the performance of any business unit
consisting of 10 or more employees or of any sized facility
and may be based upon that unit's or facility's hours of
work, efficiency or productivity. An employer may impose
certain eligibility criteria on all employees before they may
participate in a grant or right based on these performance
criteria, including length of service or minimum schedules of
hours or days of work.
(2) The employer may give grants to individual employees
based on the employee's past performance, so long as the
determination remains in the sole discretion of the employer
and not according to any prior contract requiring the
employer to do so.
(b) Extra Compensation--The bill amends section 7(h) of the
Fair Labor Standards Act (29 U.S.C. 207(h) to make clear that
the amounts excluded under section 7(e) of the bill are not
counted toward an employer's minimum wage requirement under
section 6 of the Fair Labor Standards Act and that the
amounts excluded under sections 7(e)(1-4) and new section
7(e)(8) are not counted toward overtime pay under section 7
of the Act.
(c) Effective Date--The amendments made by the bill take
effect 90 days after the date of enactment.
(d) Liability of Employers--
(1) No employer shall be liable under the FLSA for failing
to include any value or income derived from any stock option,
stock appreciation right and employee stock purchase program
in an non-exempt employee's regular rate of pay, so long as
the employee received the grant or right at any time prior to
the date this amendment takes effect.
(2) Where an employer's pre-existing stock option, stock
appreciation right, or employee stock purchase program will
require shareholder approval to make the changes necessary to
comply with this amendment, the employer shall have an
additional year from the date this amendment takes effect to
change its plan without fear of liability.
(3) Where an employer is providing stock options, stock
appreciation rights, or an employee stock purchase program
pursuant to a collective bargaining agreement that is in
effect on the effective date of this amendment, the employer
may continue to fulfill its obligations under that collective
bargaining agreement without fear of liability.
(e) Regulations--the bill gives the Secretary of Labor
authority to promulgate necessary regulations.
Footnotes
\1\ David Lebow et al., Recent Trends in Compensation
Practices, Board of Governors of the Federal Reserve System,
Fin. and Econ. Discussion Series, No. 1999-32, July 1999.
\2\ Anita U. Hattinagadi, Taking Stock: $470,000 at Risk for
Hourly Workers, Employment Policy Foundation, Mar. 2, 2000,
at 4, and Fig. 2.
\3\ Any stock option program that meets the criteria under
section 422 of the Internal Revenue Code (called an Incentive
Stock Option) is considered a qualified option. 26 U.S.C.
Sec. 422.
\4\ 26 U.S.C. Sec. 423.
\5\ 29 U.S.C. Sec. 201, et seq.
\6\ 29 U.S.C. Sec. 207(a)(1).
\7\ 29 U.S.C. Sec. 207(e).
\8\ 29 U.S.C. Sec. 207(e)(1).
\9\ 29 U.S.C. Sec. 207(e)(3).
\10\ Id.
\11\ Id.
\12\ 29 U.S.C. Sec. 207(e)(4).
\13\ See e.g., Conference Report on H.R. 5856, H. Rept. No.
1453.
\14\ U.S. Dept. of Lab. Bureau of Lab. Statistics, Employer
Costs for Employee Compensation--March 1999, available at
ftp://146.142.4.23/pub/news.release/ecec.txt.
\15\ A wage-hour opinion letter responds to a request for the
Department of Labor's view of how the law applies to a given
set of facts. The letters are available to the public upon
request or through commercial reporting services. Opinion
letters have significant practical effects: ``[T]he
Administrator's interpretation . . . has the characteristic
not only of securing `expected compliance' . . . but of
possibly stimulating double damage suits by employees who
need not fear that they would be at odds with the Government
Officials involved.'' National Automatic Laundry & Cleaning
v. Schultz, 143 U.S. App. D.C. 274 (D.C. Cir. 1971).
\16\ Letter from Daniel F. Sweeney, Office of Enforcement
Policy, Fair Labor Standards Team, Wage & Hour Division, Feb.
12, 1999.
\17\ Hearing on the Treatment of Stock Options and Employee
Investment Opportunities Under the Fair Labor Standards Act
before the House Committee on Education and the Workforce,
Subcommittee on Workforce Protections, 106th Cong. 2d Sess.
Mar. 2, 2000 (Statement of T. Michael Kerr, at 4-5).
\18\ Id. at 5. The testimony also noted that the program's
automatic exercise feature prevented the employees'
participation from being voluntary, as required under the
Division's rules for thrift savings programs.
\19\ Letter from Daniel F. Sweeney, Office of Enforcement
Policy, Fair Labor Standards Team, Wage & Hour Division, Feb.
12, 1999.
\20\ Hearing on the Treatment of Stock Options and Employee
Investment Opportunities Under the Fair Labor Standards Act
before the House Committee on Education and the Workforce,
Subcommittee on Workforce Protections, 106th Cong. 2d Sess.
Mar. 2, 2000 (Statement of J. Randall MacDonald, at 2).
\21\ Id. (addendum to statement of Patricia Nazemetz, Letter
from Gary J. Bonadonna, Director
[[Page H2443]]
& International Vice President, UNITE, February 22, 2000).
\22\ Id. (statement of T. Michael Kerr, at 7).
\23\ 26 U.S.C. Sec. 423.
Mr. Speaker, I reserve the balance of my time.
Mr. OWENS. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, I rise in support of the Worker Economic Opportunity
Act. It is kind of complicated so I think it is important that the
record reflect that we understand those complications.
Stock option programs have existed for decades, but traditionally
they have only been provided to top executives. Laudably, in recent
years a number of companies have expanded these programs to cover rank
and file workers. However, when this practice was brought to the
attention of the Department of Labor, it correctly found that in many
cases income earned by workers participating in these kinds of programs
do not qualify within any of the existing statutory exemptions for
exclusion from overtime.
As a general matter, ignorance of or disregard for the law should not
serve to justify its violation. In this instance, however, I fully
concur that speculative stock options should not be subject to overtime
and that invoking the requirements of the law at this late date ex post
facto would be unfair and unwise.
This legislation provides that if certain conditions are met, income
earned by workers as a result of participation in certain recognized
option programs, stock appreciation programs, or bona fide employee
stock purchase programs, shall not be counted for the purpose of
calculating overtime.
The legislation is not intended to alter or to undermine in any way
any other existing protection afforded to workers under the overtime
provisions of the Fair Labor Standards Act. By the same token, income
from stock option-type programs that is already exempt from the
overtime calculation is not intended to be affected by this
legislation. That income remains exempt.
Stock programs vary widely in their structure. This legislation is
not intended to impose a single structure on such programs but has been
broadly crafted to try to accommodate their variety. Consequently, the
bill is solid with regard to certain definitions and implementation
issues, and broad regulatory authority has been given to the Department
of Labor to implement the legislation.
The legislation requires that employees must be informed of the terms
and conditions of any grants made to employees and that the employees
must be able to voluntarily exercise any grant or right offered by the
employer. The intent of these provisions is to ensure that employees
are able to knowledgeably and freely determine whether they wish to
participate in the program before they are required to do so and that
they are able to knowledgeably and freely exercise such rights and
options as they are afforded within the program. Employees must have a
basis for assessing the value and the risk inherent in the choices they
face.
This legislation provides that employers may sell stock options or
stock appreciation rights to employees at a discounted rate but that
the discount may not be greater than 15 percent of the market value of
the stock. This provision applies equally to closely held companies as
well as publicly traded companies. Necessarily then stock appraisals by
closely held companies may become subject to review.
{time} 1300
The legislation provides that there must be at least a 6-month period
between the grant of stock option or stock appreciation right and the
date on which that right is exercisable. This requirement is waived in
cases involving an employee's death, disability, retirement, or a
change in corporate ownership or in other circumstances permitted by
regulation.
The limitation on stock discounts and the 6-month holding period,
taken together, reflect the intention that some level of risk be
assumed by employees in order that this legislation does not serve as
an incentive for employers to convert wages to stock options as a means
of evading overtime.
Where an employee separates from employment with an employer, whether
voluntarily or involuntarily, overtime is no longer an issue. In my
view, it is, therefore, wholly appropriate for the 6-month holding
period requirement to be waived in such instances.
Finally, while many refer to the 6-month period as a vesting period,
the use of the term vesting is not accurate. The only requirement
imposed by this legislation is that an employee may not exercise a
grant for at least 6 months.
This legislation provides that an employer may not condition the
offer of a stock program based on an employee's future performance
unless such an offer is made to all employees in a facility or in a
business unit consisting of at least 10 employees.
An exception to this rule is provided to permit employers to
condition offers upon length of service or minimum schedule of hours or
days of work. The purpose of the exception is to permit employers to
distinguish between part-time and full-time employees or between
employees on temporary or probationary status and those on permanent
status.
The purpose is not to permit employers to target offers predicted on
future performance to a single employee or to require employees to work
overtime as a condition of participation.
Likewise, the term business unit is intended to be meaningful.
Assuming an offer is made on less than a facilitywide basis, an
employer may not make an offer that is conditioned on future
performance if that offer excludes some employees within a business
unit who are otherwise eligible under the grant's terms, nor may an
employer make such an offer arbitrarily to some employees without
regard to their duties.
As is generally the case under current law with regard to performance
bonuses, an employer may offer program participation to individual
employees based upon the employee's past performance. The intent is to
enable the employers to reward employees for past service. This
provision is not intended to undermine or supersede limitations
applicable to grants that are conditioned upon future performance.
Stock-option programs are new avenues for the front-line worker;
however, the right to overtime remains protected by the Fair Labor
Standards Act for the same group of employees.
The overtime law plays a more important role in the daily lives of
Americans than any other provision of labor law. It guarantees that
workers will be fairly compensated when they are required to work
excessive hours. It creates more job opportunities for workers. It
ensures that workers will have enough time away from work to meet
family and personal responsibilities. As women enter the workforce in
increasing numbers, the overtime law has become even more vital to the
health of American families.
This legislation is necessary to accommodate the increasing
participation of rank and file workers in stock programs. This
legislation is not intended to otherwise weaken or to diminish the
vital protection afforded workers under the FLSA and should be
interpreted in the manner that is consistent with the intent and
remedial purposes of the Fair Labor Standards Act.
Mr. Speaker, I reserve the balance of my time.
Mr. GOODLING. Mr. Speaker, I yield 4 minutes to the gentleman from
California (Mr. Cunningham) who has worked tirelessly to bring this
legislation to the floor.
Mr. CUNNINGHAM. Mr. Speaker, as a lead House sponsor of H.R. 4182, I
rise in strong support today of this identical Senate counterpart, S.
2323. Originally, we came up with an idea based on the 1938 language,
and thanks to the gentleman from Pennsylvania (Mr. Goodling) and the
gentleman from North Carolina (Mr. Ballenger), the subcommittee
chairman, and the ranking minority member, they had hearings with an
attempt to match this not only with the Senate, but with the Department
of Labor and with the White House in a very bipartisan way.
Mr. Speaker, I think the outcome in the Senate of 95 to 0 vote shows
the work that went forward on this bill, not only from Republicans but
Democrats, the White House and the Labor Department as well.
Why would we do this? Well, when the 1938 legislation first came
about, they did not know that every day you pick up a newspaper that
there is jobs wanted in there that offer stock options; whether it is
medical benefits;
[[Page H2444]]
whether it is stock options or safety programs within the workplace,
workers look at these things when they select those jobs to help their
families. This bill provides for that.
This will affect over 65 million Americans, union, nonunion, private
individuals, public individuals. They want a piece of the rock, and I
laud those individuals who have helped with this.
Profits from stock options have been taken to account for too long,
Mr. Speaker, and I want to thank personally the gentleman from
California (Mr. Kuykendall); the gentleman from Virginia (Mr. Davis);
the gentleman from California (Mr. Ose); the gentleman from California
(Mr. Ballenger), chairman of the committee; the gentleman from Virginia
(Mr. Moran); on the Democrat side, the gentleman from California (Mr.
Dooley); the gentleman from Indiana (Mr. Roemer); the gentlewoman from
California (Ms. Eshoo). And I say to the gentleman from New York (Mr.
Owens) there is not but a handful of issues that we agree on in a year,
but this is one where we come together in support of it. I would like
to thank the gentleman as well.
Mr. Speaker, I want to also thank Senator McConnell on the Senate
side that drove this. In an election year, it is not important who
takes credit for this thing, it is the workers and the families that
benefit from this bill. I want to thank those individuals. This will
help protect the dot-coms of America.
Another issue is where for example, the biotechs, we have had to
bring in Ph.D.s for biotech industries from other countries. I think
that is a crime to where our education system does not provide for our
people to take those jobs, Americans to take those workers, but yet
when they brought in other doctors and Ph.D.s, there is a group that
wanted to tax that as real income, because they did not have the cash
flow to do that, it prohibited those companies from helping with
medical research.
This is a good bill, Mr. Speaker, a lot of good people worked on it
on both sides of the aisle, the White House, and with the Department of
Labor.
Mr. Speaker, I want to specifically thank the gentleman from
California (Mr. Kuykendall), for his effort in this; the gentleman from
North Carolina (Mr. Ballenger), who worked tirelessly on this, and the
gentleman from California (Mr. Rogan) and the gentleman from California
(Mr. Bilbray), my seatmate down in San Diego.
Washington, DC, April 27, 2000.
Hon. Randy ``Duke'' Cunningham,
House of Representatives,
Rayburn House Office Building, Washington, DC.
Dear Representative Cunningham: The National Association of
Manufacturers (NAM) is the nation's largest, broad-based
industrial trade group. Our membership includes more than
14,000 companies and subsidiaries, including approximately
10,000 small manufacturers and 350 member associations,
located in every state. On behalf of our member companies, we
ask you to cosponsor and support H.R. 4182, the Worker
Economic Opportunity Act. H.R. 4182 is a bipartisan bill,
sponsored by Representatives Cunningham (R-CA), Jim Moran (D-
VA), Cass Ballenger (R-NC), Tim Roemer (D-IN) and many more
of their colleagues, which simply ensures that non-exempt
(hourly) workers can continue to receive stock options and
other equity-participation programs.
H.R. 4182 is needed because of a February 1999 compliance
letter by the Department of Labor's (DOL) Wage and Hour
Division that placed stock options and other equity-
participation programs for hourly workers in jeopardy. It
required employers to recalculate overtime pay based on
profits realized when an employee exercises the stock
options. In response to the letter, many companies have
already put their programs on hold until there is legislative
clarification. If hourly employees are to continue to receive
these options, the House needs to act swiftly. This
bipartisan bill has already passed the Senate by a 95-0
margin and enjoys the strong support of the Department of
Labor.
On behalf of our members and their employees, the NAM
thanks you in advance for your support of H.R. 4182, The
Worker Economic Opportunity Act.
Sincerely,
Patrick J. Cleary.
____
Union of Needletrades,
Industrial and Textile Employees,
Rochester, NY, February 22, 2000.
To Whom It May Concern: I am writing on behalf of UNITE and
its approximately 5,300 United States bargaining unit
employees covered by a contract with Xerox Corporation. It is
our understanding that Congress is currently considering
legislation to clarify the Fair Labor Standards Act (FLSA)
treatment of stock options and other forms of stock grants in
computing overtime for non-exempt workers. Xerox' UNITE
chapter would strongly urge Congress to pass legislation
exempting stock options and other forms of stock grants from
the definition of the regular rate for the purpose of
calculating overtime.
It is only recently that Xerox has made bargaining unit
employees eligible to receive both stock options and stock
grants. Without a clarification to the FLSA, we are afraid
Xerox may not offer stock options or other forms of stock
grants to bargaining unit employees in the future. In
addition, without such a change in the law if options are
granted there could be tremendous differentials in the amount
of overtime each individual employee receives based on what
he or she decides, to exercise an option or sell stock.
However, our position that stock options should be exempt
from the regular rate for purposes of overtime in no way
diminishes our position that bargaining unit employees must
have the right to receive overtime pay for actual hours
worked.
As we begin the 21st century, UNITE hopes more companies
will begin to provide all their employees with stock options
and other forms of stock, it is a great way to assure that
when the company does well the employees share the reward
through employee ownership. Thank you for your consideration
of this matter.
Sincerely,
Gary J. Bonadonna,
Director, International Vice President.
____
Association of Private Pension
and Welfare Plans,
Washington, DC, April 19, 2000
Hon. J. C. Watts,
Chairman, House Republican Conference,
Longworth House Office Building, Washington, DC.
Dear Representative Watts: I am writing on behalf of the
Association of Private Pension and Welfare Plans (APPWP--The
Benefits Association) to ask you to co-sponsor and support
H.R. 4182, the Worker Economic Opportunity Act, a bipartisan
bill to ensure that rank and file employees continue to
benefit from stock ownership programs. A companion bill (S.
2323) has already passed the Senate by a 95 to 0 vote and the
legislation enjoys the support of the Clinton Administration.
APPWP is a public policy organization representing
principally Fortune 500 companies and other organizations
that assist employers of all sizes in providing benefits to
employees. Collectively, APPAP's members either sponsor
directly or provide services to employees benefit plans that
cover more than 100 million Americans.
Many stock option and stock participation plans, which
extend the benefits of equity ownership to working Americans
at all income levels, are in jeopardy due to an opinion
letter issued by the Department of Labor (DOL) in February
1999. The opinion letter stated that the Fair Labor Standards
Act (FLSA) requires any stock option profits earned by a non-
exempt employee to be included in that employee's regular
rate of pay for purposes of calculating overtime. The
practical result of this unexpected ruling is that employers
will feel compelled to exclude their non-exempt employees
from broad-based stock ownership plans or not offer such
plans at all. To its credit, the DOL recognizes that this
result is not beneficial to workers but has stated that only
legislative action can reverse the ruling. H.R. 4182,
introduced by Representatives ``Duke'' Cunningham (R-CA), Jim
Moran (D-VA), and Cass Ballenger (R-NC), is the product of
bipartisan discussions and agreement with the DOL and
provides the necessary revisions to the FLSA.
APPWP believes that broad-based stock ownership plans
provide important benefits to American workers. Such plans
make workers corporate owners, can serve as a significant
vehicle for wealth accumulation and enhance retirement
security. As the attached fact sheet shows, stock ownership
and its benefits are spreading to all levels of the workforce
and across the entire spectrum of American industry. Despite
these positive developments, many employers are now caught in
the quandary of how, or even whether, to proceed with
extending equity ownership to rank-and-file employees.
Therefore, quick passage of H.R. 4182 is necessary. Your
commitment to join 37 other House members as a co-sponsor of
H.R. 4182 will help achieve this goal and ensure that non-
exempt employees will continue to be eligible for stock
ownership programs.
Thank you for your consideration of this important matter.
If we can provide more information or answer any questions
you may have, please contact James Deleplane, APPWP's Vice
President, Retirement Policy, at jdeleplane@appwp.org or
(202) 289-6700.
Sincerely,
James A. Klein,
President.
[[Page H2445]]
Stock Option Bill Unanimously Approved by Senate; LPA-Backed
Legislation Moves to House
Bipartisan Bill Backed by Labor Department Corrects Law Discouraging
Employers from Providing Stock, Stock Option Programs to Hourly
Employees
April 12, 2000--Today, LPA praised the Senate's passage of
the Worker Economic Opportunity Act (S. 2323), bipartisan
legislation that would amend the Fair Labor Standards Act of
1938 (FLSA) to ensure that employers can continue to offer
stock options to non-exempt employees without fear of
violating overtime requirements. Many stock and stock option
programs had been placed on hold when companies learned last
December about a potential conflict with the FLSA. That
conflict would require overtime payments to be calculated
retroactively based on profits earned through stock option
programs.
According to Jeff McGuiness, President of LPA, ``We are
very pleased that the Senate has come to the rescue of tens
of thousands of working Americans who receive stock and stock
options from their employers. We applaud its effort to ensure
that companies will be able to continue to offer broad-based
stock option programs. Because proxy season is upon us, we
hope the House will act quickly on this important bill so
that stock programs can be resumed.'' Labor Secretary Alexis
Herman has indicated that she will strongly recommend that
the President sign the bill if it reaches his desk.
Senators Mitch McConnell (R-KY) and Chris Dodd (D-CT)
introduced S. 2323 in March. Rep. Duke Cunningham (R-CA) has
introduced an identical bill (H.R. 4182) in the House.
The need for legislation became apparent after the
Department of Labor's Wage and Hour Division advised an
employer to include employees' stock option profits as part
of base pay for the purposes of calculating overtime. The
additional administrative burden imposed by such calculations
and the liability arising from making them incorrectly has
resulted in a large number of companies suspending future
employee equity programs.
LPA is a public policy advocacy organization representing
human resource executives of more than 200 leading companies
doing business in the United States, many of whom give stock
options to hourly employees. Collectively, LPA members, many
of whom have substantial numbers of employees represented by
labor unions, employ more than 12 percent of the private
sector workforce in the United States.
____
Chamber of Commerce
of the United States of America,
Washington, DC, May 2, 2000.
Hon. Randy ``Duke'' Cunningham,
Rayburn House Office Building,
Washington, DC.
Dear Representative Cunningham: I am writing to commend you
on your leadership role in bringing to the floor of the House
S. 2323, the Worker Economic Opportunity Act. As you know,
this bill passed the Senate by a vote of 95-0 in April, and
is identical to H.R. 4182, which you introduced along with
seven other original co-sponsors from both sides of the
aisle. The Chamber strongly supports this bipartisan
legislation, which will help millions of hourly workers
retain or obtain stock options.
Last year, the U.S. Department of Labor issued a letter
ruling stating that companies providing stock options to
their employees must include the value of those options in
the base rate of pay for hourly workers. Employers must then
recalculate overtime pay over the period of time between the
granting and exercise of the options. This costly and
administratively complex process will cause many employers to
cease offering stock options and similar employee equity
programs to their nonexempt workers.
Clearly, the Fair Labor Standards Act must be modernized to
reflect the fact that many of today's hourly workers receive
stock options. For this reason, the Chamber strongly supports
S. 2323, legislation that would exempt stock options and
similar programs from the regular rate of pay for nonexempt
workers. This carefully crafted legislation will provide
certainty to employers who want to increase employee
ownership and equity building by offering stock options and
similar programs to their hourly workers. The bill is broadly
supported by members from both sides of the ideological
spectrum, as well as the U.S. Department of Labor.
We urge prompt enactment on S. 2323, which will help
millions of American workers build equity in the companies
for which they work.
Sincerely,
R. Bruce Josten.
____
The ERISA Industry Committee,
Washington, DC, May 1, 2000.
Dear Representative: The ERISA Industry Committee (ERIC)
strongly urges you to support H.R. 4182, the ``Worker
Economic Opportunity Act.'' H.R. 4182 is expected to come
before the House for a vote during the week of May 1. Timely
enactment of this legislation is critical to the continued
viability of broad-based stock options and other similar
programs that provide employees with equity ownership in the
companies for which they work.
Introduced April 5 by Representative Randy ``Duke''
Cunningham, the ``Worker Economic Opportunity Act'' enjoys
strong bipartisan and bicameral support. The bill is the
result of a cooperative effort between congressional leaders,
the Department of Labor, and the business community. The
Senate unanimously passed its companion to H.R. 4182 on April
12.
Stock options increasingly are available to a broad range
of employees, not just executives. A recent survey by William
M. Mercer, Inc., reports a better than twofold increase since
1993 in the percentage of major industrial and service
corporations that have a broad-based stock option plan.
In spite of the growing enthusiasm for employee equity
ownership among employers and employees, an advisory letter
interpreting current law issued by the Department of Labor's
Wage and Hour division has effectively stopped this movement
in its tracks.
According to the Department's interpretation of the Fair
Labor Standards Act (FLSA) of 1938, and gains from the
exercise of stock options recognized by rank and file workers
must be included in their ``regular rate of pay'' for
purposes of computing overtime wages. Thus, in order to
comply with the Wage and Hour Division's interpretation of
the FLSA, employers would be required to track stock options
granted to rank and file employees and recalculate their
overtime payments once the options have been exercised.
No rational employer will subject itself to this
impracticable burden. As a result, rank and file workers will
be denied the valued opportunity to become a stakeholder in
their employer's future.
H.R. 4182 is narrowly tailored to directly address the
issues raised by the Wage and Hour Division's advisory letter
without compromising any long-standing worker protections
under FLSA. Most important, this legislation will benefit
millions of working Americans by facilitating the continued
expansion of equity-based compensation programs. It should be
enacted without delay.
Thank you for considering our views. Please feel free to
call on us if you have any questions or need additional
information.
Very truly yours,
Mark J. Ugoretz,
President.
Information Technology
Industry Council,
Washington, DC, May 2, 2000.
Hon. Randy Cunningham,
House of Representatives,
Washington, DC.
Dear Congressman Cunningham: I am writing to thank you for
your leadership during House consideration of S. 2323, the
Worker Economic Opportunity Act. I would also like to let you
know that ITI anticipates making the vote on final passage of
S. 2323 a ``key vote'' for our 106th Congress High-Tech
Voting Guide.
ITI is the association of leading U.S. providers of
information technology products and services. It advocates
growing the economy through innovation and supports free-
market policies. ITI members had worldwide revenue of more
than $440 billion in 1998 and employ more than 1.2 million
people in the United States. The High-Tech Voting Guide is
used by ITI to measure Members of Congress' support for the
information technology industry and policies that ensure the
success of the digital economy. At the end of the 106th
Congress, key votes will be compiled and analyzed to assign a
``score'' to every Member of Congress.
We believe that passage of this legislation is an important
piece in ensuring the future growth of our industry and the
nation's economy. As you know, today more and more working
Americans worker are receiving stock options. The Worker
Economic Opportunity Act updates the Fair Labor Standards Act
to guarantee that rank-and-file employees and management can
share in their employer's economic well being in the same
manner.
We look forward to working with you on other issues
important to the information technology industry.
Best regards,
Rhett Dawson,
President.
Mr. OWENS. Mr. Speaker, I yield 2 minutes to the gentleman from
California (Mr. Dooley).
Mr. DOOLEY of California. Mr. Speaker, I rise today in support of
H.R. 4182, a bipartisan effort to address a problem that could impede
advancements in many sectors of our economy.
In many ways this legislation I think is a reflection of the
transition our economy is making from an industrial-based economy to an
information-based economy. We are seeing some of the most rapid growth
in our economy now in this information sector, where a lot of those
companies are making great efforts to recruit talent and personnel by
offering them a stake in the company. By ensuring that stock options
can be available not only to management, but to employees, we are going
to ensure that that employee will have the opportunity to benefit from
the technology and the product development that is adding so much
wealth to our entire economy.
I am real pleased that this legislation will certainly benefit not
only the
[[Page H2446]]
technology sector, but also a lot of other companies on the more
manufacturing side of things, who are seeing some examples of how they
too can reach out to make their employees more a part of their efforts
to move forward.
Mr. Speaker, I just want to join the chairman and the ranking member
in their efforts in bringing this bill to the floor, and thank all of
the efforts of the administration and other Members that have joined in
support of this legislation.
Mr. GOODLING. Mr. Speaker, I yield 2 minutes to the gentleman from
North Carolina (Mr. Ballenger), the subcommittee chair responsible for
this legislation.
Mr. BALLENGER. Mr. Speaker, I am pleased today to rise in support of
this act, a bipartisan bill to protect the stock option programs for
rank and file employees.
Stock option programs can be configured in a variety of ways and are
referred to by different names, but all the programs share similar
objectives, to reward employees, to provide ownership in the company,
and to attract and maintain a motivated workforce.
In testimony before my Subcommittee on Workforce Protections earlier
this month, witnesses discussed how stock ownership programs are now
available to more and more employees. In the past, such programs were
used to reward executives, top management and other key employees.
However, there has been a dramatic increase in the past several years
in the number of companies offering broad-based employee ownership
plans to rank and file employees.
The Department of Labor's recent interpretation saying that stock
options may be part of an employee's ``regular rate,'' threatened to
undermine the ability and willingness of employers to make stock
options available to their own nonexempt employees. Ms. Abigail Rosa,
an employee who testified at the hearing, expressed concern that the
Department of Labor's interpretation of the law would force companies
to do away with stock option programs for employees who are covered by
the overtime law.
Allowing hard-working rank and file employees to share in the growth
of their companies is good for morale, good for families, and good for
the country. I am pleased that we were able to work together to fashion
a bill that updates the 1938 labor law. We have a bill that fosters
stock option plans and has the FLSA taking a baby step into the 21st
century.
This bill represents the hard work and attention of many Senators and
Members of the House on both sides of the aisle, as well as the
Department of Labor, and I urge my colleagues to vote for this
legislation.
Mr. OWENS. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, I would like to express my gratitude to the gentlemen on
the other aisle for their cooperation in working together on this piece
of legislation.
I think the bipartisan cooperation of this legislation shows that
both parties are willing to go into the rest of this age of information
and to continue on to what I call the cyber-civilization and make the
necessary adjustments to various factors in our economy. But I think it
is important to note that the gentleman from California (Mr.
Cunningham) said that it is a crime that large numbers of foreign
workers are being imported and that they will be occupying these high-
paying jobs, they will be getting these stock options, and large
numbers of our own workforce will be denied the opportunity because
they do not have the proper education and training. So at a time when
our economy is leaping ahead and there is unprecedented prosperity, and
we heard recently that the budget surplus is going up since we were on
recess and came back, the budget surplus is going up, I think they
expect about $200 billion surplus this year or more, and over the next
10 years you may have a $2 trillion surplus, it is a crime that we do
not have the kind of education system which will develop and train the
workers who can take the jobs that are paying so well that they offer
stock options in addition to regular salaries.
This great budget surplus that we anticipate, if we were only to take
10 percent of it for education, just 10 percent, we could deal with
these 21st century problems of large numbers of vacancies in industries
which require highly educated workers. Just 10 percent. I would say 5
percent for the all-important activity of school construction, school
repairs, various things related to school infrastructure, because part
of the training process requires that you have the facilities and you
have the equipment.
There is a great need for capital investment in our schools in order
to get the workforce trained who would be able to take advantage of
such lucrative items as stock options, as well as higher paying jobs.
Take 5 percent for physical infrastructure and deal with the problem
that the National Education Association has cited as requiring $254
billion. Their survey, their report, shows that we need $254 billion to
bring the infrastructure of the public school systems up to a level
where they can take care of the present population. We are not talking
about long-term enrollment projections. $254 billion is needed at this
point to do that.
We have it. Money is not the problem. It is there in the surplus. I
am not asking for that much, but I think we ought to reserve 10 percent
for education. Five percent of $2 trillion would be like $20 billion.
Five percent of $2 trillion would be $10 billion for construction and
another $10 billion for other educational improvements. $20 billion a
year reserved out of the projected surplus would take care of the
problem of training workers so those workers could make the salaries
and be eligible for the stock options we are talking about today.
Mr. Speaker, I reserve the balance of my time.
{time} 1315
Mr. OWENS. Mr. Speaker, I reserve the balance of my time.
Mr. GOODLING. Mr. Speaker, I yield myself 30 seconds, just to
indicate that if we in the Congress of the United States refuse to
admit that billions and billions, hundreds of billions of dollars that
we have spent on education from the Federal level have not closed the
academic achievement gap one little tiny bit, and if we will not admit
that those programs have failed, I do not care how much money we spend
or how many more programs we introduce, failure is bound to follow as
it has over the last 30 years.
Mr. Speaker, I yield 3 minutes to the gentleman from Ohio (Mr.
Boehner), the other subcommittee chair of the labor side of our
committee.
Mr. BOEHNER. Mr. Speaker, team-building is replacing bureaucracy
throughout our country. That is really what we define today as the New
Economy. New Economy companies are not just high-tech firms. They are
companies that understand the value of their workforce as a team and
organize themselves around team dynamics. That goes for companies that
make sofas in southwestern Virginia, as well as companies that make
Internet servers in Silicon Valley.
A critical part of team-building is getting everyone on the same
page, making sure everyone is motivated by common interests. By making
the employee a shareholder, stock options also make them valued team
members who see their interests and those of the rest of their team as
one and the same.
Our subcommittee held a hearing in March on another stock options-
related measure, one that I introduced last winter. One of the
witnesses at our hearing was Timothy Byland, a sales employee with a
San Diego-based Internet firm. Tim told our committee, and I quote,
``Stock options are a way of sharing the gains of the business with
those responsible for those gains. With stock options, I am part of
that shared success. I am rewarded for the contributions I make and I
am motivated to make them.''
Stock options are part of almost any employee compensation package in
the high-tech sector today, but increasing numbers of more established
companies today are recognizing the value of helping employees become
shareholders, giving them an unprecedented chance to share in their
company's performance and profits. These companies range from 3M to
Pepsi to Merrill Lynch, Citigroup and CBS.
In short, Mr. Speaker, stock options just are not for the executive
anymore. This is a new economy with new opportunities for workers at
every step along the pay scale.
[[Page H2447]]
The Labor Department's current policy on stock options for overtime
employees illustrates how out of step Washington's rules are with the
opportunities of the new economy. It is a throwback to the old days
when stock options were available to almost no one except top
executives.
If fully implemented, this policy would be a dramatic step backward.
It would needlessly discourage employers from granting stock options to
hourly employees. It would limit opportunities for millions of workers
to build greater wealth and, most importantly, retirement security.
Swift passage of this measure today will remove a major Federal
obstacle to the vision of a shareholder society shared by many members
on both sides of the political aisle. It will also help to ensure
continued movement toward a regulatory system that reflects the
opportunities of the 21st century, and it will pave the way for us to
address some other problems that current law poses for rank and file
workers with stock options such as the IRS Tax Code dual taxation of
nonqualified stock options.
Mr. Speaker, I commend the gentleman from North Carolina (Mr.
Ballenger), the gentleman from Pennsylvania (Mr. Goodling), and all of
the Members who have worked on this bill, and I urge all of my
colleagues to support it today.
Mr. OWENS. Mr. Speaker, I yield 5 minutes to the gentleman from
Virginia (Mr. Moran).
Mr. MORAN of Virginia. Mr. Speaker, I thank the distinguished
gentleman from New York for yielding me this time.
Mr. Speaker, as the lead Democratic sponsor of the House version of
this bill, the Stock Options Preservation Act, I want to thank all of
the people in both Chambers and particularly on both sides of the aisle
who put aside partisanship and traditional turf battles to get this
important legislation passed into law. Particularly, I want to thank
the gentleman from California (Mr. Cunningham) and the gentleman from
Virginia (Mr. Davis), who reached out to Members on both sides of the
aisle and worked with the administration to craft meaningful,
substantive legislation. I wish we could do more of this. Not only is
this a substantive piece of legislation, but it also ought to be an
example of how we can do things when we can get together in a
bipartisan way.
What drove this, of course, was the understanding that in business,
there is only one way to increase total compensation without raising
inflation, and that is increasing productivity. Increased productivity
means that workers can take home more and that businesses can earn
more. It represents a win/win scenario and is directly responsible for
the tremendous economic growth we have experienced over the last 8
years. It has been unbelievable to be able to keep inflation down,
while wages and benefits are going up; and, of course, it is all
because of the increased productivity that we are seeing throughout our
workforce.
This is not just because of technological advances; it is achieved by
improving the way in which employees work together. When employers and
employees share the same goals, which is the success of a business,
then productivity increases. Employees and employers both win, and of
course the American economy wins too. That is why we have this enormous
surplus. We are finally going to be able to stop paying down the debt,
investing in education and research, and setting aside money for our
retirement. It is all because we have this tremendously more productive
economy.
As one example, let me just share an example. One large company that
distributed food products was losing millions of dollars each year
because of very low recycling rates. So when it imprinted the logo for
its stock option program on all of its products, the recycling rates
went up to 99 percent; 99 percent got recycled. It was because the
employees realized that recycling boxes and other waste products saved
the company millions, that improved the bottom line and consequently,
the stock price.
No longer are stock options exclusively for the CEO and top
management. Two-thirds of large companies give options to portions of
their nonexecutive workforce, and over one-fourth of those companies
give options to all of their employees.
Stock options unite employees. Some businesses have stock tickers in
their cafeterias. When the price is up, the employees all feel a sense
of achievement. When it is down, they know they have more work to do.
It overcomes divisions that oftentimes pit employees against employers,
and that is better for all of us. It promotes a sense that employees
from the CEO to the line worker in all parts of the country are part of
the same team.
This has been a long time in coming, but when we can work as a team
and we can stop that gap between management and the workforce, we are
all better off. This new economy should bring increased opportunities
for all American workers. Stock option programs provide that
opportunity by making workers into owners, investing them in the
success of the business.
The administration has endorsed this bill, the Senate passed it
unanimously, and I strongly support it, and I trust it will pass
unanimously. This is what the new economy should be all about and what
the American workforce should be all about, being invested more in the
product, in the efficiency and the effectiveness of the way in which we
develop a product and not just in the process. We are all part of this
economy, and workers need to be owners. Stock options are enabling us
to achieve that.
Again, I want to congratulate my colleague, the gentleman from
Virginia (Mr. Davis), for being one of the first people to bring that
up, and as I said, the gentleman from California (Mr. Cunningham) and
the gentleman from Pennsylvania (Mr. Goodling), and all of the other
speakers, and the gentleman from New York (Mr. Owens). It is both sides
of the aisle, and this is the way we get things done, and this is very
important for our economy.
Mr. GOODLING. Mr. Speaker, I yield 1 minute to the distinguished
gentleman from Texas (Mr. Sam Johnson), a member of the committee.
Mr. SAM JOHNSON of Texas. Mr. Speaker, it is a rare occasion when we
agree with the Department of Labor on legislation, but today we do.
This bill will ensure that all employees, including rank and file
workers, are allowed to participate in employee-provided stock option
programs.
With the advent of new technology and Internet companies that offer
stock options to lure the best and the brightest, we must make sure
that outdated laws do not stifle our growth and innovation.
It is unfair to allow only top executives to participate in these
stock options, excluding those who provide the labor for the same
company, but on an hourly basis. I believe rank and file employees
deserve the chance to make their fortune, secure their retirement, and
increase opportunities for savings. The time is long overdue to help
millions of workers and employees achieve the American dream.
Mr. GOODLING. Mr. Speaker, I yield 1 minute to the gentleman from
Virginia (Mr. Davis), another Member who worked hard on this
legislation.
(Mr. DAVIS of Virginia asked and was given permission to revise and
extend his remarks.)
Mr. DAVIS of Virginia. Mr. Speaker, the Department of Labor's opinion
letter that was issued in February was really outrageous. The letter
stated that the Fair Labor Standards Act did not allow the value of
stock options to be excluded from the calculation of a nonexempt
worker's overtime pay. Now, this had not been a problem in 20 years.
When I was a corporate executive and we were giving stock options to
nonexempt employees, we did it with the idea of they being owners of
companies.
The effect of this rule and regulation would have been that many
workers who are salaried employees would no longer be eligible for
stock options, that they were going to be deprived of their piece of
the American dream: homeownership, to be able to build equity, and get
the kind of income that exempt workers were routinely getting. That was
the effect of that decision.
Unfortunately, it created a lot of uncertainty within the business
community. When this was brought to the attention of the higher-ups,
Congress started to act and the administration moved into gear. We
appreciate everybody working together now to bring
[[Page H2448]]
this legislation where it is today. I think the unanimous Senate vote,
the fact that the administration is now going to sign legislation that
will basically solve the problem that was created when they sent this
letter out in February, is an indication that when we work together, we
can solve these problems. I want to applaud all concerned.
Mr. Speaker, I rise today to express my strong support for S. 2323,
the Worker Economic Opportunity Act, a measure that exempts stock
options, stock appreciation rights, and employee stock purchase
programs from the calculation of overtime pay for certain employees
under the Fair Labor Standards Act. As a sponsor of the House companion
to this measure, introduced by my colleague, Congressman Cunningham, I
cannot emphasize enough how important this legislation is to the
continued growth of our nation's New Economy in the 21st Century.
Over the past decade, our economy has boomed and the shortage of
workers has intensified. Within this context, employers have used
innovative ways to improve their workplaces and attract and retain
workers. Offering new financial opportunities--such as stock options--
has allowed many companies to draw in good workers and at the same
time, give employees an ownership right in the growth potential of a
business. According to Fortune magazine, of the 100 best companies to
work for, over one-third now offer stock options to all of their
employees. And the National Center for Employee Ownership reports that
over 80 percent of companies receiving venture capital financing
provide options to both non-managerial and key management employees.
The Department of Labor's opinion letter, issued in February, brought
a great deal of uncertainty for employers and employees. The letter
stated the Fair Labor Standards Act did not allow the value of stock
options to be excluded from calculation of non-exempt worker's overtime
pay, sparking serious concerns among those of us here in the House of
Representatives and the other body as to how this ambiguity would
affect economic growth. While the increased use of stock options is on
the rise in traditional businesses, the high technology industry in
particular owes a great deal of its growth to the issuance of stock
options. The high technology industry has been a boon to our economy,
creating more than 1 million high-paying jobs since 1993. In my home
state of Virginia, some 12,100 technology-based firms call Virginia
home, employing more than 370,000 workers and contributing more than
$19.4 billion in wages.
S. 2323 passed the Senate overwhelmingly with a vote of 95-0 last
month and received the support of the Secretary of Labor, Alexis
Herman. It will assure the protection of worker's stock options and
ability to share in the success of a company without harming the
computation of fair overtime pay. I want to commend Chairman Goodling,
Chairman Ballenger, and Congressman Cunningham, for their leadership on
this issue. I urge all of my colleagues to support this bill and save
stock options for all workers.
Mr. GOODLING. Mr. Speaker, I yield 2 minutes to the gentleman from
California (Mr. Kuykendall).
(Mr. KUYKENDALL asked and was given permission to revise and extend
his remarks.)
Mr. KUYKENDALL. Mr. Speaker, I rise today in strong support of S.
2323, the Worker Opportunity Act. It is important legislation that
encourages companies to grant stock options to all employees without
triggering overtime calculations of the Fair Labor Standards Act. It is
a much-needed update to reflect current realities in the workforce and
our economy.
Passed in 1938, the Fair Labor Standards Act guaranteed that hourly
workers would receive fair pay for their work. It set strict
requirements with respect to how overtime would be calculated. Over the
years, overtime pay provisions have been amended to reflect changing
realities of the workplace.
For example, today current law excludes health and pension plans from
overtime calculations as a means of encouraging employers to offer
these important benefits to hourly employees. The United States economy
has changed dramatically since 1938. It is an economy fueled by
information technology and high-tech industries.
Many companies today have tight capital constraints when starting
out. Companies in this new economy attract potential employees by
offering the promise to share future corporate profitability through
stock options or other stock purchase plans; and for the first time,
employees at all levels have a meaningful stake in the success of their
businesses, creating other positive benefits. Imagine, the attitude
that every employee is important to the success and welfare of their
employer, and they can participate in the benefits of ownership are
attitudes that our labor laws and policies should encourage.
Unless changes are made to the Fair Labor Standards Act, most
employers have indicated that they would exclude nonexempt employees
from participation in stock purchase plans. According to the Employment
Policy Foundation, the potential impact of the Department of Labor's
interpretation is that 26 million Americans would stand to lose their
stock options or other corporate equity. This is not a result intended
by the Fair Labor Standards Act, by the Department of Labor, or by
labor representatives. With passage of this bill today, we undertake
the much needed revision to provide the Department of Labor with
additional flexibility.
I was pleased to be an original cosponsor of the House companion
bill, and I am proud to support S. 2323 today, and I urge all of my
colleagues to vote in favor of this important resolution.
Mr. GOODLING. Mr. Speaker, I reserve the balance of my time.
{time} 1330
Mr. OWENS. Mr. Speaker, I yield myself the balance of my time.
Mr. Speaker, I think it is important to note that the language on
both sides has been the same. The concepts have been the same. We
basically agree that the Committee on Education and the Workforce
understands the implication of the New Economy. We understand the kind
of society we are going into. We understand that we have
responsibilities for the workforce.
Here we are exercising an important responsibility in terms of
payment; that they should not be barred from enjoying the prosperity
and should not in any way be kept from having stock options as other
people do within the confines of a corporate enterprise. So we all
agree.
Mr. Speaker, I think we all ought to agree that the Committee on
Education and the Workforce is primarily for the American workforce. We
may have some international obligations sometime in the future; we may
choose to assume those, but it is the American workforce that we would
like to see take advantage of the opportunities that exist in our
economy now.
The sad thing about this bill, as the gentleman from California (Mr.
Cunningham) pointed out, is that so many of our people who ought to be
qualified for these jobs are not qualified, and we are going to be
reaching out to the rest of the world to bring in workers who will not
pay into the Social Security system, who will not contribute to the
full economy of our Nation, while we are denying the opportunity to our
own people because we have not developed a sufficient education system.
So given the fact that we now have an opportunity with a huge
surplus, 10 percent of that surplus ought to be devoted to revamping
our education system. Revamping it in ways that do not interfere with
local controls, starting with school construction, which is a capital
expenditure. Buying computers is a capital expenditure. We can do the
things that capital expenditures require, get out, and do not interfere
with the operation of the schools.
It is relevant to this discussion. At the end of the war in Vietnam,
we did not jettison or throw away our military establishment. We did
not say, look, they have lost a war to a Third World country; and,
therefore, they have not succeeded so we will not continue to support
our military. Just the opposite happened. We began to pour more and
more resources more and more dollars into revamping and building up the
world's greatest military system that existed.
So the failure of our school systems up to now, the huge amount of
problems that we have in terms of educational reform and improvement,
should not prevent us from utilizing this window of opportunity to
provide help for working families. Working families should be allowed
to join the economy and enjoy the stock options, because they qualify
for those good-paying jobs.
Mr. Speaker, I yield back the balance of my time.
Mr. GOODLING. Mr. Speaker, I yield back the balance of my time.
[[Page H2449]]
The SPEAKER pro tempore (Mr. Quinn). The question is on the motion
offered by the gentleman from Pennsylvania (Mr. Goodling) that the
House suspend the rules and pass the Senate bill, S. 2323.
The question was taken.
Mr. GOODLING. Mr. Speaker, on that I demand the yeas and nays.
The yeas and nays were ordered.
The SPEAKER pro tempore. Pursuant to clause 8 of rule XX and the
Chair's prior announcement, further proceedings on this motion will be
postponed.
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