The Congressional Band-Aid Approach.

• Author: Hardock, Randy

Did you ever look at your computer keyboard and wonder what idiot decided to put the keys in that order? In fact, the QWERTY keyboard (named after the upper leftmost six letters) was something of an engineering masterpiece for its time, the mid-1800s. This engineering masterpiece was forcing secretaries to type more slowly to prevent the typewriter keys from getting jammed. Despite these built-in flaws and tests showing that other designs could double typing speed, the QWERTY became so widely accepted that it survived improvements in typewriters that eliminated jamming and, more recently, became the standard for computer keyboards.

Often, our laws seem to resemble the QWERTY -- anachronistic remnants from another age that have a difficult time keeping pace with innovation. This is the story of one such law -- the Fair Labor Standards Act (FLSA) -- and how, in one isolated case, Congress stepped in and cobbled together important relief from what could have been a catastrophic snafu. That relief came at a price.

The issue here involved stock option plans covering rank-and-file workers. While stock-based compensation has grown to play a vital role in today's economy, the bulk of federal labor law (and most other federal law, for that matter) was written before stock options became a critical element in the compensation and incentive structure of the American workplace. The FLSA, for example, includes a number of workplace mandates, including the requirement that employers pay non-exempt employees who work overtime (i.e., more than 40 hours in a week) one and a half times the employee's regular rate of pay for all overtime hours.

The term "regular rate of pay" is broadly defined to include all remuneration for employment paid to, or on behalf of, the employee -- with a number of exceptions provided. Not surprisingly, because the statute was drafted in another era, there was not, until recently, a clear exception from the definition of "regular rate of pay" for stock-based compensation programs or awards.

Earlier this year, the Department of Labor (DOL) dropped a bombshell on employers offering stock option plans. In an advisory opinion the DOL ruled that because the FLSA did not contain an explicit exception for stock-based compensation programs, income resulting from the exercise of stock options might have to be included in the regular rate of pay in calculating an individual's overtime pay. The DOL then proposed an extremely complex...