Attorney at Law

Stock Options

What Are Stock Options?

The term “stock options” refers to an employee benefit that is a form of equity compensation offered to some employees in a company. Equity compensation is a non-cash payment that is given to employees, typically in the form of stocks.

Employee stock options are different from an employee stock ownership plan (ESOP). While ESOPs are typically used as a form of retirement plan more similar to an IRA, stock options are actually a type of call option offered by the company to its employees. A call option is an agreement that allows a buyer to purchase a stock at a given price. If the stock rises before the buyer purchases the call, they will profit by being able to buy the stock for a cheaper price and potentially immediately turn around and sell it.

Similarly, employee stock options in general allow an employee to purchase a stock at a given price and then, after a period of time called the vesting period, either keep it or sell the vested stock depending on the terms of the agreement. This allows members of an employee stock option program a greater degree of freedom with their shares over an ESOP where the shares are required to enter into a shared trust with all other ESOP shares until an employee retires.

Employee stock options allow members to profit from increased value in stock holdings, gain a sense of ownership in their company, and even potentially allow employees to gain tax savings from their shares.

Key Takeaways

  • Stock options are a form of equity compensation offered to employees that allow the employee to purchase company stock for a set, often discounted price.
  • After a certain period of time, stocks become “vested” and can be kept or sold by the employee as they see fit.
  • Employee stock options can be limited to a few high-ranking members or offered to all depending on the nature of the stock option, but they must be offered in a fair way that does not discriminate against any protected class. 
  • If you have experienced discrimination or mismanagement in the administration of employee stock options, an experienced Employment Law attorney may be able to improve the outcome of your case by utilizing experience and expert knowledge.

Stock Options and Employment Law

The major legislation that governs much of how stock options are offered and regulated is the Worker Economic Opportunity Act of 2000. This law was passed in order to amend certain sections of the Fair Labor Standards Act (FLSA) along with a Congressional Record in order to set and define the ways that certain workers can qualify for stock options. The handling of stock option distribution is overseen by the U.S. Department of Labor.

In general, no employer is required to offer its employees stock options. Under the Worker Economic Opportunity Act, employers can offer employees the opportunity to earn stock options when they work overtime hours, deducting the value of the stock options from the overtime pay that would have been earned.

In order to participate in this program, the employer must meet certain criteria such as:

  • Providing the potential employee with sufficient information in a reasonable manner to explain the terms and conditions of the stock option program at the time the employee begins participating in the stock option program or when the employer grants the stock options.
  • Waiting at least 6 month after the grant is offered to exercise the options.
  • Offering stock options at at least 85% of the fair market value.
  • Ensuring that the employee is voluntarily participating in the stock option program.

Some of these general rules do have exceptions. For example, the Department of Labor allows options to be exercised in the event that an employee dies, becomes disabled, retires, or if there is a change in ownership of the company before the full vestment period.

Employee stock options can come in two major varieties: incentive and non-qualified stock options. Incentive stock options, also known as ISOs, statutory, or qualified options, are offered to key employees or top management. ISOs are treated as long-term capital gains and as such can often receive preferential treatment in regards to taxes.

By contrast, non-qualified stock options can be offered to any employee of a company as well as non-employees like consultants or board members. Non-qualified stock options are considered ordinary income for the purposes of taxation and do not enjoy any special protections.

Employees who are excluded from receiving stock options on the basis of a protected class such as gender or race may be able to file a discrimination lawsuit or report the incident to the Equal Employment Opportunity Commission to rectify this issue.

Bottom Line

If you have been discriminated against by your company’s stock option policy or have suffered a fraud at the hands of your company regarding their stock option policy, you may be able to file a lawsuit to rectify your situation. In order to file and prevail in your lawsuit, you will need the help of an experienced Employment Law attorney.

An Employment Law attorney can zealously advocate on your behalf in order to achieve the best possible outcome to your case. Using their legal expertise, trial tactics, and expert witnesses, your Employment Law attorney can gather and present evidence to the court in the way that most compellingly supports your arguments.

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