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Are you an employee at a tech startup getting paid in equity, rather than wages? You almost certainly have a wage and hour claim.

Posted by Adam Braverman | Mar 12, 2019 | 0 Comments

Equity Compensation Such As Stock Options Does Not Count As Wages Under U.S. Federal Or New York Law

Many startup technology companies are in bootstrapping mode, i.e., they are self-funded through personal savings, credit cards, and family and friends. Even well financed companies might be particularly reluctant to part ways with cash. Whatever the reason, tech companies will sometimes pay employees and founders in equity, be it common stock, stock options, so-called “profits interests” in  a LLC, or what have you, rather than cash wages.

In most cases this is illegal. Federal and state wage laws generally require non-exempt employees—including founders—to be paid minimum wages, to be paid on a regular basis (at least semi-monthly for office employees), and to be paid overtime wages for work over 40 hours in a workweek at the rate of 1.5 times the regular rate. The federal minimum wage is $7.25 per hour, but in New York City, as of December 31, 2018, the minimum wage is $13.50 an hour for small employers (10 employees or less) and $15.00 an hour for large employers (11 employees or more).[1]

Equity compensation does not count as “wages” under federal law or New York state law.  Under the federal statute, the Fair Labor Standards Act (the “FLSA”), and its interpreting regulations, “[s]hares of capital stock in an employer, representing only a contingent proprietary right to participate in profits and losses or in the assets of the company at some future dissolution date” are outside the ambit of “wages.”[2] Further, under the FLSA's “salary basis” test for exempt employees (see below), the employee must “regularly receive[] each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee's compensation.” Stock options, or profits interests or other equity awards would not meet this standard. Similarly, under the New York Labor Law (the “NYLL”), equity-based awards to incentivize employees to remain with an employer are not “wages.”[3]  So, if you are a non-exempt employee, you must be paid cash wages.

If You Are Not Being Paid Wages, The Exemptions Will Not Apply

Now, some employees are exempt from the minimum wage and overtime rules of the FLSA.  Many tech workers could potentially fall under the so called “white-collar” exemptions, such as the executive, administrative, professional or computer exemptions. While a detailed discussion of these exemptions is beyond the scope of this post, it is important to note that they each have both a salary test and a duties test. Under the FLSA, to meet the salary test for the executive, administrative and professional exemption, you would need to be paid at least $455.00 per week, and for the computer employee exemption, you would need to receive a salary of at least $455.00 per week or, if paid on an hourly basis, receive at least $27.63 per hour.  Under New York law, the salary thresholds are generally higher.[4]

Thus if you are not receiving any compensation (or only “equity” compensation), the salary test would not be met, you would be non-exempt, and you would be owed minimum wages and overtime for work over 40 hours per week.[5] Also, even if the salary test is met, you may not be exempt, depending on whether your actual duties match the requirements of the exemption.

An Executive Employee Who Owns At Least A 20% Equity Interest Is Exempt Under Federal Law, But Not New York Law. That Won't Be Relevant For Most Employees.

The FLSA does provide an exemption (from minimum wage and overtime) for a bona fide executive employee who owns “at least a bona fide 20-percent equity interest in the enterprise in which the employee is employed . . . and who is actively engaged in its management.” 29 C.F.R. § 541.101.  The criteria to be “engaged in [] management,” is set forth in 29 C.F.R. § 541.102, and includes training employees, directing and disciplining employees, planning the budget, and so forth.  Many job functions, such as being a developer, would not qualify.

In New York, though, an owner of at least a 20% equity interest would not be exempt from the minimum wage requirement and would only be exempt from overtime if paid at least 1.5 times the New York minimum wage for all hours over 40 in a workweek. 12 N.Y.C.R.R. § 142-2.2.  Thus an employee and part owner with at least a 20% equity interest could still have a minimum wage and overtime claim under New York law if she had not been paid any wages.

Apart from the fact that New York law does not provide the same exemption, the FLSA's exemption for executive employees who own 20% or more of the equity of a business is probably of little practical impact: An executive with such a substantial ownership stake is unlikely to sue that business in the first place.  In reality, the vast majority of employees who are paid in equity rather than cash will own far less than a 20% equity interest, and will therefore have both federal and New York state law claims.

At Braverman Law PC, attorney Adam Braverman has witnessed many situations in which employers have denied employees their rightful compensation for minimum wages and overtime, even in the context of technology companies. Braverman Law PC knows how to evaluate your rights under federal and state law and seek the full compensation you deserve for the hours you put in for your employer. To schedule a consultation, please call (212) 206-8166 or contact the firm online today.

[1] Note that the minimum wages rates are scheduled to increase each year on 12/31 until they reach $15.00 per hour.  The current minimum wage rates vary by whether the employer is located within or outside New York City.  See this chart.

[2] See 20. U.S.C § 203(m) (defining wages as including the reasonable costs of providing board, lodging or “other facilities”), and 29 C.F.R. § 531.32(b) (excluding shares of capital stock from the definition of “facilities”).

[3] See Guiry v. Goldman Sachs & Co., 31 A.D.3d 70, 71, 73, 814 N.Y.S.2d 617 (1st Dep't 2006) (holding that “restricted shares of [an] employer's stock, and options to purchase such stock” are “deferred equity-based compensation” that is “as a matter of law, ‘incentive compensation ... not included in the definition of “wages” under Labor Law § 190(1).' ”); Econn v. Barclay's Bank PLC, No. 07 Civ. 2440(BSJ), 2010 U.S. Dist. LEXIS 143063, at *14–15 (S.D.N.Y. May 10, 2010). Further, such awards are not wages where “the ultimate value of [an] equity-based compensation would depend on [an employer's] stock price after the rights vested” and thus “on [the employer's] ‘overall financial success,' not simply on the employee's personal productivity.”  Guiry, 31 A.D.3d at 73, 814 N.Y.S.2d 617.

[4] Note that New York has no salary test for its professional exemption, which otherwise tracks the language of the FLSA.  See Minimum Wage Order For Miscellaneous Industries and Occupations, 12 N.Y.C.R.R. § 142 - 2.14

About the Author

Adam Braverman

I come to my current practice of law at the end of an interesting journey. After graduating Phi Beta Kappa from UC Berkeley, and receiving my J.D. from the UC Berkeley School of Law, I chose corporate law, concentrating in venture capital and mergers and acquisitions. I was drawn to the challenge...


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