The Berger Law Firm, P.C. |
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To succeed in the competitive labor market for skilled employees, high tech companies have embraced stock options plans and, in some cases, have suffered unintended consequences. Traditionally, stock option plans were reserved for top management and "key" employees, to reward them and to link their interests with the company’s. Increasingly, technology firms are using stock options to attract and retain employees at all levels. Start-up companies trade options for salaries in order to lure professionals from larger firms, while established companies use options to retain employees and invest them in the enterprise. Stock options are often misunderstood, however, spawning employment law suits and IRS audits. In general, a stock option grants an employee the right to buy a certain number of company shares at a fixed price for a limited number of years. Employees hope the share price will rise so that they can exercise the option (purchase the stock) at the lower grant price, and then sell the stock at a higher price. Options come in two basic types - non-qualified stock options ("NSOs") and incentive stock options ("ISOs") - which have different rules and tax treatments. With an NSO, the company receives a tax deduction for granting the option, while the employee is taxed when he exercises the option on the difference between the stock’s grant and market price. With an ISO, there is no employer deduction and the employee is taxed when the stock is sold. An employer’s failure to adopt and follow a well-documented stock option plan can have expensive results. A federal judge in Pennsylvania recently awarded the fired president of a long-distance telephone provider over $600,000 in lost stock options. The executive, who had no written employment contract, claimed he was fired without cause to prevent him from exercising his options. Likewise, in June a federal appeals court in San Francisco upheld a $1.6 million jury award against Parametric Technology Corp., finding that it terminated a key employee to deprive him of unvested options. The enormous value of options has also raised the stakes in employment discrimination claims, when fired employees make settlement demands for the value of their unvested options, dwarfing traditional back-pay claims. Independent contractors and temporary service employees have also had some success in suing their temporary worksite employer for options intended only for regular employees. In April 1999, the IRS drew the ire of many in the high tech industry by raising employment tax issues for certain option plans. It issued an advisory to its field auditors that employers must withhold payroll taxes on the discount employees enjoy when they buy stock through ISO’s and related Employee Stock Purchase Plans (ESPPs). The audits have focused on high tech companies, which the IRS claims are leading the way in the adoption of the ESPPs. The bottom line is that while stock options plans can be an effective tool to attract and retain qualified staff, employers take on more than they bargained for if they do not approach the adoption and administration of these benefits with care. Likewise, employees who hope to share some of their company’s wealth through stock options should obtain competent advice so that they can ultimately take these options to the bank. © 1999 Jeffrey Berger REPRINTED FROM:
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