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TECHWORKPLACE
by Jeffrey L. Berger, Esq.
Jeffrey L. Berger
specializes in management-side employment and business law, and related litigation in
Washington, D.C., and nationally. Questions and comments on the TECHWORKPLACE are
encouraged. Other articles are available at www.bergerlaborlaw.com.
TAKING STOCK OF HIGH TECH
OPTIONS
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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:
TECHGAZETTE - October 1999, Vol. 2, No. 10
The Berger Law Firm, P.C. 1825 Eye St. N.W., Suite 400, Washington, D.C. 20006.
Phone: (202) 861-1361 Fax: (202) 861-1362
Legal advice is case specific and is not intended to be provided by this article.
The Berger Law Firm, P.C. may not be held responsible for any consequences
that may arise in connection with the use of or reliance on the information provided.
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