Major Win for Employers: Apple’s RSUs are excluded from FLSA regular rate

In what appears to be the first published federal court decision to squarely address the issue, a federal court in California recently ruled that restricted stock units, commonly referred to as “RSUs,” are excluded from the regular rate of pay under the federal Fair Labor Standards Act.

Exclusion from the regular rate of pay means that the employer is not required to compute and pay overtime premiums on the RSU when it is granted to a nonexempt employee who works overtime hours.

The court concluded that the relevant inquiry is the nature of the award when it is granted, not what ultimately happens when it vests.

The plaintiffs have appealed to the U.S. Court of Appeals for the Ninth Circuit, meaning that employers should continue to monitor this developing area of the law.

Costa v. Apple, Inc.

The plaintiffs, current and former nonexempt employees of Apple, Inc., alleged that Apple violated the FLSA by excluding the value of vested RSUs from employees’ regular rate of pay when calculating overtime.

According to the plaintiffs, Apple grants RSUs as a promise to pay employees in stock, subject to continued active service until vesting, making the awards more akin to contractual compensation than discretionary gifts. Thus, the plaintiffs argued, the value of vested RSUs should be included in the regular rate for purposes of calculating overtime premiums.

Apple contended that its RSUs fell within the statutory exclusion found in 29 U.S.C. § 207(e)(8) of the FLSA (scroll down to subsection (e)(8) at the link), which excludes from the regular rate certain value or income derived from qualifying employer-provided equity compensation. Apple also argued that, even if Section 207(e)(8) did not apply, the RSUs were independently excluded under Section 207(e)(1) (scroll down to subsection (e)(1) at the link), commonly referred to as the FLSA’s “gift” exception.

The court’s decision

The court concluded that the RSUs were excluded from the regular rate under Section 207(e)(8) and granted summary judgment to Apple.

The court noted that no published federal decision had squarely addressed whether RSUs fell within that statutory exclusion and therefore undertook a detailed analysis of the statutory text, the regulations of the U.S. Department of Labor, the legislative history, and the structure of Apple’s compensation program.

The court rejected the plaintiffs’ argument that vested RSUs should be treated like ordinary wages. Instead, it concluded that the proper focus should be on the character of the award when it is first granted. In other words, because Apple originally granted the awards as equity compensation, the fact that employees later received shares when the RSUs vested did not change their fundamental nature. Because Apple’s RSUs were part of a legitimate long-term equity compensation program, not simply another way to pay employees for their work, the court concluded that the RSUs fell within the statutory exclusion.

The court did not stop there. As an alternative basis for its ruling, it concluded that Apple’s RSUs also fell within the FLSA’s “gift” exception under Section 207(e)(1). Although that provision is often associated with holiday bonuses or other gratuitous payments, the court reasoned that the RSUs were not measured by hours worked, production, or efficiency, that employees had no contractual right to future grants, and that Apple retained discretion over whether to issue additional awards.

Why this matters for employers

The court’s ruling is significant, as it appears to be the first published federal court decision to squarely address whether RSUs must be included in the FLSA regular rate. As a result, it is likely to become a frequently cited case in wage and hour litigation.

For employers who compensate non-exempt employees with RSUs or other equity awards, Costa provides welcome guidance on an issue that previously lacked direct authority.

However, because the plaintiffs have appealed, employers should avoid assuming that this issue has been definitively resolved.

Instead, employers should continue to monitor the appeal and consult with counsel when evaluating whether their equity compensation programs are properly excluded from overtime calculations under the FLSA.

We will keep you up to date on the Costa appeal and other related wage and hour developments affecting employers. If you have questions about this decision or any other wage and hour matter, please contact any member of Constangy’s Wage and Hour Compliance & Litigation Practice Group.