Lipis Consulting, Inc.

Keeping a close watch on changing attitudes and the laws that often follow is important. Here are some perennial Hot Topics – please check back for updates:

1. Exempt/Non-Exempt Determination

The old days of "thinking" or guessing that a job is not eligible for overtime are long gone. Not only have the definitions of what qualifies a job to be exempt from overtime changed, the risks of getting it wrong can be enormous. The words "class action" are enough to scare anyone, particularly in California where plaintiffs can, in addition to the lost overtime, recover penalties, interest and attorneys fees going back as far as 4 years in some cases. While most companies are not going to make headlines in the WSJ, companies must understand that all it takes is one employee saying one thing to the DOL or California Department of Labor Standards Enforcement (DLSE) - even an employee who likes the company – and you might find yourself between an uncomfortable rock and a very hard place.

2. Backdating Stock Options

"There are some very bright people who did some very dumb things. In some cases, it was greed. In some cases, it was naiveté. In some cases, it was misplaced trust, meaning, 'Well, I didn't understand this stuff, but the people who I had faith in were telling me it's okay.' "

Who said that? Mark Lipis did, as quoted in Human Resoruce Executive Online; see the article link to Human Resource Executive Online in the Press Section.

Volumes have been written on this scandal. Long story short, granting stock options at a discount from the current value is not illegal. Doing so and not telling anyone about it, is. Doing it retroactively makes a bad decision worse.

There are many egregious examples of failures in corporate governance and avarice in the executive suite, but backdating options should head the list of dumb – and bad – moves.

We have one word of advice for executives, Boards and human resource executives who might be considering backdating an option: Don't.

Here's a tip based on wisdom from the Real World. I've worked with dozens of publicly-traded companies who run out of time during a compensation committee or Board meeting and don't get around to authorizing grants. "Don't worry," they say, "we'll do it next time and just make the grants retroactive.

Again, Don't. Manage the process and the meetings properly so that you can authorize the grants in a timely manner which, by the way, is the right thing to do in fairness to your executives.

3. Employee vs. Contractor?

There are two perennial Hot Topics for compensation professionals: errors in exempt/non-exempt classifications, and incorrectly treating an employee as an independent contractor (think W2 vs. 1099).

Sometimes the employer makes this determination because there's a hiring freeze or caps on employee headcounts. Perhaps the employer doesn't want to provide benefits or pay overtime. Maybe the employer wants to avoid issues when terminating the worker at the end of a project. There are many reasons an employer may prefer a worker to be a contractor rather than an employee.

On the other hand, some workers request contractor status because they want the tax deductions that come with being self-employed.

Regardless of the reasons why an employer and a worker might want to set the relationship as client – contractor rather than employer – employee, the IRS and States have very specific rules. Even if the employer and worker mutually agree to consider the worker a contractor, the taxing authorities have their own tests and make their own determination.

There are risks to getting it wrong. If the relationship is determined to be employer-employee, then the employer will be required to pay employment taxes to the taxing authorities plus possibly workers compensation and pay additionally for missed meal and rest periods. Plus perhaps fines and interest. Since the contractor presumably set his or her billing rate with the knowledge that, as a self-employed contractor, he or she will have to pay both the employer's and employee's FICA and social security taxes, the employer could try to get the contractor-turned-employee to refund the taxes. Good luck trying....

There's also the issue of overtime payments lurking in the background but I'm sure you get the point.

4. 123R: So what is a Stock Option Actually worth?

No one knows for sure. But FAS 123R says we must estimate that value nonetheless. One of the hottest of all hot topics is how to estimate the value of Stock Based Pay. Answering this question becomes more difficult after the company learns that its normal response ("We don't know; let's ask our accountants") will not work in this case. Your auditor can and must audit your calculations but cannot advise you on how to do the calculations. Well, we can.

5. SEC Changes Executive Compensation Disclosure

The spirit of Transparency marches on. The SEC recently issued new guidelines on what must be disclosed in public filings. Here's a hint: for the most part, the SEC wants you to explain in greater detail than ever how your Compensation Committee and Board decided what to pay your key executives. And, of course, you must disclose how much.

6. Deferred Compensation Rules Have changed

You might think we're done with the new rules, but more changes are said to be in the wings. Deferring funds is still a valuable and important component of the overall executive compensation program, but doing it right is more important than ever.