District Court Finds Stock Awards Exempt from Regular Rate for Overtime Pay

The U.S. District Court for the Northern District of California recently became the first federal district court to hold that restricted stock units (RSUs) need not be included in the "regular rate" of pay used to calculate overtime under the Fair Labor Standards Act (FLSA). In Costa v. Apple Inc., No. 3:23-cv-01353-WHO (June 11, 2026), the district court granted Apple's motion for summary judgment, holding that the company's RSU awards are excluded from the regular rate under both the "gift" exception of 29 U.S.C. § 207(e)(1) and "equity" exception of Section 207(e)(8).

Background

The plaintiffs sued Apple alleging it violated the FLSA and New York and California state wage and hour laws by failing to include the value of vested RSUs in Apple's calculation of the "regular rate" of pay for overtime purposes. Because the FLSA requires that "all remuneration for employment" be included in the regular rate used to calculate overtime unless a specific statutory exception applies and because California and New York generally follow the FLSA regulations in this regard, the key issue was whether Apple's RSU awards fall within one of the enumerated FLSA exclusions. After conditionally certifying an FLSA collective and Rule 23 classes, the district court ultimately granted Apple's motion for summary judgment.

RSUs Qualify as "Gifts" Under Section 207(e)(1)

Section 207(e)(1) of the FLSA excludes from the "regular rate" of pay all payments made as "gifts" or on special occasions, provided they are not measured by or dependent upon hours worked, production or efficiency. Apple's RSU awards satisfy this exception for several reasons. First, Apple retains complete discretion over whether to grant any RSU award at all, to whom awards are granted and the size of each award. The RSU program is not governed by a pre-announced formula tied to hours, output or efficiency metrics. Second, the awards function as discretionary longevity incentives rather than contractual compensation for services rendered.

The plaintiffs argued that RSUs cannot qualify as "gifts" because employees must fulfill a contractual obligation of continuing active service until the vesting date or forfeit the awards. But the district court rejected this argument, finding instead that the service-based vesting condition does not transform a discretionary award into compensation measured by hours worked.

RSUs Fall Within the Equity Exception Under Section 207(e)(8)

Section 207(e)(8) excludes from the regular rate the value of income derived from stock options, stock appreciation rights and bona fide employee stock purchase plans. RSUs are not expressly mentioned in the FLSA. The district court nonetheless concluded that RSUs fall within the exception's scope, reasoning that the U.S. Congress could not have intended to exclude stock options while treating RSUs, which are "almost identical in purpose, form, and function," differently.

Adopting a practical interpretation of the FLSA's amendments, the district court observed that RSUs rarely were used in 2000 when Congress created the so-called "equity exception." Changes in accounting standards regarding treatment of stock options, generally making them less attractive, coincided with the growing use of RSUs as the primary equity vehicle at public companies. The district court held that reading the statute to exclude only "stock options" from the regular rate calculation while including RSUs, the functionally equivalent instruments replacing stock options, would produce an "overly rigid" outcome inconsistent with the FLSA's purpose.

The district court declined to apply the FLSA's discretionary bonus and "other similar payments" exceptions, reasoning that Apple loses control over the RSUs ultimate value once granted because the RSUs' worth depends on the stock price at vesting.

Good-Faith Defense

The district court also found that Apple acted in "good faith" and had reasonable grounds for believing its pay practices complied with the FLSA, thereby barring any award of liquidated damages under Section 260. The district court credited Apple's contemporaneous documentation of its legal basis for the exclusion as evidence supporting the good-faith defense.

California-Specific Uncertainties

Though California generally looks to the FLSA regulations for guidance, in 2009 the California Supreme Court stated in dicta that RSUs are wages. The high court noted that RSUs in the case before it were "wages," but because the employee agreed to the terms of the vesting schedule – including forfeiting unvested units – the RSU plan did not run afoul California's wage payment laws. Put differently, the unvested units were not "earned wages" remaining unpaid upon employment separation.

A 2024 California Court of Appeal decision addressed precisely the same issue presented in Costa and adopted the earlier logic that RSUs with an ascertainable value that are immediately issued to employees are, in fact, wages. But the 2024 decision holds that "options [that] merely grant the holder a contractual right to buy shares of stock at a later date at an agreed upon exercise price" are not wages under the California Labor Code because the value of the shares is not known and wages must be "fixed or ascertainable amounts." As the court noted, "[w]hether and when the holder chooses to exercise these options and what the market value of the stock will be at some future date at the time the holder chooses to exercise the options are unknown and undeterminable at the time of the grant."

The 2009 California Supreme Court ruling and 2024 California Court of Appeal ruling raise the possibility of a conflict between federal and state law as to whether RSUs are to be considered "wages." Regardless, Costa and the two California decisions hold that uncertain, unascertainable amounts that are not immediately issued to the employee are not "wages" to be factored into the "regular rate" of pay.

A Growing Wave of RSU-Overtime Litigation

The Costa decision arrives amid significant legislative and litigation activity. The Valuing Employee Stock Today Act (H.R. 8660), introduced by Rep. Ryan Mackenzie (R-Pa.), proposes to amend Section 207(e)(8) to expressly add RSUs to the equity exclusion. This move follows on the heels of Google's recent resolution of a comparable RSU-overtime class action for $8.36 million – and additional suits against other large employers remain pending.

Practical Implications for Employers

Costa provides important guidance for employers that grant equity to nonexempt workers.

First, employers should inventory which nonexempt populations receive RSUs or other equity awards and confirm whether payroll currently includes or excludes vested RSU value from the regular rate. Organizations also should contemporaneously document the legal basis for any exclusion to support a good-faith defense barring liquidated damages and a finding of willfulness.

Equally important is ensuring that equity grants remain discretionary in both plan documents and practice. This generally means reserving sole discretion over whether to grant awards, to whom and in what amounts, and avoiding pre-announced formulas tied to hours worked, production or efficiency. And plan documents should not create an enforceable contractual right to a specific award amount for nonexempt employees.

Lastly, employers should monitor legislative and judicial developments closely. If H.R. 8660 is enacted, RSUs will be expressly excluded from the regular rate. If the U.S. Court of Appeals for the Ninth Circuit reverses or narrows Costa on appeal, exclusion practices will need to be reassessed. Employers should also confirm state-by-state treatment of equity compensation in overtime calculations independently of the federal result.

For more information or questions, please contact the authors.

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