BEWARE: Compensating Employees With Equity Alone Likely Violates the Fair Labor Standards Act

In recent years, the practice of offering equity to compensate employees has gained traction, especially among startups and tech companies. Equity-based compensation, such as stock options and restricted stock units (RSUs), can provide employees with a sense of ownership and incentivize them to contribute to the company’s success. However, while equity compensation offers significant benefits, equity alone is rarely permissible under the Fair Labor Standards Act (FLSA). That is, an employer does not satisfy the minimum salary requirement (for exempt employees) nor the minimum wage requirements (for non-exempt employees) owed to its employees if it is only offering equity in the company.

The FLSA requires most exempt employees receive a minimum salary to avoid the obligation to pay overtime compensation when the employee works more than forty (40) hours in any given workweek. The Department of Labor (DOL) recently raised the salary threshold to $844/week (as of July 1, 2025) and $1,128 (as of January 1, 2025). Failure to pay the minimum salary requirement will cause an employer to lose the exemption where the minimum salary is required (e.g., employees employed under the administrative, executive, or professional exemptions). The FLSA also mandates that employers pay all covered, non-exempt employees at least the federal minimum wage (currently $7.25, though the minimum wage requirement is much higher in many states and in various municipalities).

Equity compensation, while valuable, does not provide immediate, tangible wages that can meet an employee’s living expenses. Since stock or stock options may not be liquidated easily and can fluctuate in value, equity-based pay alone cannot substitute for salary or payment of a minimum wage. For this reason, employers cannot rely solely on equity to satisfy the FLSA’s minimum wage or salary requirements. Instead, employers must ensure that employees receive a cash wage equivalent to or above the minimum wage or the required salary threshold, separate from any equity-based compensation. Relying exclusively on equity, even with significant potential value, could lead to wage violations under the FLSA and expose the company as well as certain individuals (such as officers, directors, and those responsible for payment of employees) to significant potential legal liability and repercussions.

There is, however, an exception: a special rule applies to business owners. Under the business owner’s rule, an employee who owns equity equal to not less than 20% of the company — and who is actively engaged in the entity’s management — is considered a bona fide executive, irrespective of the FLSA’s salary requirement. There is no exception to the level of equity owned; it must be at least 20%. There is also no exception to the individual being involved in the management of the company, i.e., exercising typical executive duties and responsibilities.

So, a word of caution: while equity is nice, cash is still king!