The NASPP Blog

When I posted the results of the NASPP’s quick survey on the CEO pay ratio, the data I got the most questions on were the results for how companies are handling independent contractors in the calculation. When we conducted that survey, the SEC’s guidance seemed to indicate that some individuals that are treated as contractors for other purposes might be considered employees for purposes of the CEO pay ratio. That has now changed.

The SEC’s Original Position

The SEC’s original position was that the final rules permitted the exclusion of workers who are employed by and have their compensation set by an unaffiliated third party (e.g., leased employees). A CDI issued by the SEC in October 2016 clarified that some workers who are considered nonemployees for tax purposes might be considered employees for purposes of the CEO pay ratio.

The SEC’s Reversal

In the guidance issued in September 2017 however (see the NASPP alert “SEC Issues Guidance on CEO Pay Ratio“) the SEC relaxes their original position significantly, stating:

We believe it would be consistent with Item 402(u) for a registrant to apply a widely recognized test under another area of law that the registrant otherwise uses to determine whether its workers are employees.

In addition, the CDI issued on this question in 2016 has been withdrawn and the new guidance seems to suggest that reliance on the determination of employee status for tax purposes is sufficient to establish employment status for the CEO pay ratio.

The July-August issue of The Corporate Counsel notes that in addition to the test used under the US tax code (which is fairly complex) companies might rely on the determination under the Fair Labor Standards Act (FSLA) or other laws.

A Shift in Administration = A Shift in Position?

The SEC notes in Release No. 33-10415 that the shift in their position is due to concerns expressed by commenters. I don’t doubt that this is the case, but I also wonder if it is partly attributable to the Trump administration’s pro-business agenda. Obviously, one way for companies to improve their CEO pay ratio is to contract out lower paid positions (e.g., in gig-economy type arrangements). The SEC’s original position was an obstacle to this approach; the new position is much less so.

– Barbara

P.S.—I removed the chart on how companies are handling contractors from the quick survey results (in case you are wondering why you can’t find it). Now the that SEC’s position has been changed, companies are likely changing their approach and I don’t think our data on this particular question is reliable.