Federal Court Rules RSUs Can Be Excluded from FLSA Overtime Calculations

Employers that grant restricted stock units (“RSUs”) to non-exempt employees now have favorable new guidance. On June 11, 2026, the U.S. District Court for the Northern District of California issued what appears to be the first-of-its-kind decision addressing whether RSU value must be included in the FLSA “regular rate”—holding that it does not. In Costa v. Apple, Inc., the court identified two independent statutory bases for exclusion—the equity and the gift exceptions—an important development for the many employers that use RSUs in compensating overtime-eligible employees.

Background

In 2015, Apple expanded its RSU program to all employees, including non-exempt employees. Each year, RSU awards were determined by job level and function—not hours worked, production or performance. Employees who wished to accept an award were required to sign an award agreement. While employees could decline an RSU award if they did not wish to sign an award agreement, they would not receive an alternative payment if they elected to do so. The RSU awards were fully discretionary and voluntary, and the award agreements created no contractual right to future grants or benefits in lieu of RSUs. The RSU value was unknown at grant because it depended on market conditions at vesting.

Apple did not include the value of vested RSUs when calculating the regular rate of pay for its non-exempt employees. In March 2023, a non-exempt employee filed a hybrid FLSA collective action and Rule 23 putative class action, contending that Apple underpaid them in violation of the FLSA and California and New York state laws because Apple failed to include the value of vested RSUs when it calculator their regular rate of pay for overtime. The Court granted conditional certification of a federal FLSA collective in late 2023, and certified Rule 23 California and New York state classes in 2025. Thereafter, both parties moved for summary judgment on the legal question of whether RSUs must be included in the regular rate.

Under the FLSA, overtime must be paid at one and one-half times the employee’s “regular rate,” which broadly includes most remuneration paid to the employee. However, Section 207(e) permits employers to exclude eight categories of payments from the regular rate, and a threshold question in any overtime dispute is whether a particular form of compensation falls within one of those exclusions.

The Court’s Analysis

In its motion for summary judgment, Apple invoked four FLSA exclusions. The court accepted two—the equity and gift exceptions—and separately upheld Apple’s good-faith and lack-of-willfulness defenses.

Equity Exception

Section 207(e)(8) of the FLSA permits exclusion from the regular rate calculation “any value or income derived from employer-provided grants or rights provided pursuant to a stock option, stock appreciation right, or bona fide employee stock purchase program.” 29 U.S.C. § 207(e)(8). Although RSUs are not expressly named in the statute, the Costa Court read them into the exception, finding RSUs to be functionally identical to stock options: both are voluntary, discretionary, non-cash awards with no guaranteed value that give employees an ownership stake subject to vesting.

The Court analyzed the legislative history of the Worker Economic Opportunity Act of 2000 (WEOA), which introduced the FLSA equity exception. Congress’s joint statement of intent called for an exclusion “broad enough to capture the diverse range of broad-based stock ownership programs” offered to non-exempt employees, to be applied in a “forward-looking” and “flexible” manner. The Court found this intent dispositive in light of market realities: when the WEOA was enacted in 2000, almost no public companies granted RSUs; by 2024, 92% of public companies granted stock-settled RSUs, while stock option usage declined to approximately 40%. The Court concluded it would be “hard to imagine that Congress would exclude stock options from FLSA overtime rate calculations but would choose not to exclude RSUs, which are almost identical in purpose, form, and function.”

Gift Exception

Under Section 207(e)(1), a payment may qualify as a gift that can be excluded from the regular rate calculation when it is not measured by hours worked, production, or efficiency and is not contractually required. The Court held that Apple’s RSUs met that standard. Apple’s RSU award agreements expressly stated that each award was “an exceptional, discretionary, one-time grant, is voluntary, and occasional and does not create any contractual or other right to receive future awards of RSUs, or benefits in lieu of RSUs.” The agreements further provided that RSUs were “extraordinary items that do not constitute compensation of any kind for services of any kind rendered to the Company.” Relying on this language, the Court found Apple was not contractually obligated to offer the awards, that they were discretionary and voluntary, and that their value was unknown at grant. Critically, the Court analyzed the character of the award at the time of grant, rather than at vesting. 

Discretionary Bonus and “Other Similar Payments” Exceptions

The Court rejected Apple’s arguments that the RSUs fell within the FLSA exceptions for discretionary bonuses or the “other similar payments.” The Court held that the discretionary bonus exception did not apply because, although Apple controlled whether to grant RSUs, it did not control their value at or near the end of the relevant work period—a requirement the Court found essential. The “other similar payments” exception under Section 207(e)(2) also failed because the Court did not find RSUs to be the types of payment subject to that exception. In reaching that conclusion, the Court looked to the Department of Labor’s illustrative examples of excludable “other similar payments” under the FLSA’s implementing regulations (29 C.F.R. § 778.224(b))—which include payments for vehicle rentals, loans, parking benefits, and wellness programs—and found that RSUs were “sufficiently distinct from each listed example” to fall outside the exception.

Good Faith and Willfulness Defenses

The Court further found that Apple acted in good faith and did not willfully violate the FLSA because: (a) the legal question at issue was novel; (b) no prior case law addressed RSUs; and (c) Apple’s payroll team had conducted regular audits and stayed current on relevant legal developments. As a result, the two-year statute of limitations for FLSA claims applied, rather than the three-year period applicable to willful violations. The Court also declined to award liquidated damages under the FLSA, and plaintiffs’ derivative California state law claims for waiting time penalties and wage statement penalties under California Labor Code Sections 203 and 226—which require willful or knowing and intention conduct—failed.

Takeaways for Employers

Costa offers favorable guidance for employers that grant RSUs to non-exempt employees, but it remains a single district court decision that is being appealed by the plaintiffs to the Ninth Circuit. However, in the wake of the decision, employers should assess whether RSU value under their RSU programs can be excluded from the FLSA regular rate under the two statutory exceptions discussed in Costa. In doing so:

• Structure matters. Employers should ensure that their RSU award agreements include language making clear that the programs are (a) fully discretionary and voluntary, (b) not tied to hours worked, production, or efficiency, and (c) that employees have no contractual right to future awards. For example, by including the language relied upon by the Costa Court, which stated that awards are “exceptional, discretionary, one-time” grants that are “extraordinary items” outside the scope of regular compensation.
• Focus on grant-level characteristics. Under Costa, the relevant inquiry under the gift exception is the character of the award when granted—not the conditions or value at vesting. Ensure that the terms of the award at the point of grant support exclusion from the regular rate.
• Maintain and document compliance efforts, including regular payroll audits and monitoring legal developments, to support good-faith and lack-of-willfulness defenses.
• Consider the broader implications. Although Costa addressed RSUs specifically, the Court’s reasoning under the equity exception—emphasizing functional similarity to stock options—may support arguments for excluding other equity-based compensation vehicles that share similar characteristics, such as performance share units that vest based on time.
• Monitor the Ninth Circuit appeal and any Department of Labor guidance addressing RSUs and regular-rate calculations.