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Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Stock Options and Leased Employees

(Posted September 5, 2001)

Question 124: Can a recipient organization provide an Incentive Stock Option (ISO) plan to persons who perform services for the recipient organization but are leased from a staffing firm?

Answer: Let's start by looking at the definition of an ISO in IRC 422(b):

For purposes of this part, the term "incentive stock option" means an option granted to an individual for any reason connected with his employment by a corporation, if granted by the employer corporation or its parent or subsidiary corporation, to purchase stock of any of such corporations, but only if--[conditions deleted]

So, the entity granting the option (and the stock involved in the option) must be the employer of the recipient or a parent or subsidiary of the employer.

This, of course, moves us back to my favorite question (other than, perhaps "How large of a retainer would you like?"): Who's the Employer? If it is the recipient, as it usually is (see Chapter 4 of my book, Who's the Employer?), then there is absolutely no problem with the recipient granting an option to one of its common law employees. If the staffing firm is the true employer (rare), then there is no authority for the recipient to grant an ISO. The provisions of 414(n) do not apply to 422.

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.