It sounds like the company got it wrong. According to a KPMG article on the subject:
"The taxable spread on the exercise of an NSO by an employee (or at vesting if the stock received on exercise remains subject to a SROF) is considered wages subject to employment tax withholding and must be reported by the employer on Form W-2, Wage and Tax Statement. The employment tax withholding and Form W- 2 reporting requirements continue to apply on exercise of an NSO even when the employee option-holder terminates employment with the company prior to exercise of the option. Option exercises by service providers other than employees (e.g.,outside board of directors and independent contractors) are reported on Form 1099-MISC (Box 7) and withholding is typically not required."
As for what leverage you have with the Company, that's beyond the scope of Answer Xchange. You can contact them and point out their error, or you could contact the IRS.
