There are many employee incentive arrangements available and there is no one size fits all approach.  An employer should carefully consider all relevant issues in advance of adopting an incentive arrangement to ensure it is fit for purpose and appropriate for the relevant business. In this article, Gillian Dully, Associate Solicitor in the Corporate and Commercial Department, LK Shields, outlines potential share option schemes and discusses potential employment and tax implications of these.

Why Would an Employer Implement an Employee Incentive Arrangement?

There are a variety of reasons why an employer might introduce an employee incentive arrangement.  One of the current primary objectives for employers is to attract and retain key talent in a competitive business environment by introducing flexible remuneration packages.  SMEs and start-ups typically do not have cash resources available to offer prospective key employees comparable salary packages to larger multinational employers.  From an employee’s perspective, remuneration in the form of share incentives may improve the attractiveness of the SME employment offer if there is potential future growth in the value of the business.

Types of Schemes

The type and size of the business will influence the suitability of a specific type of incentive arrangement.  There are broadly two types of share schemes in Ireland.  Revenue approved arrangements (e.g. Save As You Earn Schemes and Approved Profit Sharing Schemes) are tax efficient but must be made available to all employees on similar terms so are typically unsuitable for an SME or a start-up.   Unapproved schemes (non KEEP share option scheme, restricted or forfeitable shares, growth or flowering shares, phantom share schemes) do not generally require Revenue approval and are more flexible for start-ups and SMEs.

Keep Share Options

The Key Employee Engagement Programme (KEEP) is a relatively new tax advantageous share option incentive arrangement for SMEs.  Qualifying SMEs may grant KEEP share options to key employees and income tax is not payable on the exercise of an option which is a considerable advantage.  Capital Gains Tax (CGT) may arise when the employee subsequently disposes of the share option.  Unfortunately, to date, the KEEP scheme has not been utilised by many SME’s on the basis it imposes too many onerous restrictive conditions on a qualifying SME and any qualifying employee being granted KEEP share options.

Non-Keep Share Option Schemes

An employer may grant options to acquire shares under an unapproved share option scheme.  Generally, such schemes are not tax efficient but if an employer is planning a sale of the business then non-KEEP share options might be capable of being exercised during the overall sale process and the employee’s tax on exercise of the options funded by the share sale proceeds.

Restricted, Clogged or Forfeitable Shares

An employer may award employees free or discounted shares and income tax and Universal Social Charge (USC) are payable based on the market value of such shares.  CGT may arise on the disposal of the shares.  Where such shares contain genuine restrictions on the sale or transfer then the taxable value of those shares may be abated by up to a maximum of 60% for restrictions of in excess of five years.  If the shares are subsequently forfeited the employee may be entitled to a rebate of tax paid.

Growth or Flowering Shares

An employer may issue shares to employees with limited rights attaching to such shares at the date of issue.  The shares will only grow into more valuable shares when certain specified events occur.  An employer might be able to structure growth or flowering shares so as to minimise income tax arising on the issue of the shares and ensure CGT treatment on the subsequent disposal only.

Phantom Share Schemes and Long-Term Incentive Plans

Some employers do not want to provide equity to employees.  There are a wide range of employee incentive arrangements that an employer can establish, which do not involve the issue of shares to an employee.  These arrangements are essentially an employee bonus arrangement enabling an employer to provide flexible remuneration and avoid the issue of shares to employees.

Employment Issues to Consider with Employment Incentives

An employer will need to carefully consider and manage relevant employment law issues which may arise when establishing an incentive arrangement and during the life cycle of the relevant scheme.  Common thorny employment law issues which need to be considered by an employer in advance include:-

• Equality law – are benefits being provided to “key employees” only and is the scheme being operated in a non-discriminatory manner?
• Leavers and Unfair Dismissal – what happens to share/incentive rights in an unfair dismissal and other termination of employment scenarios?
• Redundancy – will a redundancy payment take into account the value of employee incentive arrangements?
• Transfer of Undertakings Regulation[1] – how is an incentive arrangement treated in the event of a transfer of the business and what rights will employee participants have on transfer of their employment?

Latest Developments

Recently, the Department of Finance carried out a public consultation process on the KEEP Scheme to identify potential enhancements that might be made so that it operates in an efficient and effective manner.  The Minister for Finance has indicated that issues raised during the public consultation process will be analysed and proposals submitted in the context of the Finance Bill 2019.  We await details of improvements, if any, to the Keep Scheme in Budget 2020.            

Conclusion

There are many employee incentive arrangements available and there is no one size fits all approach.  An employer should carefully consider all relevant issues in advance of adopting an incentive arrangement to ensure it is fit for purpose and appropriate for the relevant business.