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Covid-19: Employee Share Schemes

16 April 2020

Employee share scheme can incentivise staff during lockdown whilst ease the cash-flow burden on your business.

We are seeing a rise in businesses looking to retain and motivate their staff during the lockdown by offering employees an option to purchase shares in the company.

Why set up an employee share scheme?

Setting up an employee share schemes is a low-cost way to remunerate employees without the company having to pay employees money at a time where cash-flow is critical.

The main benefits of adopting an employee share scheme during this time are both financial and motivational:

  1. Working capital – raising working capital when employees exercise the option and purchase shares in the company, relieving pressure on cash-flow.
  2. Tax advantages – there are various types of share schemes available with different tax advantages. Some attract income and national insurance contributions advantages, whilst corporation tax relief is available under an enterprise management incentive (EMI) scheme.
  3. Loyalty – assist in recruiting, maintaining and motivating high-calibre staff.
  4. Retaining key employees – with some companies asking employees to take voluntary pay cuts, employers may want to consider implementing an employee share scheme to retain key employees.
  5. Aligning interests – when employees are stakeholders in the company, they will be more understanding and supporting of difficult business decisions.

Existing options and the impact of Covid-19

Whether you are an employer who has previously granted share options to employees or are an employee holding share options, now is an important time to review the terms of your options and scheme rules to find out how Covid-19 may impact you:

  1. Vesting – the exercise of options may be subject to key performance indicators or targets which, given the current circumstances may not be attainable. Employers may wish to review the scheme rules to allow for the options to vest in any event or to amend the targets during this period.
  2. Exit – some options may vest on the occurrence of certain events, such as the company being sold or listed, which now look unlikely to occur before the options lapse.
  3. Value – if your company has recently granted share options, the exercise price may now be far higher than the current market value of those shares, in which case the option holder is unlikely to exercise his or her options. Employers should consider the benefits of introducing a new share scheme with a lower exercise price, to encourage the exercise of options and inject working capital into the business.
  4. Redundancy – scheme rules will deal with redundancy differently, some resulting in an automatic lapse of an option, good leaver provisions or giving directors discretion to decide on a case by case basis.
  5. Furlough – under an EMI scheme an employee must meet minimum working time requirements and ceasing to meet this condition can lead to an immediate disqualifying event. HMRC is yet to confirm its approach in relation to furloughed employees.

This article is provided by Burlingtons for general information only. It is not intended to be and cannot be relied upon as legal advice or otherwise. If you would like to discuss any of the matters covered in this article, please contact Lydia Mills or write to us using the contact form below.

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