There are many strands of law that weave in and out of a share incentive plan but few areas have as close a relationship with the fabric of a plan as employment law. This article by IPSA Council member Rosaleen Boyle, Incentives Senior Advisor with A&L Goodbody, looks at some key or developing areas of employment law that have an impact on how plans operate in Ireland.
1 WHO CAN JOIN?
Companies generally want to focus on giving share-based awards out to anyone who is contributing to their business. This will normally be employees, but may extend to directors or non-employees, particularly companies at the start-up phase who may be relying on a few key technical or business advisors that dont work or commit full time to the business. Many bigger companies with a US-facing shareholder base follow common US practice of extending share awards to non-executive directors and consultants.
Rosaleen Boyle: Incentives Senior Advisor with A&L Goodbody
There is nothing in Irish employment law to prevent a company from giving shares to any of these individuals. However, there are two key areas of employment law that can leave holes in a share plan which may cause it to unravel and expose the company to claims:
- The first is to ensure that any discretions in relation to who is given an award do not breach employment equality legislation e.g. that the company does not – inadvertently or otherwise – discriminate against certain protected groups on grounds of age, gender, or part time worker status for example.
- The second is that in Ireland, a person’s status as an employee or non-employee consultant should be made clear in all share incentive documents and the share award terms should not cut across that. Irish courts have developed several tests to help determine whether a contract of employment exists. For example, if a plan states that it is only for employees, the grant of a share-incentive to a consultant may help to undermine their status as a consultant.
One other recent development that has emerged during and after the pandemic is “employer of record” or “professional employer organization” structures, which are used by companies wanting to dip a toe into Ireland without setting up a branch or subsidiary, at least initially. Individuals who work under these arrangements can generally participate in equity plans, if the relevant plan provides for this.
2 RECRUITMENT & MAKING AN OFFER
Like a kitten chasing wool, employees are often tempted through the door by a company when it makes an up-front promise of share-based awards. In this regard, companies should be cautious about making promises they may not be able to deliver and should avoid including details of entitlements in offer letters or the employment contract.
- To ensure that entitlement to participate in a particular share plan does not become a contractual right, it is advisable not to refer to share plans in offers of employment and employment contracts.
- Difficulties can arise if a particular price or value is promised which cannot be delivered, or if the grant is promised within a time frame that cannot be met e.g. because shareholder approval is required or the company (if listed) is in a closed period.
- Where the employer is a subsidiary of an overseas parent, the subsidiary should not make offers that are beyond its remit e.g. it will normally be the board of the parent company that makes decisions about awards of parent company shares, so a subsidiary can only commit to recommending a person for an award, which should be reflected in any offer letter.
3 KEY TERMS
As flagged above, the terms and conditions attached to an award should not inadvertently discriminate against any protected categories of employee. Many companies now avoid referring to age or retirement in awards to minimise any age discrimination risks.
A well drafted document should be clear at the outset about the consequences for a share incentive should an employee leave and set out the scenarios for different leaver reasons as applicable. Ideally it should also contain language that protects the company as far as possible to exclude compensation claims for a loss of rights relating to an award.
Awards granted by non-Irish multinationals will typically need to be modified to fit with Irish employment law e.g. many US award documents refer to “at will employment”, a company’s right to dismiss and termination “for cause” under certain US categories of felony or misdemeanour, none of which sit well with Irish employment law and rights.
4 TERMINATION AND SETTLEMENT
Establishing the reason why the person is leaving and when the date of termination occurs are both important steps in order to apply the terms of an award correctly to the scenario. It may seem obvious, but it is also critical to identify what awards or other rights the employee holds in relation to company shares, and all supporting documents, as different outcomes may apply to different types of award.
Where there is discretion for a company board to determine an outcome at termination, it will need to be mindful of relevant case law (principally UK law) which has established that discretions should not be exercised irrationally.
Termination of employment of a senior employee may generate specific issues, due to the individual’s level of awards, seniority or even public profile. A settlement agreement may need to include detailed negotiated terms in relation to share-based awards held by an employee.
Some awards will contain post-termination restrictive covenants or malus / clawback provisions which will continue to apply for a period of time following the end of the employment relationship and companies should seek advice on their enforceability.
5 TRANSACTIONS
Employment law often has a significant role to play for share awards during a transaction. For example, where employee share incentives are held by employees in a target company who will be transferred to a new employer under TUPE, it is important to consider what rights those employees have and to what extent the new employer must offer a replacement award, among other things. If the transaction will result in redundancies, or newly negotiated compensation packages for key staff, share incentives will often be an important part of the mix.
6 CONCLUSION
Woolly drafting in a share incentive document is best avoided and well drafted, clear terms will save companies a lot of time and effort in the long run. The tighter the knit, the better the fit!
