By Brett Cooper, Backhouse Jones Solicitors

Keeping staff incentivised is an issue with many employers across the globe and throughout a variety of industries. With the well-known current shortage of HGV drivers, the concern may be particularly prevalent in the transport industry as employers seek to ensure they attract and hold onto good quality employees.

A popular method of incentivisation used by small and medium companies (SMEs) is a share option scheme, whereby an employee is given the legal right to buy a company’s shares in the future, but at a price that is fixed today. The fixing of the share price means that, if the value of the company increases over time, the employee could make a significant profit when they eventually sell their shares.

One type of share option scheme which has become popular is an ‘Enterprise Management Incentives option’ (EMI option). An EMI option is a type of employee share option which can enable both the company and the individual to benefit from favourable tax treatment. As per the EMI Code, this type of share option scheme must involve a written agreement between the employer and employee.

In order to grant EMI options, there are certain requirements to be fulfilled by the company:

• It must be an independent trading company;
• It must have a maximum of £30million in gross assets;
• It must have fewer than 250 full-time employees;
• It must not operate an ‘excluded activity’, which, under the relevant law, includes industries such as
• those dealing in:
  • Goods, other than in the course of ordinary trade of wholesale/retail distribution;
  • Leasing (including assets on hire);
  • Property development;
  • Farming.

In addition, the employee has to work at the company for at least 25 hours per week (or, if less, at least 75% of their working time). They cannot be granted EMI options if they, or their associates, have a material interest in the company, or if they are non-executive directors or consultants of the company.

In order to avoid the EMI options lapsing, they must be bought by the employee within 10 years of their grant. Other lapsing provisions will often be written into the option agreement, to the employer’s advantage, such as if the employee becomes bankrupt, tries to assign the options to someone else, or tries to use them as security.

A recent government publication found several pieces of evidence that supports the EMI scheme. The research that was carried out showed that the scheme is often used as a tool to assist with the recruitment and retention of employees.

Over 8 in 10 of the companies surveyed reported that the EMI scheme had assisted their business with retention and there was an improvement in staff morale. Around half of the businesses said that the scheme had benefited in recruiting staff generally, and also in recruiting higher quality workers – which can, of course, help the company’s growth going forward.

EMI share option schemes are really worth considering for SMEs who want to incentivise, motivate and involve their staff (or, indeed, potential staff). There are questions which can arise when thinking about granting EMI options, so it’s important to involve your solicitor and accountant to ensure that the scheme is executed correctly.

Backhouse Jones has a corporate commercial team which can work alongside your accountant to advise on EMI share schemes and draft the documents required.

Bio

Brett Cooper is a solicitor at Backhouse Jones and Head of the Commercial and Corporate Team.  Brett specialises in commercial, corporate, property and construction law.  Brett can be contacted on 01254 828 300 or e-mail brett.cooper@backhouses.co.uk.

Photo: Brett Cooper