COVID-19: Employee Share Plans – Impacts and Opportunities
As the economic effects of the COVID-19 crisis continue to develop, many businesses are experiencing cash-flow issues, reduction in turnover, falling share prices, and suspensions of corporate transactions. In addition, many employees have been placed on temporary lay-off, short-time and reduced hours, with others taking unpaid leave and pay reductions, while a large cohort of employers are availing of the Temporary Wage Subsidy Scheme (“TWSS”) as a means of paying their employees and keeping them on payroll. The ripple effect of these factors will have consequences for employee share incentive schemes, affecting both Revenue approved and unapproved share scheme arrangements. Employers may need to consider how changes to their business, and the way that they engage and remunerate their employees, may affect the operation of employee share incentive schemes and outstanding equity awards.
The impact of the current COVID-19 crisis on employee share incentive schemes will vary depending on the specific terms of the scheme, the performance of the organisation during the current financial year, and whether the organisation is a private entity or publicly listed. For example, if changes to an employee share incentive scheme of a publicly listed company are envisaged, this may require shareholder approval and may also have wider market implications on the entity’s share price, depending on what changes are being proposed to the share scheme. Corporate governance requirements and remuneration policies also need to be carefully reviewed, particularly in light of the newly transposed Shareholders Rights Directive II (more on this here).
In relation to all of the issues outlined below, strategies around employee engagement and effective communication with affected employees will be vital. In addition, the appropriate solutions and next steps for any affected employee share incentive scheme will be primarily dictated by both the type of scheme and the rules of the individual scheme, and we recommend that employers seek advice in relation to the operation of each scheme on a case-by-case basis.
General Impact of COVID-19 on Employee Share Incentive Schemes
The following are some of the general issues that may affect current employee share incentive schemes:
- In light of the volatility of stock markets arising out of the COVID-19 crisis, employers may need to consider adjusting outstanding awards. A review of the terms and rules of the specific share incentive scheme will be key to ascertain if this is possible. If this is being contemplated, employers need to be cognisant of the wider market implications, as well as the original purpose behind granting the awards to begin with.
- As the vesting of certain types of share options may be dependent on both company and individual performance targets linked to profit, sales or turnover, given the effects of COVID-19 on businesses and the economy, both companies and individual employees may not meet these targets. Clearly, this will subsequently impact the vesting schedule of performance related share and share option schemes. In order to combat this issue, employers may wish to review whether the scheme rules allow targets to be modified and/or whether the Board has discretion to allow shares to either fully or partially vest notwithstanding that the specified targets may not be fulfilled.
- A general consideration affecting unapproved plans (in particular certain growth/flowering share plans) or long-term incentive plans (LTIPs), will be to consider the impact of any corporate transactions/IPOs that were in train prior to COVID-19 crisis, and which may now been discontinued or postponed. Such schemes may have value creation/hurdle-type award criteria whereby shares vest on an exit event. With many corporate transactions and IPOs now abandoned or on hold, these options may automatically lapse and employers may wish to consider how affected participants will be remunerated in the absence of such awards in the short to medium term.
- The fact that the organisation may be operating remotely will also need to be considered. Remote working arrangements may affect logistical and administrative aspects of the operation of employee share incentive schemes and additional data security mechanisms may need to be implemented.
In relation to tax filings, one good piece of news is that the filing deadline for share scheme reporting returns for the 2019 tax year was extended by Revenue from 31 March 2020 to 30 June 2020 in light of the COVID-19 crisis.
Revenue Approved Schemes
We outline below specific issues to consider in relation to the main types of Revenue approved schemes. Generally speaking, employers are more limited in terms of what adjustments can be made to Revenue approved schemes and KEEP schemes, as approval depends on compliance with legislative provisions and Revenue’s guidance notes, which are strictly applied.
Approved Profit Sharing Scheme (“APSS”)
An APSS is a popular Revenue-approved share scheme which can be used by an employer to provide share based remuneration to employees in a tax efficient way. Under an APSS, if certain criteria are met, shares can be appropriated to eligible employees free of income tax. PRSI and USC is still applicable. Shares may be allocated on the basis of length of service, basic level of salary or similar factors. In addition, an APSS can be used by employees to convert an otherwise taxable discretionary bonus or element of salary into shares in their employing company. Employees may also apply a percentage of basic gross salary towards the purchase of shares, known as salary forgone.
Many of the issues linked to an APSS as a result of COVID-19 will relate to situations where employees are laid-off, on short-time, reduced hours or unpaid leave, or where their remuneration has been reduced (including where the employer is availing of the TWSS). This may affect an employee’s ability to continue making contributions to a contributory APSS or salary forgoing (if this is part of the scheme provisions). While employers may be happy to allow affected employees to take contribution holidays, in practice, the ability to do so is limited by the Trust Deed & Rules of the Scheme, the legislation underpinning APSS schemes, and Revenue guidance. Employers may wish to consider whether it would be possible to suspend the operation of the scheme entirely for a specific period, possibly linked to the duration of the TWSS. This would reduce the administrative burden associated with dealing with each individual employee’s contribution separately. At the time of writing, we are awaiting guidance from Revenue in relation to this matter.
Save as You Earn Schemes (“SAYE”)
SAYE schemes allow employers to grant employees options over company shares at a discount of up to 25% of the market value of the shares at the beginning of the savings period. Employees must commit to regular monthly savings of between €12 and €500 from their net income over a predetermined period of three, five or seven years. At the end of the savings period, the employee may (but is not obliged) use his/her savings to purchase all or some of the shares granted by the option.
Similar to an APSS, employees who are laid-off, on short-time, reduced hours, unpaid leave or whose pay has been reduced may have difficulties continuing with their contributions to an SAYE scheme. As set out above, employers may wish to consider whether it would be possible to suspend the operation of the scheme entirely for a specific period, possibly linked to the duration of the TWSS. This would reduce the administrative burden associated with dealing with each individual employee’s contribution separately. In relation to employee savings contributions to the SAYE, we understand that Revenue are considering whether or not employees would be permitted to take savings holidays as a result of Covid-19. If such savings holidays were permitted, certain consequential issues arise such as if, when the employee eventually resumes their savings contributions, the individual will have time to accumulate enough savings to exercise their options. Potential solutions to this issue would include allowing employees to continue contributions from their personal bank accounts (rather than through payroll) or allowing employees to make catch-up contributions. However, none of these measures are currently possible under the legislation or Revenue guidance notes. At the time of writing, we are awaiting guidance from Revenue in relation to this matter.
Key Employee Engagement Schemes (“KEEP”)
KEEP is a share-based remuneration incentive scheme to facilitate the use of share-based remuneration by unquoted SME companies in order to attract and retain key employees. For further information in relation to KEEP schemes, including the qualifying criteria, please refer to our briefing here. To qualify for KEEP, the legislation states that employees must meet certain criteria in relation to minimum hours worked with the qualifying company, and where employees are on temporary lay-off or short-time, this may impact the qualifying criteria.
Following a submission by the Irish ProShare Association, Revenue has confirmed that, in relation to the definition of “qualifying individual” set out in the legislation:
- employees who are currently on a shorter working week or have their working hours reduced as a result of COVID-19 should continue to qualify on the basis that at least 75% of their working time is spent with the qualifying company; and
- for employees who have been temporary laid-off, in respect of KEEP options granted prior to the COVID-19 crisis, in the case of a temporary lay-off or any temporary short-time working arrangements, Revenue will consider the individuals to continue to be regarded as “qualifying individuals” for the purposes of this relief, if the requirement to work the 20 hours per week or devote 75% of their working time to the company would have been satisfied were it not for COVID-19.
Revenue has also indicated that the qualifying company and individual must retain records which support the position should any queries arise. In addition, Revenue has confirmed that it will consider any period of temporary short-time working imposed as a result of COVID-19 as part of the “relevant period” for statutory purposes. Revenue has also acknowledged that qualifying KEEP options may already have been granted prior to a period of a change in working arrangements as a result of COVID-19, which may result in situations where the value of the KEEP options granted will exceed the annual emoluments for 2020. Revenue has confirmed that, for options issued prior 15 March 2020, Revenue will continue to view these as qualifying share options for the purposes of KEEP relief notwithstanding that the value of KEEP options granted may exceed the cash value of emoluments for 2020. For further information, please refer to the IPSA press release, available here.
COVID-19 and Potential Opportunities for Implementing Employee Share Incentives Schemes
While the COVID-19 crisis raises a myriad of issues and potential difficulties for employee share incentive schemes, on the other hand, as many businesses are now experiencing cash-flow shortages, offering share-based incentive schemes to employees may in fact be a useful means of remunerating employees and boosting employee engagement and morale during this difficult time. This would also provide employees with tax savings, particularly in respect of time-based (rather than performance-based) awards. Share-based remuneration can also be beneficial for the employer as it is not subject to employer PRSI.
While it may not be the focus of many organisations at the present time, introducing an employee share incentive scheme may in fact offer efficient solutions to cash shortages while retaining key talent. In addition, employers may be in a position to take advantage of reduced share prices by granting options to employees. However, there are a number of issues to consider in relation to substituting salary for shares, including employee and possibly shareholder consent, compliance with directors’ remuneration policies, whether existing share incentive schemes can be utilised or whether new schemes will need to be put in place, and the taxation implications for both employees and the company, including issues around salary sacrifice. Where decisions to substitute salary for shares are introduced unilaterally without employee consent, there may be a risk of claims for breach of contract or under the Payment of Wages Act.
How can we help?
The Employment, Pensions and Incentives Group at McCann FitzGerald can assist organisations with any further queries in relation to employee share incentive schemes in the context of COVID-19, or otherwise, and in developing response strategies to deal with issues as they emerge.
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.