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Share Option Schemes - Avoiding Contractual Liability

Posted on October 13, 2010

Jo Atkinson of JMA HR & Legal considers how best to avoid unwanted linkage between your share scheme and your employees' contractual rights.

So you have decided to introduce a share option scheme for the benefit of all or some of your employees. You are likely to be advised against making any reference to the scheme in your employees' contracts of employment. There are two main reasons for this. Firstly, as the employer, you do not want to create an obligation to provide share plan benefits which you may not be able to deliver at a later date. Secondly, remembering that any changes to your employees' contracts of employment will usually have to be agreed in advance through a process of consultation, you do not want to be bound into agreeing any future changes, or indeed the withdrawal of the plan, with your employees because the scheme has become a term of the contract of employment.

You will also want to ensure that you avoid creating an implied contractual right to the share plan by virtue of its operation over a period of time, effectively making the right to participate customary. Over the years, case law has established that this implied right can arise where an employer's custom or practice is "reasonable, notorious and certain" or followed "because there is a sense of legal obligation to do so". Consequently, you will want to avoid creating a situation where these factors can be argued successfully.

So how is this best achieved?

As the employer, you may want to ensure that any references to the share plan do not specifically refer to a particular plan. You should state clearly that employees may be invited to participate in the plan, subject to the eligibility requirements of the scheme. It should also be made clear that participation in the scheme is discretionary, and participation on one occasion does not imply a right to participation in the future.

Another approach is to make it clear in the contract of employment itself that it contains the entire agreement between the parties, so that any additional documentation which refers to the share plan is likely to be viewed as outside the contractual arrangement and not implied into the contract over time through custom and practice.

Of course, in many cases the opportunity to participate in a share option plan may well be an enticement for joining employees or encourage loyalty amongst your existing employees, and therefore you will want to offer participation in the plan with a degree of certainty for the employees concerned. In which case, do ensure that any obligations that are made can be carried out, and keep a degree of flexibility in terms of the amendments that can be made to the scheme as well as ensuring the freedom to be able to replace the scheme at any stage without your employees' consent.

The RM2 Partnership is pleased to recommend Jo Atkinson, who is an experienced solicitor and a director of JMA HR & Legal Ltd, a specialist legal practice which provides HR and employment law advice. She regularly runs free employment law workshops for employers. For more information about the current series of workshops please go to www.jma-hrlegal.co.uk or telephone her direct on 01252 821792.

 
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