A complete guide to Employee Share Schemes in Australia

Nowadays, more and more Australian businesses are investing in employee share schemes (ESS) as a way to attract, motivate, and retain talented staff, but what are the complexities of ESS? This guide explores how business shares for employees work, the benefits, challenges, and tax implications and offers practical tips for businesses looking to implement this method successfully.

What is an employee share scheme? 

ESS allow employees to buy shares or options in the company they work for, giving them a chance to own part of the business, bringing both financial benefits and a sense of belonging. In Australia, ESS is used to help businesses boost employee engagement, attract talent, and keep staff by offering a share in the company’s success.

Why do businesses offer employee share schemes?

Several factors typically drive the decision to offer an employee incentive scheme:

• Attract and retain talent: offering shares in the company can be a powerful way to attract and retain employees, particularly in competitive industries. 
• Encourage productivity: when employees have a financial stake in the company, they are often more motivated to work hard, as their success is directly tied to the company’s performance.
• Create a more attractive business environment: ESS can form part of a flexible remuneration package, which helps companies provide added value to their employees without impacting their cash flow too much.
• Shift mindset from employee to business owner: employees become more invested in the company’s long-term success when they are treated as stakeholders, which can improve loyalty and morale.

How do employee share schemes work?

To qualify for an ESS in Australia, certain criteria must be met. The company offering the scheme must:

• not be an investment company;
• Have had a total turnover of under $50 million in the previous year; and 
• avoid offering preference shares or shares to employees who already hold more than 10% of the company’s shares or voting rights.

In terms of the scheme itself, the share distribution may be offered to employees either immediately or after a vesting period.  In most cases, employees must wait until their shares vest, which means they earn the right to them over time, often contingent on remaining with the company or meeting certain performance targets.

Venture period 

A venture schedule is a structured plan that determines when employees can access their shares or options under an employee share scheme (ESS). It’s typically linked to milestones like a vesting period, performance targets, or company goals.

Types of employee share schemes in Australia

There are several types of employee share plans that businesses can offer; the most common include:

1. Share Options

Share options give employees the right to purchase company shares at a predetermined price within a specific time frame. If the share price goes up, they can buy at the lower price and profit from the difference, making it a valuable financial incentive.

2. Restricted Stock Units (RSUs)

RSUs are shares granted to employees that are subject to certain restrictions, such as a vesting period. Once the restrictions lapse, the employee owns the shares outright.

3. Employee Share Purchase Plans (ESPPs)

ESPPs allow employees to purchase shares in their company at a discounted price, often via payroll deductions. This gives employees an affordable opportunity to buy shares and build their ownership in the company.

What is an employee share option plan (ESOP)?
An Employee Share Option Plan (ESOP) lets employees buy company shares at a set price in the future. Unlike an Employee Share Scheme (ESS), which may provide immediate ownership or future purchase options, an ESOP in Australia is a long-term incentive that aligns employees’ interests with the company’s success.

Benefits of ESS

For employers

• serves as a competitive tool to attract and retain skilled employees;
• encourages employees to think like business owners, boosting productivity and commitment; and
• reward employees without significant cash outlay.

For employees

• benefit from the company’s success and can build personal wealth through their share ownership;
• instils loyalty and a deeper connection to the company, improving engagement; and
• be more likely to work towards the long-term success of the business.

Challenges of implementing an employee share scheme

Some common ESS implementation challenges include: 

• Limitations on buying/selling shares: Employees may face restrictions on when they can sell shares, and there are often conditions related to length of employment or performance targets.
• Financial risk: Employees risk losing money if the company’s share price falls or if the business faces difficulties.
• Unlisted shares: For companies not listed on the stock exchange, employees might find the shares less attractive due to their reduced liquidity.
• Taxation complexity: Understanding the tax implications of ESS can be complicated, and the risk of penalties for non-compliance is real.

Tips to set up an employee share scheme in Australia 

If you are thinking of setting up an ESS, here are some final tips to keep in mind: 

• Align with company goals: tailor the scheme to meet the business’s objectives, whether focused on growth, innovation, or market expansion.
• Communication and education: ensure employees fully understand the ESS and how it benefits them.
• Compliance and reporting: keep accurate records, adhere to ATO guidelines, and seek expert advice to ensure compliance.
• Seek expert guidance: engage legal advisors to navigate the complexities of setting up and managing the scheme.  

If you are an employee, consider asking the following questions to your employer:

• what type of scheme is offered?;
• what is the vesting schedule?;
• what is the cost of participating in the scheme?;
• how is the share price determined?;
• are there any tax implications?;
• what information will be provided about company performance?; and 
• what happens to shares or options if you leave the company?

Is an employee share scheme right for your business?

Employee share schemes can be a win-win for both businesses and employees, providing incentives that promote growth, productivity, and loyalty. However, like any business strategy, they come with risks and challenges. 

By carefully evaluating your company’s goals and seeking expert advice, you can design an ESS that aligns with your needs and supports your long-term success.

If you’re considering an ESS for your business, H+A Legal is here to help. Our team can walk you through the legal complexities and business structuring elements to help ensure your ESS are structured to benefit both your business and employees. Get in touch with us today to create a plan that supports your long-term goals.