An employee share ownership plan (“ESOP”) is a program that, as the name suggests, provides the employees of a company with a way to acquire an ownership interest in that company. ESOP shares may form part of the remuneration package offered by the employer-company. These shares are typically held on trust until the option vests and the employee exercises it or the employee leaves the company.
The attractiveness of an ESOP is premised on the notion that this kind of partnership and engagement with employees serve as an incentive to stimulate productivity, which will, in turn, boost the financial performance of the company. A 2012 study conducted in the United Kingdom, involving 41 employee-owned businesses and 22 non-employee owned businesses, concluded that companies with employee ownership have a stronger long term focus and enjoy improved performance.
In Jamaica, the Employee Share Ownership Plan Act (“the Act”) which became effective on April 1, 1995 uses tax incentives to encourage employee ownership of assets in local companies. This worker-participation initiative was the brainchild of former Prime Minister the Hon. Michael Manley (it should be noted, however, that prior to the introduction of this statute there were various unregulated employee share ownership schemes in existence). The Act offers relief from income tax, stamp duty and transfer tax to ESOPs provided that these plans satisfy the requirements of the Act and are approved by the Commissioner General of Tax Administration Jamaica (TAJ).
There are several pre-conditions for approval of an ESOP. Importantly, the proposed plan must be consistent with the provisions of the Articles of Incorporation of the granting employer and, at the time of approval, an independent auditor must certify that the proposed plan satisfies all the requirements of the Act. These requirements include (but are not limited to) the following:
- The plan should not include any provision that would have the effect of discouraging any category of employees who fulfill the conditions of eligibility from acquiring shares under the plan;
- The plan should not be “top-heavy”. This means, for example, that the top paid 30% of employees should not own more than 70% of the total assets of the plan; and
- There should be no discrimination between employees or in favor of higher paid employees. All employees should be entitled to participate in the plan on similar terms.
The Act requires the creation of a trust and the assets of the plan are vested in the trustees thereof who are empowered to hold the assets for the benefit of the employee-participants. There are several methods through which employees may acquire shares. These include employee share purchases, employer grants or through the issuance of share options plans without the interposition of the trust arrangement. The manner in which share acquisitions are funded vary considerably. For example, an employee share purchase may be achieved through salary deductions, loans from the company or from external sources.
Despite its seeming advantages, this legislation has been severely under-utilized. According to a review of Jamaica’s ESOP program conducted in 1999 by the Inter-American Development Bank (IDB), the legislative goal was to have 3-5% of Jamaica’s employed labor force involved in an approved ESOP. Unfortunately, it would appear that this was an overly ambitious goal given that, at the time of the IDB’s review there were seven approved ESOP plans representing less than 1% of the workforce. Twenty years after the introduction of the Act, the TAJ indicates that there are only three active ESOPs operating in Jamaica. It is believed that the reason for the under-utilization of the Act is that it is cumbersome and complicated. It would appear, therefore, that employers consider that the tax benefits to be derived do not outweigh the administrative costs to establish and operate such a plan.
The IDB, in its review, opined that the failure to reach the employee ownership goal has not been as a result of any deficiency in the ESOP legislative framework. In fact, the view was posited that it is likely that employee ownership will play a significant role in Jamaica in the foreseeable future provided impediments such as poor economic conditions and traditional ownership attitudes are addressed. If this view is accepted, the climate may now be ripe for the launch of ESOPs given the positive economic forecasts and the increased popularity of the Junior Stock Exchange which shows that companies are now more open to equity financing.
In any event, as companies and employers become increasingly tax conscious ESOPs should be viewed as an attractive arrangement for any entity looking to raise financing and improve its employee benefits whilst reducing its tax burden.
Kerry-Ann Heavens is an Associate at Myers, Fletcher & Gordon and is a member of the firm’s Commercial Department. Kerry-Ann may be contacted via firstname.lastname@example.org or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.
This article originally appeared in The Jamaica Observer on May 25, 2016.