Now you have your cake, should you eat it too?

After reading part one of this start-ups series, we know you’ll be eager to hear about how Employment Share Schemes (‘ESS’) work. We consider the benefits of having your cake and sharing it amongst employees.

Employment…what?

An ESS is an invitation to employees to acquire shares in the company they work at. When short of capital or unable to pay salaries above market rates, it is not uncommon for a business to offer shares to employees in lieu of salary (also known as ‘sweat capital’). However, shares cannot be offered to an employee in lieu of payment of the federal minimum wage.

If an employer wants to offer shares to employees via an ESS, it can either:

require upfront payment from them to purchase the shares;
offer them a loan to purchase the shares; or
enter into a salary sacrifice arrangement with them, where part of their salary will go directly into the purchasing of shares.

It’s also possible for the business to offer shares as part of a performance bonus. If employees reach pre-agreed targets (eg sales targets, securing new clients), shares can be issued in lieu of a bonus payment or other financial incentives.

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So, what are the benefits of an ESS?

Fosters job satisfaction and commitment in the success of the business.
Assists to retain experienced or key employees.
Remuneration flexibility.
Supports a performance-based culture.
Employees may be eligible for start-up tax concessions.

Or have your cake and eat it too…

Some negatives of an ESS include:

Complex taxation issues, including income tax, capital gains tax, pay as you go withholding and fringe benefits tax.
An employee’s right to sell shares may be limited under an ESS, including the risk of share forfeiture if the employee leaves their employment.
They are relatively complex and require compliance with the requirements of the Corporations Act 2001 (Cth), including disclosure obligations (unless an exemption applies).
High establishment costs.
Shares issued under an ESS will dilute other shareholdings (raising potential issues of control).

Not sure about sharing?

We know that every business is unique, so deciding whether to establish an ESS depends on the intricacies of the business. For tailor-made advice, contact a Bespoke corporate lawyer.