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Important information about staff participation

What you should take into account if you want to offer your staff the opportunity to participate in the company's equity.

The answer in detail

Important information about staff participation

In general, a staff participation plan is understood to mean the participation of employees in their company's equity. In so doing, the employees assume two different functions and interests: On the one hand, they are investors, and on the other hand, employees. There are several legal aspects to be aware of here.

What does a participation in the form of shares mean?

Employees receive shares either at no cost or at special conditions. This can be in the form of free or restricted shares. In the case of free shares, employees have unlimited rights to them, while with restricted they have only restricted rights during a blocked period.

What does a participation in the form of options mean?

An option means the right to purchase or sell a certain number of shares during or after a certain time at a price defined in advance. It is thus the opportunity to participate in the company’s equity by exercising the option and buying shares. An option that can be exercised during an unlimited time period is a free option. A restricted option can only be exercised during a specific time or at a specific point in time.

What are phantom stocks?

Phantom stocks are not really shares, but rather contractually agreed profit-sharing based on the stock price. In this way, employees can participate in the increasing stock price without selling them shares in the company.

When are employees entitled to participation?

It depends on whether this regards a salary component or a gratuity. A gratuity is a voluntary benefit. A salary component, on the other hand, is contractually owed and is enforceable before the court.

What is the difference between a gratuity and a salary component?

It is important to find out what the parties actually intended to agree or how the employment contract should be understood in line with the principle of good faith. If the benefit was defined by objective criteria set out in advance, it is more likely to be deemed a salary component than if it were an unplanned, discretionary benefit. If a benefit has regularly been paid in the same amount in several consecutive years, than a new contractual claim of the employee may result and the compensation becomes a salary component.

What else needs to be taken into account in this regard?

If the participation constitutes a salary component, the employees may not be restricted in its use through restrictions on disposal and blocking periods. This is because they must be able to freely access their salary. However, if it is a gratuity, then such restrictions can be agreed.

What else do companies need to bear in mind?

Oftentimes, the participations of employees are governed in such a way that the employees may only sell the stock or options they receive back to the company. However, a company may only buy own shares if it has enough share capital freely available and the total nominal value of the shares does not exceed ten percent of the total share capital. This threshold must be taken into account if a company buys back shares or options from employees.

You can find more detailed information in our document below.

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