What you need to know
- Define roles and responsibilities: Define the US parent company as the grantor and the Irish entity as the conduit for administration and tax reporting.
- Jurisdiction clause: Use a US choice of law and jurisdiction clause.
- Liability ringfencing: This is achieved by decoupling equity from ‘renumeration’ and including waivers to that effect in any agreements. It is also prudent to emphasise that employees have no contractual entitlement to vested shares unless the terms and conditions are adhered to. Noting the volatility of the of the value of shares also safeguards the company from liability.
- Operational compliance: The Irish entity must ensure local compliance with reporting and withholding mandates in accordance with best practice payslip management tips.
- Seek legal advice: It is recommended that US parent companies and/or their Irish subsidiaries seek expert legal advice to understand their potential obligations and to mitigate legal risk.
Employee share incentive schemes are relatively common in some sectors of the Irish economy. They have resulted in windfall gains for many employees in Ireland. Employee share incentive schemes are an attractive recruitment and retention tool. However, they can be tricky to manage, particularly when housed in and run from US parent entities.
Our Employment Law & Benefits team has experience advising clients on employee share incentive schemes and representing them in related disputes. They have set out 10 tips for navigating Irish employee participation for foreign parent companies developing and overseeing their equity schemes.
1. Define roles and responsibilities
Employers should ensure that it is clear from the equity incentive plan document which entity provides the benefits under the plan. This entity is known as the “grantor”. This entity is usually a US parent company with the Irish employing entity merely a conduit for distributing the grants and benefits.
This helps to prevent the equity from becoming an implied term of the Irish employment contract.
In a recent, highly publicised case, Caroline O’Connell v Lionbridge International Unlimited Company[1], the WRC provided a detailed analysis on remuneration and the concept of loss in unfair dismissal cases. The Adjudication Officer found that the Restricted Stock Units (RSUs) did not form part of the complainant’s remuneration. This was because the complainant was employed by an Irish entity whereas the RSU Agreement was with a US entity. As a result, the RSUs represented a distinct corporate arrangement rather than a benefit provided by the employer who effected the dismissal.
2. No contractual entitlement to vested shares
The scheme documentation should include express language on this point. Each participating employee should understand that they have no contractual entitlement to vest shares unless they comply with the terms and conditions of the plan.
3. Note volatility
The scheme documentation should include language referring to the potential volatility in the value of shares that may vest under the plan. It should also make clear that neither the employing entity nor the grantor is liable for any decrease in value between the date of grant and the date of exercise/sale.
4. Keep documentation separate
In order to keep the schemes separate and distinct, we recommend making sure that Irish compensation package letters/notifications do not include or refer to awards under the equity incentive plan. References to the equity incentive schemes should be kept separate in a grant notice or side letter.
This reinforces the separate roles and responsibilities of the US company and Irish subsidiary. It also underpins the fact that the incentives are separate to the employee’s remuneration.
5. Grant of shares is not remuneration
The scheme documentation should include language in both the plan and grant letters which makes it clear that the grant of shares is not in any way remuneration for work done. It is important to emphasise in these letters that the US entity is not the employer and therefore cannot make a payment for work completed by an employee in Ireland. Avoid references in grant letters to “rewarding” employees for their “fantastic work” or “brilliant contributions” to the company, i.e. for anything done or already ongoing by the employee.
In a recent high-profile decision, X Internet Unlimited Company v Gary Rooney[2], the Labour Court provided clear guidance on the inclusion RSUs in the calculation of compensation for unfair dismissal claims. The Court looked at the Award Agreements at issue. The Award Agreements contained waivers emphasising that the RSUs were not remuneration and that if the complainant’s continuous active service terminated for any reason, all RSUs for which vesting was no longer possible would be forfeited to the respondent company. The Agreements also highlighted that the provision of RSUs was voluntary and occasional and did not create any contractual or other right to their grant.
6. Jurisdiction clause
It is legally permissible and, in fact advisable, that scheme documents include a US choice of law and jurisdiction clause, e.g. the State of Delaware, State of California etc. This ensures that any disputes regarding the equity itself are heard in US courts rather than the Irish civil courts. This includes disputes concerning vesting valuation or forfeiture.
In Rooney, the Award Agreement included a Governing Law and Choice of Venue clause in favour of Delaware and California, USA, depending on the type of dispute. The Irish Court held that this did not prohibit an unfair dismissal case being taken under Irish law and was therefore not inconsistent with section 13 of the Unfair Dismissals Act 1977.
7. Retention incentive
If appropriate, the scheme documentation should make it clear that the purpose of the plan is to incentivise employees to remain with the company into the future rather than be viewed as ‘bonus’ pay.
This strategy prevents employees from successfully claiming that they are ‘owed’ the value of unvested shares upon exit.
8. Waiver of ability to claim for value of unvested shares
The scheme documentation should make it clear, both in the plan and the grant letter, that by signing up to the plan an employee is expressly waiving their ability to include the prospective loss of the value of any unvested shares for the purposes of seeking compensation. The documentation should also highlight that employee has the opportunity to seek legal advice prior to signing up to the plan and at each grant.
In the Rooney case, the Labour Court noted that Mr Rooney benefitted financially from the awards and had the opportunity over a number of years to take legal advice about the rewards. He was therefore bound by their terms. As such, the Court held that the for the purpose of remuneration and/or loss under the Unfair Dismissals Act 1977 (as amended), RSUs should be excluded in this case.
9. Payslip management
If, for accounting reasons, the withholding of vested shares needs to be recorded, this could be done on an instrument other than a payslip where possible. The same approach could apply where shares need to be sold to fund a tax liability. It is important to distinguish the exercise from normal remunerative payroll processes. If there is no other instrument available to the company, we recommend a standalone payslip is used with the sole entry being the tax following the vesting of shares.
10. Seek expert advice
Employers should seek expert legal advice to understand their potential obligations and to mitigate legal risk.
The use of stock options by US parent companies to entice and retain international employees requires careful consideration and planning. These tips should be used as a starting point for US parent companies when designing their equity plan as it relates to employees of their Irish subsidiary.
For more information and expert advice, contact a member of our Employment Law & Benefits team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.
[1] ADJ-00057077
[2] UDD2612.
