Tax

Incentives | Suspension of vesting or reducing awards

Published on 26th Sep 2022

Incentive awards such as employee share options are often subject to time-based vesting, so that they "vest" over a specified period of months or years

An increasing number of companies are exploring whether they can suspend or reduce vesting if an employee starts to work reduced hours or is away from work for specified categories of leave (including parental leave or sabbaticals). Some are also considering whether the size of the award (whether a cash sum or number of shares) can be similarly reduced if an employee reduces the number of hours they work. Although such provisions are occasionally included in overseas plans, they are not typically included in UK plans. Suspension of vesting and/or reducing the quantum of awards can carry risks from an incentives and employment law perspective.

The drafting of the rules of the plan and award documentation will need to be considered. When do awards vest in normal and special circumstances? Any proposed exercises of discretion should be carefully considered, particularly in relation to tax-advantaged plans such as enterprise management incentive (EMI) options or company share option plans.

From an employment law perspective, there is a risk that including these types of provisions in UK plans could potentially lead to discrimination claims. Where an employee successfully brings such a claim, the employer may have to pay compensation.

Suspension of vesting during periods of leave (for example maternity, parental or paternity) or a reduction in quantum in response to working reduced hours may amount to discrimination. In relation to sabbaticals, much will depend on the reason for the absence. If the sabbatical is linked to a protected characteristic, then there is again the risk of discrimination claims. If it is for other reasons (such as an extended holiday for travelling), then it may be possible to suspend vesting. The drafting of the plan documentation is key, and it is important that the employer ensures that all employees are treated fairly and consistently.

Please get in touch with your usual Osborne Clarke contact or one of the experts below if you have any queries or would like to discuss further.

(This article was previously published as part of our Employment Law Coffee Break update series.)

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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