Enterprise Management Incentives (EMI) share schemes are popular with employees because they offer a tax efficient way of owning the company for which the employee works. Simply put, they are a great way to increase employee motivation and longevity.
Qualifications for an employee to take part in an EMI scheme
To qualify to be part of an EMI share scheme, an employee must meet conditions based on his or her:
- employment status;
- commitment of working time; and
- lack of 'material' ownership interest.
The individual must be an employee of the company whose shares are the subject of the options, or, in the case of a group, an employee of any qualifying subsidiary of that company. The term 'employment' includes:
- employment under a contract of service (i.e. an employment agreement);
- employment under a contract of apprenticeship, and
- any service under the Crown.
Note that executive directors are also employees of a company. As long as they meet the criteria, they too qualify to hold shares under an EMI scheme.
Commitment of working time
Employees must spend a significant amount of time working for the company or for a qualifying subsidiary. The is expressed either as a specific amount of time, or as a fraction or percentage of total employment time. The amounts are:
- at least 25 hours each week (known as the 25 hours requirement), or
- if less, 75% of their working time (known as the 75% requirement).
When calculating whether an employee meets the 75% requirement, you should take into account their total working time including all remunerative work. This includes employment and any self employment, for example, as a consultant.
In calculating the total working time, any time on sick leave, annual leave, maternity, paternity or parental leave needs to be taken into account.
If employees do not work as much time as they had planned to do and this brings them below the commitment of 25 hours each week, or 75% of their working time, they are still disqualified from participating in an EMI option scheme.
Sam works as an employee of The Soap Company for 20 hours a week. As such, she does not meet the 25 hours requirement.
She also works as a self-employed engineer for 10 hours per week. She does no other paid work.
Her total working time amounts to 30 hours a week. Only 66% of her working time is for The Soap Company, so she does not qualify for share options under an EMI scheme.
If Sam reduced her time working self-employed to 5 hours a week, she would qualify.
No material interest
An employee is not eligible if they have a material interest in the company whose shares are under option, or, if that company is a parent company, in any group company. A material interest is either:
- beneficial ownership of, or the ability to control directly or indirectly, more than 30% of the ordinary share capital of the company, or
- where the company is a close company, possession of or entitlement to acquire rights that would give 30% of the assets, if the company were to be wound up, and make them available for distribution among the participators.
An employee has a material interest if:
- they alone have a material interest in the company;
- they, together with their associates, have a material interest in the company; or
- any associate of theirs has a material interest in the company.
An associate is:
- a relative of the employee that is a spouse, parent, grandparent, child, grandchild or remoter relative in the direct line (but not siblings);
- the trustees of any settlement in relation to which the employee or any relative is or was a settler;
- if the company has shares in trust, the trustees of any settlement where the employee has an interest; or
- the personal representatives of a deceased person, where company shares are part of the estate and the employee has an interest in the estate.
Acquiring a material interest greater than 30% after the grant of an EMI option
If an employee gains a material interest of more than 30% only after he has been granted the EMI option, it will not affect the existing EMI option. However, they will not be eligible for the grant of any more EMI options.
All shares over which the employee has an option have to be taken into account, except shares that are under an EMI option.
Related articles and documents
Net Lawman offers a number of share option agreements, with some of the templates suitable for use to grant employees options in the company for which they work.