Every employee who works for a company owned by an Employee Ownership Trust (EOT), is a beneficiary of the trust.
That means they are entitled to a profit share payment each year.
On top of that the employees, as a collective, have a lot of control over the business they work for. Far more so than in traditionally owned companies.
So what happens when an employee leaves an EOT?
That is what we are going to look at in today’s blog.
What Happens When An Employee Leaves An EOT?
When an employee joins a company owned by an EOT, they do not directly own any shares in the business. Instead the shares are owned by the EOT, who hold them on behalf of the employees (who are beneficiaries of the trust). If an employee leaves the company, they cease to be a beneficiary of the trust. So they no longer receive a profit share payment. As they never directly owned the shares in the first place, they have nothing to sell and nothing to report to HMRC.
How Does An EOT Work?
The answer to the question of what happens when an employee leaves an EOT is actually quite simple.
But before we look at it, let’s remind ourselves exactly what an EOT is and how it works.
An EOT is essentially a vehicle that allows a business owner to sell their company to its employees. Crucially the employees don’t have to spend any of their own money to buy shares in the company.
It is the EOT that buys the shares in the business. However as the EOT doesn’t have any funds, in most cases, it will pay off its debt to the owner via company profits over a period of time and tax-free.
Once this debt is paid off the employees become the sole beneficiaries of the EOT. They’ll enjoy profit-sharing payments each year.
It is also worth noting that staff can still benefit financially each year even whilst the owner is being paid off if there are excess profits.
An extra sweetener is the fact that the first £3,600 of profit share per employee, per tax year is tax-free.
Leaving an EOT? This is What Happens
The key point to note in the section above is that it is the EOT that buys shares in the business and holds them on behalf of the employees.
Employees do not directly own any shares in the company. Well, they might do, but only if there’s something separate put in place, independent of the EOT.
So really, the answer to the question is quite simple, when an employee leaves an EOT nothing happens.
That is they don’t take anything with them. they are no longer entitled to profit shares and can not vote on matters relating to the company anymore.
The EOT continues to retain the shares. A new member of staff may be employed who comes in and takes on the associated benefits of working for a company owned by an EOT.
The exiting member of staff does not need to do anything. They have nothing to report to HMRC, beyond the P45 that the company’s payroll will file.
Employees only benefit from the EOT when they work for the trading company. Once they leave those benefits stop.
Why Employees Don’t Often Leave Employee-Owned Companies
This also highlights the benefits of working for a company owned by an EOT.
The fact employees know if they leave they’ll no longer be receiving a profit share payment, means employee-owned companies have greater retention of staff and lower levels of absenteeism.
On top of that, productivity in employee-owned companies is higher as staff are more committed to the success of the company knowing they have a stake in it.
Unsurprisingly, the result of both of these factors means employee-owned businesses usually have an accelerated growth trajectory.
To find out more about the benefits to both the employee and the employer, read our blog post on whether it is good if a company is employee-owned.
Sometimes an EOT may decide that individual share ownership works better for some employees in the company.
When this happens the trading company either sells or issues new shares to certain employees directly.
This will often be done for one of two reasons:
- To incentivise key employees, such as senior management, to stick with the firm and grow the business.
- To use as a financial investment to push the business forward.
Exactly what staff can/can’t do with shares when they leave will typically be drawn up in the legal documents put in place when the share scheme/sale was agreed. These will typically deliberately limit the options available to staff that leave.
A key point of employee ownership is that profits are for the benefit of employees.
Hence the last thing the business wants is staff selling their shares to competitors, or some other third party with very different motivations to the staff!
Summary
The simple answer is when an employee leaves an EOT, the benefits they receive cease and are inherited by any new members of staff that replace them.
When an employee works for a company owned by an EOT, the employee themselves doesn’t actually own anything of value as individuals.
It is the EOT that owns the shares and manages them on behalf of the employees of the trading company.
As its beneficiaries, employees are entitled to profit-sharing payments each year and have a say in how the business is run.
They only enjoy these benefits whilst they work for the trading company. When they leave, they no longer receive these perks.
If you are interested in finding out more about transitioning to an EOT, get in touch with us at Go EO to see how we can help.