More and more SME business owners are looking at employee participation as a way to attract and retain good new staff. By letting employees share in the success of the business in a different way, employee engagement and loyalty can be strengthened. Through employee participation, they can feel like co-owners and, as a result, be (even more) motivated to contribute to the growth of the business.

However, such an arrangement also comes with important legal and tax points of attention. In this blog we discuss five legal points of attention.

Six points of attention for employee participation.

1. The form of the employee participation

The form of the participation can vary. This ranges from, for example, options on your shares, or depositary receipts for your shares via an Administration Foundation, to the issue of new (non-voting) shares. Based on your wishes as a business owner, and what you wish to give away in terms of profit share and control, the best variant is broadly determined.

2. Choice between remuneration in cash or shares

The other choice with employee participation is the form in which the remuneration takes place. There are broadly two categories: remuneration in cash or in shares. Under an arrangement where the remuneration is in cash, the employee receives remuneration based on the value development of (the shares of) the business they work for, directly or indirectly. The employee does not even need to actually hold the shares (phantom shares) in that case. Under an arrangement where the remuneration is in shares, the employee receives shares or depositary receipts for shares in the business they work for, directly or indirectly. At agreed moments, they can then cash in these shares.

3. The valuation of shares

If the employee participation takes place by way of shares, the valuation of the shares is an important point of attention. The Tax Authority generally requires the valuation to be carried out by an external expert, using a generally accepted valuation method, so that a fair, commercial price results. This also helps prevent discussions with employees. A valuation that is too high is disadvantageous for the employee, because they pay tax on a higher notional value. With a valuation that is too low, you as an employer risk corrections and additional tax assessments, including interest and penalties, from the Tax Authority, because the excess benefit is regarded as wages.

4. Employment-law aspects: an acquired right?

Over time, a participation plan can come to be regarded as an acquired right. If it qualifies as a term of employment, this means an employer cannot simply amend or withdraw the arrangement. Where employees regularly participate in an arrangement, this can lead to expectations and possibly even an enforceable right. This plays a role especially if the arrangement is included in the employment contract, or where there are structural grants. Therefore, always make sure you properly manage expectations and build in the necessary legal safeguards.

5. Arrangements on the transferability of shares when a participant leaves.

Careful thought must also be given to the consequences of a participating employee leaving. A clear “leaver” arrangement around departure prevents conflicts and provides legal certainty. For example, it can be determined under what conditions a departing employee may keep or must sell their shares. A distinction is often made between a “good leaver” and a “bad leaver”. Good leavers are usually employees who leave due to retirement, long-term illness or a reorganisation. They can then keep their shares or sell them at a market-conform price. Bad leavers are employees who are dismissed for culpable conduct or who leave prematurely. They can be required to sell their shares at a reduced price, or even without any compensation at all.

The transferability of shares must also be properly arranged. Many participation plans include a lock-up arrangement, so that shares are not freely tradeable. This prevents unwanted third parties from becoming shareholders and safeguards the continuity of the business.

6. Good employership and transparency.

Employee participation can only be successful with clear and transparent communication. Employees must be properly informed about their rights, the conditions and the risks. In addition, the employer must act as a good employer and take reasonableness and fairness into account when implementing the plan. This means the employer cannot simply unilaterally amend employees’ rights and obligations, and must communicate clearly about any changes to the arrangement, such as relevant legislative changes for them.

How can we help you?

Drafting an employee participation plan requires advice on the choices to be made, and a tailored approach. A correct tax qualification is also of great importance in this regard. We can help you legally (and tax-wise) structure a participation plan that fits your business’s needs. We also offer advice on the employment-law consequences of various forms of participation. We draft clear, legally sound agreements and provide guidance throughout the entire process.

An employee participation plan can be a powerful tool to grow your business and motivate your employees, but it does require legal and tax attention. Setting up such an arrangement is not a cheap undertaking, and investment will be needed upfront. We are happy to take the legal (and tax) concerns off your hands, so you can focus on the success of your business. Contact us directly via info@thelegalcompany.nl or call 020 345 0152.

This article was published on 3 March 2025.

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Nothing changes as much as legislation and regulations. Please note that our blogs may no longer align with current legislation and regulations and may therefore be outdated. If you have questions or an issue relating to this blog, or wish to obtain legal assistance, please contact us.