Rajah Abusrewil
Partner, Walkers (CI) LP
Jersey
Introduction
Employers are increasingly aware of the essential role top-performing employees play in the success of their business. With a globalised workforce and competitive job market, companies that do not focus on employee retention strategies risk losing their key talent to more lucrative opportunities.
A commonly used method to secure employee loyalty is through a well-structured employee incentive scheme, with the Employee Benefit Trust ("EBT") considered as an invaluable structure.
Purpose and Typical Structure of an EBT
Employers utilise EBTs to attract, retain and reward their most valuable employees. EBTs often form a critical part of an employee's compensation package, where high-performing staff are granted partial ownership in the company through a share award scheme. This structure aligns employees’ interests with shareholders, fostering a committed and motivated workforce invested in the company’s success.
Founders typically allocate a portion of their company's shares (usually between 5-10%) as a reward for employees, former employees and certain of their relatives and dependants. These shares are placed into an EBT, typically set up as a discretionary trust. EBTs are highly flexible and can be tailored to align with a specific employee share plan or event (such as an initial public offering), or it may be administered over several years in connection with a variety of employee incentive arrangements, depending on the company’s objectives, business plans, anticipated share structure, the number of beneficiaries, and any relevant legal and tax considerations.
The beneficiaries of the EBT are the company's employees; the company is the settlor (but excluded from benefit under the EBT); and a professional fiduciary is appointed as trustee to act in the best interests of the employees. Although an EBT is established by a settlor company, and the trustee is generally appointed by that company, the EBT is independent of the business as is the trustee. This means that although the company can request that the trustee take certain steps in relation to the EBT, the trustee must exercise its discretion in deciding whether or not to follow the company's requests unless the terms of the trust provide otherwise. In doing so, it must exercise its fiduciary duty to act in the best interests of the employees (as beneficiaries of the trust) as a whole.
How EBTs Work
While it is not easy for shareholders to set aside up to 10% of the company’s value, particularly considering the years of effort invested to build the business, EBTs provide a flexible solution. For example, employers can delay the transfer of full ownership and control of the shares to employees through a vesting schedule, typically spanning 5-10 years. This ensures that employees remain focused on the success of the company without immediate rights to income, capital or voting until the shares vest. Employers retain the ability to select participating employees, set performance criteria, and determine the conditions under which shares may lapse or be forfeited.Companies are also free to dictate the operation of the scheme and often appoint members of their board, usually from finance or human resources, to assist trustees in administering the scheme.
Benefits of an EBT
EBTs are adaptable for a global workforce, irrespective of employee location (whether in the UK, Hong Kong, Singapore, the US, or elsewhere).
Assets held in an EBT are protected from creditor claims, ensuring that if the operating company incurs debts or is declared bankrupt, the EBT's assets remain safeguarded. Furthermore, appointing an independent professional fiduciary as trustee helps avoid conflicts of interest and assures employees that their awards are properly managed. In cases where employees forfeit their shares, such as when leaving the company before the vesting period ends or breaching eligibility terms, the EBT can act as an internal market to repurchase and redistribute those shares as future incentives.
In recent years, there has been a shift towards electronic platforms for EBT administration. These platforms allow employees to engage directly through dedicated websites or smartphone applications. Employees receive timely updates on legislative changes and trustee decisions, enhancing transparency and streamlining administration.
Where to Establish an EBT
Over the years, several leading companies have established their EBTs in Guernsey and Jersey. These jurisdictions offer several advantages: English-speaking, located in the same time zone as London, with close ties to the UK and Europe, they are politically stable with independent legal systems and established trust industries. Their experienced trust administrators ensure the proper management of EBTs.
Both Guernsey and Jersey have taken a proactive stance on combating money laundering and tax evasion, keeping them off the European Union’s lists of non-compliant jurisdictions. The islands’ sophisticated corporate banking systems offer a wide range of services for trading companies, holding and investment companies, funds and trusts, including EBTs.
While tax advice should be sought before establishing an offshore trust, Guernsey and Jersey offer clear tax advantages when EBTs are appropriately structured.
Conclusion
Companies are encouraged to prioritise employee retention strategies when growing their business, as this significantly contributes to the success of the company. As outlined above, EBTs offer flexibility, tax efficiency, confidentiality, and the ability to retain some control over employee compensation, making them one of the most widely used employee incentive schemes. As such, EBTs serve as an invaluable tool for rewarding high-performing staff during critical growth stages of the business.
