An employee benefit trust (EBT) is a type of discretionary trust established for the benefit of employees and former employees of a company (or its group). It can also be used to benefit relatives and dependants of employees.
A company will establish the EBT via a trust deed and appoint a trustee who is independent of the company. The trustee must act in the best interests of the beneficiaries of the trust.
EBTs are often, but not always, used in connection with employee share schemes. This is because they can create a vehicle to acquire and hold shares to satisfy share awards under an employee share scheme. They also create a useful internal market to enable employee shareholders to sell their shares in private companies and ultimately receive value for those shares.
EBTs can also be used to enable the company to become wholly or partially owned by its employees. This is done via a special form of EBT, an employee ownership trust. Such a trust gives business owners the opportunity to sell their shares to an employee-owned trust.
Further, EBTs can be used alongside other employee incentive arrangements, such as bonus payments.
The main purpose is therefore to incentivise and reward employees which in turn can encourage employee engagement and loyalty.
EBTs will often need to be tailored to meet the needs of a business and its structure. Some key legal and practical considerations include:
The main document required to establish an EBT is a trust deed. The trust deed will outline the powers of the trustee along with defining the scope of the class of beneficiaries.
There will also be ancillary documents, such as board minutes and any shareholders resolutions, to ensure that the company has the relevant authorisations to establish the EBT.
If the EBT will be funded by a loan from the settlor company or a group company then a loan agreement will be required. Even if the EBT is to be funded by gifts, it is good practice to have in place a simple contribution agreement which sets out the terms on which the contribution is made.
Other documents may also be required at the outset or shortly after establishment, depending on what the EBT is being set up for. For instance, rules of a share plan scheme and template share option or subscription agreement. The company’s articles of association will also likely to need to be amended or new articles adopted.
If you need any advice on employee benefit trusts, please contact a member of our corporate and commercial law team in confidence here or on 02920 829 100 for a free initial call to see how they can help.
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