Attorney at Law

Employee stock ownership plan (ESOP)

What Is an Employee stock ownership plan?

An employee stock ownership plan (ESOP) is a form of employee benefit plan that awards or allows the opportunity to award stock shares to an employee. This is usually classified as a bonus in addition to traditional compensation. Some ESOPs may also allow employees to purchase stock shares by withholding some of their pay.

There are several tax reasons that an employer or employee may want to participate in an ESOP, but one of the biggest stated reasons for establishing an ESOP is to align the interests of employees and stockholders. The idea is that if employees are made shareholders, then they will focus their work on driving up the price of the stock since both they and the shareholders will benefit from this action.

An ESOP is established by forming trust within the company. Workers will then gain shares by methods that vary from plan to plan. Some plans may allot shares based on the employee’s pay scale, the terms of their contract, or on some other metric determined by the company. The shares that are allotted to employees can be newly issued, existing company shares, or public shares bought by the company using the employees’ funds. 

Key Takeaways

  • An Employee stock ownership plan is a benefits package that allows employees to acquire shares of company stock for no upfront cost to be paid out when they retire or resign.
  • ESOP participants gain shares as they become “vested” with long-term employees earning more over time. 
  • Because ESOPs payout at the stock’s current price, corporate malfeasance such as undervaluing shares when they are paid out to employees can cause serious harm to retirement prospects.
  • If you were a part of an ESOP and your shares were undervalued, oversold, or otherwise fraudulently presented to you, an experienced Employment Law attorney may be able to improve the outcome of your case by utilizing experience and expert knowledge.

Employee stock ownership plan and Employment Law

ESOPs can be an appealing part of an employee’s pay package. Companies benefit from the increasingly motivated employee and the employee gets to invest in their future. However, how ESOPs function and their potential pitfalls of them are worth examining.

First, ESOPs are usually offered to employees with no upfront costs. While receiving free stock shares of a company, particularly one that is performing well on the stock market may seem appealing, there are some limitations to consider. First, the stock is not owned by the employee themselves to do as they please. ESOP shares are held in a trust that is managed by a trustee of the company. Employees will receive their stock charges once they either retire or resign. 

Secondly, there is a concept to consider known as “vesting.” Most ESOP plans are part of the benefits for “vested” employees. This means that long-term, full-term employees will earn increasing benefits over time, but the same opportunities may not be available to part-time or seasonal workers. Additionally, not all full-time employees may be presented with the option of an ESOP. An employee who is fired may only qualify for a portion of their vested ESOP shares, or the amount that they have accrued up to the point of their firing.

If a fully vested employee does manage to retire or resign with ESOP shares, they do not get the shares themselves when they leave. Instead, the company buys back all of the shares that they have acquired in either one lump sum or periodic installments. In this way, an ESOP is similar to a 401(k) or another retirement plan. The drawback to this plan is that an ESOP is directly tied to the price of a stock. 

This means that if an employee signed up for an ESOP when a stock was holding steady at $100 a share but shortly before they retired the stock price dropped to $20 a share, they have effectively lost 80% of their shares. The company is only buying the stock back, therefore they are not obligated to pay the stock out at a certain point. This volatility places the ESOP at risk of forces entirely out of the employee’s control. 

Some circumstances result in an ESOP becoming virtually worthless due to the company’s behavior. If the employer knowingly concealed damaging facts that would affect their stock price, then several employees may have several of their retirement savings swept away before their eyes. Other times, the owner of a company may sell their stock to an ESOP at an inflated price or allow high-ranking employees to purchase ESOP shares for less than they were worth.  In these unique circumstances, an employee may be able to file a lawsuit.

Bottom Line

If you have participated in a plan where your ESOP shares were inflated at the time of opting in, undervalued when you cashed your plan out, or otherwise received fraudulent information about your plan, you may be able to file a lawsuit to recover your damages. To do so, you will need the help of an Employment Law attorney. 

An experienced Employment Law attorney will be able to zealously advocate for you to get you the best possible outcome in your case. By utilizing their legal expertise, trial tactics, and network of expert witnesses, and Employment Law attorney can bring your fight for justice directly to your employer.

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