What is the law around profit share schemes?
Profit sharing can be a great way to improve and maintain employee loyalty and retention by motivating employees to participate in earning and protecting company profits. What are your legal rights if an employer promised you a share or the business or its profits but did not deliver? Trust is a big part of any deal. A situation where you’ve been promised something but never received it is a major breach of trust. Let’s look at what legal action you can take if you find yourself in this situation and how to avoid this happening in the future.
Profit Sharing Schemes – What are they?
A profit share will often come as cash and/or stock, normally on top of regular wages or a salary. Bonuses are a little different but driven by the same principle. An employee share scheme will be a contract between an employer and its employees to give or sell shares in the company to its employees, often at a discount or pre-determined price. Sharing a business’ cash profits is more straightforward as it provides immediacy and does not require the employee to continue to hold the stock.
What legal action can I take?
Written promises:
Many profit share schemes operate seamlessly. There will sometimes be a straightforward calculation of an entitlement based on external metrics that speak for themselves (such as meeting a sales target). The contract may be explicitly laid out in employment contracts negotiated when employees start or set out a policy in the company's employee handbook. If your Employment Agreement entitles you to a particular number of shares in a company at a particular point in time and you do not receive those shares, a breach of the promise is actionable legally.
Verbal Promises:
Verbal promises are messier. In some cases, a verbal agreement/conversation takes place and the employer fails to follow through with their promise. In general, verbal agreements like written agreements are enforceable under New Zealand law. Whether or not a verbal agreement is legally binding and enforceable depends on a few important variables:
-With verbal agreements, it can be difficult to provide clear evidence showing that a particular term was agreed by both parties. We’ve all been a party to conversations where the participants come away from the conversation with a different understanding of what was said and different expectations. If you want to enforce an agreement, you must be able to prove that a verbal agreement took place. You would need a trustworthy testimony and a clear reference to the agreement in either an email, message, or document. Contemporary and accurate evidence is the key.
-If you can prove the initial verbal exchange did in fact take place, the question becomes whether the elements of a binding agreement are present. What this means is whether or not an offer was made and/or acceptance was made from each party. There should be an identifiable exchange of something for the promise made such as money, or agreeing to accept a job in exchange for the promise of shares, this will make the verbal promise legally enforceable. After showing that the verbal agreement is valid, the next step is proving the precise terms of the agreement.
One of the areas of law I like and which is useful in such situations is the law of equity. Non-lawyers think of this in terms of what is fair in the circumstances, and whether someone should be able to pull out of an agreement when they’ve already received some of the benefit. Equity uses concepts like quantum meruit which is where the law recognises the value of someone’s work. The principle is that another person – say an employer – should not be able to receive the benefit of someone else’s work without paying for it.
Another concept is promissory estoppel. This principle recognises that a person who has made a promise that another party has relied on should not be able to pull out of their promise – that would be unfair. We can apply these principles to profit share arrangements where one party receives the benefit of the other party’s work in exchange for a future share of the profit. Equity says the party that benefits can’t pull out of the deal – they are stopped from going back on their word and their promise is enforceable.
If you find yourself in a situation where you believe you are entitled to a profit share and your employer did not follow through, you can get a remedy if you can prove the promise. The courts generally won’t uphold vague discussions so you will need to show something concrete.
I have worked with a range of employees when disputes have arisen in a variety of profit share situations. Any agreement that creates a clear entitlement is legally enforceable. If you find yourself in this type of dispute with your employer or employee please don’t hesitate to get in touch, I regularly see the result of fallouts between company directors and shareholders where expectations differ and can help resolve those sort of disputes.
Of course, the best way to avoid issues with enforcing promises is to record your agreement in writing. That does not guarantee you won’t face problems, but a written agreement is much easier to work with than people’s memories of past conversations. It is also a good idea to get professional input when negotiating and recording agreements to ensure that they are complete, and provide protection the parties expect.
