Some companies considering using PEOs to hire personnel worry that, since the personnel are employees of the PEO, they will not be eligible to participate in the company’s employee stock option plan (ESOPs).
If true, this would make working in a PEO structure less attractive for potential hires who want the upside potential of ESOP participation.
The good news is, PEO hires are generally eligible to participate in ESOPs.
Ensure ESOP’s are Broad Enough to Include Non-traditional Personnel
The starting point is to review, and adjust if necessary, the language of the company’s ESOP to make sure that it is broad enough to include personnel who do not have a traditional employment relationship with the company.
For example, many ESOPs extend eligibility to consultants and advisors of the company who spend a significant amount of their time working for the company. If an existing ESOP is limited to traditional employees, the language can usually be expanded to include PEO employees.
In the US, stock options and stock issued under ESOPs are generally exempt from registration with the Securities and Exchange Commission (SEC) or are entitled to “short form” registration on Form S-8, if they meet certain conditions.
The good news for PEO hires is that the registration exemptions apply not only to options granted to traditional employees but to “common law employees” and “advisors and consultants” who work for the issuing company on an ongoing and substantial basis.
Each situation must be addressed individually, but generally speaking hiring through a PEO structure should not get in the way of offering stock options and other incentive compensation to potential hires.
Utilize a PEO Service Company to Employ ESOP-eligible personnel
Companies can readily utilize a PEO as an employer of record while at the same time granting equity awards via their headquarters to those same personnel.
This option is an efficient means by which to maintain maximum operational flexibility, while utilizing the PEO to shoulder compliance–related issues associated with ESOP-eligible personnel.