This guide is maintained as a current resource for September 2026 and covers only the laws of England and Wales. Information is for general guidance, not legal advice. Consult a qualified solicitor for advice specific to your situation.
Can redundancy affect share schemes and employee incentives in the UK? This guide explains how redundancy impacts share options, bonuses, and long-term incentive plans in England and Wales, including good leaver rules, vesting rights, tax implications, and employee entitlement to compensation and awards.
Redundancy can significantly impact employee share schemes, bonuses, and long-term incentive arrangements. In England and Wales, the effect depends on the type of scheme, the contractual terms governing participation, and whether the employee is dismissed by reason of redundancy or remains employed during a restructuring process.
Share schemes and incentives are often designed to reward long-term service and performance. When redundancy occurs, these arrangements may be accelerated, reduced, forfeited, or in some cases partially preserved, depending on the rules of the scheme and applicable employment and tax law.
Overview of Employee Share Schemes and Incentives
Employee incentives in UK companies commonly include:
- Share Incentive Plans (SIP)
- Enterprise Management Incentives (EMI)
- Company share option schemes
- Restricted stock units (RSUs)
- Performance-related bonuses
- Long-term incentive plans (LTIPs)
These schemes are usually governed by a combination of:
- Employment contracts
- Scheme rules
- Share option agreements
- Tax legislation (particularly HMRC-approved schemes)
The contractual structure is critical in determining what happens on redundancy.
What Happens to Share Schemes on Redundancy?
The impact of redundancy depends on whether the employee is:
- Actively participating in a scheme
- Holding vested but unexercised options
- Subject to performance or time-based vesting conditions
Most schemes distinguish between “good leavers” and “bad leavers”.
Good leaver status
Redundancy is commonly treated as a “good leaver” event. This may result in:
- Retention of vested shares
- Accelerated vesting of unvested options (in some schemes)
- Ability to exercise options within a limited post-termination window
- Pro-rata entitlement to bonuses or LTIPs
However, this is not automatic and depends entirely on scheme rules.
Bad leaver status
Less commonly, scheme rules may classify certain dismissals as “bad leaver” events, which can lead to:
- Loss of unvested shares
- Forfeiture of options
- Restricted or no exercise rights
Redundancy is typically not treated as a disciplinary dismissal, so bad leaver treatment is less common in genuine redundancy cases.
Share Options and Exercise Periods After Redundancy
Where employees hold share options, redundancy often triggers a limited exercise window.
Common outcomes include:
- 90 days to exercise options after termination
- Extended periods in some company-approved schemes
- Immediate lapse of unvested options unless protected by scheme rules
If options are not exercised within the permitted period, they may expire permanently.
The exact treatment depends on scheme documentation rather than statutory redundancy law.
Impact on Bonuses and Performance Incentives
Bonus entitlement on redundancy depends on:
- Contractual bonus terms
- Discretionary vs guaranteed structure
- Timing of redundancy within the performance period
Contractual bonuses
If a bonus is contractually earned but not yet paid, employees may still be entitled to it on a pro-rata basis.
Discretionary bonuses
Where bonuses are discretionary, employers may reduce or withhold payment, although decisions must still be made in good faith and not unlawfully discriminatory.
LTIPs and performance shares
Long-term incentive plans often include:
- Vesting schedules tied to continued employment
- Performance conditions over multi-year periods
Redundancy may result in:
- Partial vesting based on time served
- Early vesting at the discretion of the employer or scheme rules
- Forfeiture if conditions are not met
Legal Principles Governing Incentives on Redundancy
The treatment of incentives is primarily governed by:
- Contract law (employment contracts and scheme rules)
- Equity and trust principles (for share-based awards)
- Tax regulations for approved schemes
- Implied terms of good faith in discretionary decisions
Courts and tribunals generally uphold clear scheme rules unless they are applied unlawfully or inconsistently.
A key principle is that redundancy does not automatically override scheme conditions unless explicitly stated.
Tax Implications of Redundancy and Share Schemes
Tax treatment varies depending on the scheme type:
- EMI options may retain favourable tax treatment if exercised within permitted timeframes
- SIP shares may be withdrawn from tax advantages if removed early
- Income tax and capital gains tax may apply on exercise or sale
Redundancy can trigger tax events earlier than expected, particularly where options are accelerated or exercised immediately after termination.
Common Scenarios
1. Redundancy with EMI options
An employee with EMI options is made redundant. The scheme classifies redundancy as a good leaver event, allowing 90 days to exercise vested options.
2. LTIP during redundancy process
An employee partway through a three-year LTIP cycle is made redundant. The scheme rules allow pro-rata vesting based on time served, but performance conditions must still be met.
3. Discretionary bonus dispute
An employee made redundant before bonus payment argues entitlement. The employer relies on discretion, but tribunal scrutiny may assess whether discretion was exercised fairly.
Employer Obligations and Legal Risks
Employers managing redundancy alongside incentive schemes must ensure:
- Consistent application of scheme rules
- Clear documentation of leaver classification
- Non-discriminatory exercise of discretion
- Transparent communication of post-termination rights
Legal risks include:
- Breach of contract claims
- Wrongful dismissal disputes linked to lost incentives
- Claims for unlawful deduction of wages (in relation to bonuses)
- Disputes over misapplication of scheme rules
Disputes often arise where incentives form a significant portion of total compensation.
Employee Rights and Dispute Options
Employees affected by redundancy may consider:
- Reviewing scheme documentation in full
- Checking whether redundancy is defined as a good leaver event
- Calculating potential vesting or exercise deadlines
- Raising internal grievances
- Bringing claims for breach of contract or unpaid remuneration
Strict time limits apply for tribunal claims, typically three months less one day from termination for most employment-related disputes.
Key Considerations When Reviewing Incentive Loss
Important factors include:
- Whether awards are vested or unvested
- Classification as good or bad leaver
- Timing of redundancy relative to vesting schedule
- Contractual discretion clauses
- HMRC-approved scheme rules
Small differences in wording can materially affect entitlement.
Key Takeaways
Redundancy can significantly affect share schemes and employee incentives, but the outcome depends almost entirely on scheme rules and contractual terms. In most cases, redundancy is treated as a good leaver event, allowing partial or time-limited retention of benefits, though unvested awards may still be lost. Bonuses and long-term incentives are highly dependent on contractual and discretionary provisions. Careful review of scheme documentation is essential to determine entitlement and deadlines following termination.
