ESOPs to Non-permanent Employees: An Analysis of SEBI’s Recommendation

[Anant Budhraja is a III year student at the West Bengal National University of Juridical Sciences, Kolkata]

Unacademy, the ed-tech unicorn, became the first Indian company to issue Employee Stock Options (ESOPs) to gig workers, i.e., educators on their platform, in July 2021.These options, referred to as Teachers Stock Options (TSOPs), constituted a corpus of $40 million, which had directly benefitted at least 300 educators on the date of its issue. The issuance of such options is an unparalleled event, because it has transcended the scope of granting of ESOPs beyond the regular employees on the payroll of the company, to leverage the interests of educators as well. These educators were generally classified into the category of gig workers or contractual workers, and mostly denied benefits akin to permanent employees.

However, SEBI has recently proposed in its discussion paper that the definition of the term “employee” under rule 2(1)(f) of the SEBI (Share Based Employee Benefits) Regulations, 2014, must be broadened so as to extend the benefits of ESOPs even to non-permanent employees. Such a move was targeted at securing the equity rights of gig workers and contractual workers, inter alia, who must be treated at par with permanent employees in terms of the benefits awarded against their labour.

This post seeks to examine the validity of the extension of ESOP rights to non-permanent employees of companies governed by SEBI Regulations by looking at recent labour laws as well as the redefined global gig economy, which reinforces the notion of such rights for gig workers.

Analysis of the present legal framework

Rule 2(1)(f) of the SEBI (Share Based Employee Benefits) Regulations (SBEB Regulations), defines the scope of ‘employee’ for the purposes of ESOPs, as mentioned under section 62(1)(b) of the Companies Act, 2013. Under the said Rule of SBEB Regulations, the first sub-part refers to only the ‘permanent employee of the company working inside or outside India’. The particular inclusion of the word ‘permanent’ has statutorily withheld the grant of ESOPs to non-permanent employees like gig workers in India hitherto.

Analysis of new labour codes

The deliberation on the grant of ESOPs to gig workers, predates the consultation paper of SEBI which tends to amend the definition of ‘employee’ under rule 2(1)(f) of the SBEB Regulations. A deep dive into the new labour codes passed recently in 2020, reveals a promising picture for the recognition of different types of gig workers, along with their particular rights, being at par with permanent employees.

To begin with, the Code on Social Security, 2020, underscores various forms of contractual workers and delineates their roles in the labour law framework. For instance, under section 2(34) of this Code, a ‘fixed term employment’ is defined as the engagement of the employee based on the written contract of employment for a fixed period. The proviso b) to section 2(34) provides that such an employee would be eligible for the benefits available to any permanent employee, albeit on a proportionate basis. Apart from this, section 2(35) of the Code recognises a ‘gig worker’ as a person who performs any work under a specific work arrangement, however, outside the ambit of the orthodox employer-employee model. Moreover, section 2(60) and section 2(61) of this Code tend to define the role of a ‘platform worker’, who, akin to the gig worker, is not employed in the traditional set-up, rather is deployed for an online platform, providing specific services in exchange for remuneration.

Furthermore, similar provisions with respect to contractual workers are found in the Code on Wages, 2019 and Industrial Relations Code, 2020.  For starters, under section 2(g) of the former Code, a ‘contract labour’ is defined as a worker employed in connection with the work of some establishment, and is particularly distinguished from any worker who is a regular or permanent employee. Such a contractual worker has also been identified in the Industrial Relations Code, 2020, under the definition of ‘fixed term employment’ stated in section 2(o), wherein reference has been made to the engagement of a worker based on a written contract of employment on a fixed period of time. It must be noted, that the proviso b) to section 2(o), underscores the eligibility of these contractual workers to avail all the statutory benefits at par with permanent employees, with the familiar caveat of extending these benefits to only proportionate services offered by these workers.

Therefore, an amalgamation of these new labour codes depicts that the current legal framework governing these employees is wary of the recognition of their labour as distinguished from that of permanent employees. However, they also emphasize that for proportionate services, they must be awarded benefits similar to those of the permanent employees. Thus, in order to harmonize the interplay of these legislations with the SBEB Regulations, it seems appropriate to extend the ESOP rights even to the gig workers, and thereby duly remunerate them.

The employment potential of the gig economy

A recent Boston Consulting Group (BCG) report highlights that due to the emergence of technology-driven platforms, nearly 200 million people can be attributed to be a part of the gig workforce all around the world. Moreover, the report which mapped its potential in the Indian economy estimated that the gig economy could provide up to 90 million jobs and thereby add approximately 1.25% to India’s GDP in the long-run. Furthermore, the report mentions that nearly 1 million new jobs can be created over the next 2-3 years by merely providing near-term incentives to the employers and the workers. In this backdrop, it becomes necessary to safeguard the interests of the gig-workers by providing them with appropriate incentives like ESOPs, so as to retain them in the gig economy, and thereby propel the Indian GDP in a forward direction. However, the lack of this recognition under the SBEB Regulations makes the implementation of these incentives very difficult.

A similar tussle can be identified in the US, wherein it has been hotly debated whether gig workers (app-based workers), should be classified as employees or as mere contractual workers. If these workers are categorised into the latter setup, then they would be devoid of traditional wage protections, workers’ compensation, unemployment benefits, inter alia. After several discussions by the legislators and the companies, a hybrid model by the California legislators was introduced in 2019, under the name of ‘Proposition 22’, which sought the classification of these gig workers as contractors, albeit offered limited protections. Nevertheless, in the current scenario, the Biden administration has made consistent efforts to amend this misclassification of the gig-workers and thereby correctly deem them as employees of the app-based companies.

Furthermore, a welcome change has been introduced by the Securities and Exchange Commission of US, wherein it proposed to introduce equity compensation to be awarded to ‘platform workers’ who provide their services through technology-enabled platforms. This proposal was in line with making appropriate amendments to the rule 701 or Form S-8, so as to accommodate the developing ‘gig economy’, which has boosted in the recent years.

Therefore, the emerging importance of the gig economy invokes the implementation of the rights of the particular gig workers or platform workers, such that their efforts are duly culminated into fruition, with being appropriately rewarded for the same. In order to realise this goal, it is important to legitimise the grant of equity compensation in the form of ESOPs to these non-permanent employees, thereby duly remunerating them against their labour.

Conclusion

The SEBI discussion paper, in agreement with the aforesaid analysis, has proposed the deletion of the word ‘permanent’ under rule 2(1)(f) of the SBEB Regulations, 2014, so as to provide the listed companies with the flexibility to award stock options to other non-permanent employees, like gig workers, platform workers, inter alia. Nevertheless, as this recommendation awaits confirmation via legislative amendment, it is pertinent to observe that SEBI has refused to walk the entire length and thereby expressly recognise the different gig workers like contract labourers, platform workers inter alia, within the framework of the SBEB Regulations, and instead left it open to interpretation and implementation at the whims of the employers of the public companies. Thus, to avoid ambiguity of the interpretation of the sole term ‘employee’ under rule 2(1)(f) against the labour codes, and to expressly recognise the gig workers, it is pertinent to explicitly mention the different branches of these workers, within the said definition, and thereby award them their deserved ESOP rights.

Anant Budhraja

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