The Azerbaijani Labor Code has been amended to introduce a legal framework for employee share ownership plans. These amendments will provide employers with a clear legal basis for offering shares in the company as a long-term incentive to employees.
How can employees receive shares?
Under Article 7-1 of the Labor Code, an employer (or the company’s founder) and an employee may enter into an employee share ownership plan agreement. The agreement may specify that an employee becomes entitled to company shares based on one of the following conditions:
- Length of service (time-based vesting) – the employee earns the right to the shares gradually or after remaining employed for a specified period; or
- Performance-based vesting – the employee receives the shares after achieving agreed performance targets, either individually or at the company level.
In other words, employees do not necessarily become shareholders immediately. Their entitlement to shares may depend on how long they stay with the company or whether business or individual performance goals are achieved.
What happens when employment ends?
The amendment also allows the parties to determine in advance what will happen to the employee’s share rights if the employment relationship ends.
Depending on the reason for termination, the agreement may provide that:
- The employee keeps all or part of the shares or becomes entitled to shares that had not yet vested;
- The employee is required to sell vested shares to the company or its founder at their fair market value; or
- In certain cases, such as termination due to employee misconduct, the employee may lose unvested share rights or be required to sell vested shares back at their nominal value or another agreed lower price.
This gives employers greater flexibility to design share incentive plans and helps avoid disputes over employee share ownership after termination of employment. (Article 76-1 of the Labor Code)
Shares are not considered salary.
The amendment also clarifies that shares granted under an employee share ownership plan do not form part of an employee’s salary and cannot replace salary payments. (Article 154.4 of the Labor Code). This means that employee shares are treated as a separate incentive designed to encourage long-term commitment and align employees’ interests with the company’s growth, rather than as remuneration for work performed
