From 1 September it will be possible for companies to engage staff as employee shareholders, a new type of employment status with tax benefits.
Controversial legislation comes into force on 1 September which introduces the new employment status of "employee shareholder". The Government was forced to make several late changes to its proposals earlier this year in order to ensure the relevant provisions of the Growth and Infrastructure Act 2013 passed the Parliamentary process.
An employee shareholder may be recruited on that basis or may be an existing employee who agrees to change status.
Shares for rights
The relevant provisions are contained in a new section 205A of the Employment Rights Act 1996. An employee shareholder agrees to have different employment rights to employees and, as the name suggests, employee shareholder status involves becoming a shareholder.
Individuals must receive fully paid up shares in their employing company or its parent company with a market value of at least £2,000 on the day of issue or allotment (the "employee shareholder shares").
The value of the shares is defined as the market value within the meaning of sections 272 and 273 of the Taxation and Chargeable Gains Act 1992. It will be possible to get an agreed valuation in advance from HMRC.
The shares may be in a company which is UK or overseas registered or which is a Societas Europaeas.
Individuals must give no consideration for their employee shareholder shares other than their agreement to become an employee shareholder.
Employee shareholders will not have the following statutory rights:
- The right not to be unfairly dismissed (subject to some important exceptions, see below).
- The right to a statutory redundancy payment.
- The right to request flexible working (unless such request is made within 14 days of returning from parental leave).
- The right to request time off for study or training.
Employee shareholders will be protected against unfair dismissal for an automatically unfair reason (such as whistleblowing or pregnancy), a dismissal in breach of the Equality Act 2010 or in relation to suspension on health and safety grounds.
In addition, some notice rights for statutory entitlements are varied for employee shareholders who must give 16 weeks' notice rather than eight or six weeks notice (as the case may be) of their intention to return early from maternity, adoption leave or additional paternity leave.
However, some new protections are introduced: existing employees will be protected against detriment and dismissal on the grounds that they have refused to become an employee shareholder.
In order to establish employee shareholder status a restrictive process must be followed. Firstly, the individual must receive from the employer a written statement, in the form prescribed in the legislation, setting out information about the rights attaching to the employee shareholder shares and the employment rights to be given up.
Much like a settlement agreement, the individual must receive legal advice from an independent legal adviser as to the terms and effect of the proposed agreement to become an employee shareholder. Having received legal advice, the individual may of course decide not to accept the offer to become an employee shareholder.
The reasonable costs of such advice must be met by the employer whether or not the individual decides to become an employee shareholder.
There is a seven day "cooling off" period after the individual receives their legal advice before any agreement to become an employee shareholder can become binding.
The first £2,000 of employee shareholder shares will not be subject to income tax or national insurance.
In addition, employee shareholders shares up to the value of £50,000 are exempt from capital gains tax on first disposal. This limit on the value of the shares applies as at the time of acquisition not sale. For employee shareholders working in a business which increases in value during their employment there could therefore be a substantial tax-free gain on exit. There are significant exclusions from this generous treatment however, including where the employee shareholder has, or has had in the previous 12 months, a "material interest" in the company (i.e. can exercise 25% or more of the voting rights, either alone or with "connected persons").
Much of the criticism of the new status has focused on the fact that employee shareholders will not enjoy various statutory employment rights which are available to employees. However, it is important to remember that nobody can be forced to become an employee shareholder and the generous tax treatment involved means that many individuals will find the new status very attractive.
The types of individuals to take advantage of this new employment status seem likely to be those working in start-ups or private equity backed businesses and they will probably place less value on the loss of limited statutory employment rights and more on the fiscal advantages on offer.