Employee shareholders: the basics

Employee shareholders: the basics


Author: Niall Murphy

A new employment status intended to encourage small and medium-sized businesses to take on staff was proposed by the Government last year. Following a short consultation the legislation incorporating the changes is now making its way through Parliament.


Clause 27 of the Growth and Infrastructure Bill 2012-13 (the Bill) currently contains the provisions introducing employee shareholders (originally dubbed "employee owners"). The controversial proposals provide for employees to give up certain employment rights in exchange for shares in their employer.

The proposals have been rather unenthusiastically received so far with commentators critical and various questions outstanding about how this will work in practice, for example, what will the position of employee shareholders be on a TUPE transfer?

The details

The parties will be able to agree that an individual will be engaged as an employee shareholder. This will not be mandatory it will be a matter of choice for the parties, but there will be nothing to stop an employer deciding only to engage staff in this way.

To create an employee shareholder arrangement the employer will have to offer a minimum of £2,000 of shares in their company. The market value of the shares will be determined in accordance with the provisions of the Taxation of Chargeable Gains Act 1992 ("TCGA") as their unrestricted market value at the time of issue.

Any gains made on the first £50,000 of such shares will be free of capital gains tax.

In return the employee will agree to:

  • give up rights in respect of unfair dismissal, redundancy, flexible working, and time off for training; and
  • provide 16 weeks' notice or a firm date of return from maternity or adoption leave (instead of the usual eight).

Because of the requirements of European law, there are some significant employment protections left in place for employee shareholders including the right to claim unfair dismissal where the dismissal is automatically unfair or relates to discrimination. In addition, an employee will be protected from detriment and dismissal for refusing to accept an offer from the company to become an employee shareholder.

Open issues

Regardless of the view one takes of the desirability of an employee giving up fixed employee rights for the uncertainty of share ownership a number of issues remain unclear from the legislation.

  1. Market value is to be determined in accordance with the provisions of the TCGA. However, valuation is a notoriously uncertain area. There does not appear to be any pre-valuation check available as there is for Revenue approved share option schemes. A company issuing shares in these circumstances has no guarantee that the requisite minimum value has been issued. If it does not issue sufficient shares, presumably the employee shareholder will continue to be an employee for employment law purposes, but will be faced with an income tax bill (and possibly national insurance) on the value of the shares received.
  2. It is not clear what will happen when an employee leaves. There is no restriction on the type of shares that can be paid, so long as they are fully paid. Accordingly, it would be possible for the company to create a class of shares which automatically forfeit except in the event of a third party sale. Given the employee gives up protection against unfair dismissal, there is presumably nothing to stop a company dismissing the employees to whom it has granted shares immediately prior to, say, an exit.
  3. We understand that employees will still continue to participate under other tax favoured share incentive/share option plans in addition to the £50,000 employee shareholder plan. There does not appear to be anything preventing shares being issued to senior executives, who may see it as a useful top-up to existing share plans.


Clause 27 of the Bill will be reconsidered by the House of Lords on 27 February (when further amendments can be put forward for debate) so further changes to the legislation are still a possibility, but given the Government's determination to push this through, seem unlikely.

Given the controversy which this measure has generated since its' announcement it will be interesting to see how much of a take-up arises, or whether it will turn out to be a damp squib, like the national insurance holiday for regional businesses.