Out-Law / Your Daily Need-To-Know

Government publishes new guidance as 'employee shareholder' contracts come into force

Out-Law News | 04 Sep 2013 | 11:22 am | 2 min. read

New 'employee shareholder' equity-linked employment contracts are now available, allowing workers to give up some of their employment rights in exchange for shares in the companies that they work for.

The Government has published guidance on the new employee shareholder status, while more technical guidance on the tax treatment of employee shareholder shares has been published by HM Revenue and Customs.

The new status has been criticised by trade unions, which have warned that employees will lose basic protections and that the scheme could be exploited as a tax loophole. In addition, the Telegraph has reported that neither the British Chambers of Commerce (BCC) nor Department for Business, Innovation and Skills (BIS) has received any expressions of interest about the new scheme from businesses.

Employee shareholder status is designed to be a third form of employment status, alongside ‘employee’ and ‘worker’. In exchange for giving up certain employment rights, employees will become owners of a stake in the business that they work for by being given shares in the company worth between £2,000 and £50,000. Any profit on those shares will be exempt from capital gains tax (CGT) when the shares are sold.

In exchange, an employee shareholder will not have certain rights which a ‘standard’ employee would have, including those in relation to unfair dismissal, redundancy and certain statutory rights to request flexible working and time off for training. Employee shareholders will still be protected from ‘automatic’ unfair dismissals, such as those stemming from discrimination or as a result of whistleblowing. Existing employees cannot be forced to take up employee shareholder status, but employers can choose to offer only employee shareholder contracts to new joiners.

The Government's new guidance makes it clear that individuals, including those on Jobseeker's Allowance, do not have to apply for or accept an employee shareholder contract if they do not want to. Existing employees that are asked to change their contracts to those of employee shareholders are also entitled to refuse, and can complain to an employment tribunal if they are dismissed or suffer any detriment because they did not accept the offer. Employers that wish to offer employee shareholder contracts to existing employees must follow the same steps as those offering the contracts to new joiners.

There are six conditions set out in the guidance that must be met before an individual can become an employee shareholder. These are mutual agreement; receipt of fully paid-up shares in the company worth at least £2,000 that the individual does not pay for in any way; the issue of a "written statement of particulars" of the status of employee shareholder from the employer to the individual; independent advice on the terms and effect of that statement, paid for by the employer whether the individual accepts the job or not; and a seven-day cooling off period. According to the guidance, responsibility for meeting these conditions is shared by the employer and the individual.

The guidance also states that an employee shareholder retains this status even if the shares are sold. The only way that an employee shareholder can become another type of employee, with the accompanying rights, would be if the employment contract was changed.

According to guidance from HMRC, income tax and National Insurance contributions (NICs) will not usually be chargeable on the first £2,000 of share value received by an employee shareholder. However, the normal rules on the taxation of employment-related shares will apply to any value received in excess of this amount. Disposal of employee shareholder shares worth up to £50,000 at the date of acquisition will also usually be exempt from CGT. In both cases, the employee shareholder must not have a 'material interest' in the company. Employer companies will also receive tax relief against the acquisition of shares by new employee shareholders.