Following on from the proposal for a new employee shareholder contract, which finally came into force in 1 September 2013, the Government has now produced guidance on employee shareholder status. For detailed information see the guidance from the Department of Business, Innovation and Skills (BIS) www.gov.uk/employee-shareholders.
Before becoming law the proposal was heavily criticised in the House of Lords… as quoted in an article in The Telegraph one peer said it had
“the trappings of something that was thought up by someone in the bath”.
The guidance provides information which needs to be considered when thinking about employee shareholder contracts. This includes the conditions which must be met, the rights that an employee shareholder has, and the general process and procedure to be followed for both the employer and the individual. The guidance also provides basic information on taxation and share valuation.
By accepting and agreeing to a shareholder contract the worker is relinquishing certain rights in exchange for shares which could range from a minimum of £2,000 upwards…at present there is no set upper value.
A new employment status will means different rights and responsibilities, so what does this mean in practical terms….
- A decision to apply for or accept an employee shareholder position can be made by anyone, from a new employee to an existing employee. Employers can ask existing employees to change their employment contract to a shareholder contract; however an existing employee does not have to agree to any change. Where an existing employee is subjected to any detriment for refusing to accept such a change, a complaint can be made in the employment tribunal.
- The provision of shares in a business could result in the recruitment of the best person for the job and for the business, especially in a competitive market. Where an employee has an actual stake in the business this could result in a greater affinity and an increased responsibility by the individual towards the business. Benefitting both the business and the individual.
- With the employee shareholder contract, certain rights are maintained and certain rights are relinquished in exchange for shares. The rights an employee shareholder will not have must be understood and clearly communicated to both parties in a written statement.
- An employer however can choose to offer contractual rights that are more generous than those provided for by law.
- Before an individual can accept or refuse an offer of employment as an employee shareholder a compulsory sequence of events must take place. If these actions are not undertaken, or if they are not undertaken in the correct order this would result in the employee shareholder contract being invalid.
- A potential employee shareholder should ensure they receive advice from a relevant independent advisor. Failure to do so would result in the contract being invalid. It is in their best interests and a legal requirement to understand and consider the contract before acceptance.
- As with most types of agreement, any potential tax implications should always be considered and understood. With the employee shareholder contract the first £2,000 of shares would not attract income tax or national insurance contributions, however where the value of shares is higher, the normal rules for the taxation of employment related securities would apply.
- Although the first £2,000 of shares would not attract income tax or national insurance contributions this would only apply on the first occasion where an individual acquires any qualifying shares under the employee shareholder scheme. This is also subject to the employee not having any material interest in the business! An important point to remember regarding shares however is where shares are not worth £2000 at the time of issue, a complaint can be made in the employment tribunal. The Tribunal could find that the individual was not an employee shareholder, but was an employee. Therefore any complaint that is made in a tribunal could be for statutory redundancy pay or for unfair dismissal!!
- Shares sold up to £50,000 would be exempt from any Capital Gains Tax. Again, subject to the employee not having any material interest in the business. For further guidance on any tax implications, the HMRC’s employee shareholder guidance should be consulted.
- The guidance states that the written statement should also include clear information on what would happen to the shares where an individual decides to leave the company. For example there may be ‘buy back’ clause. If there is no particular clause or restrictions and the shares are still retained by the individual they will continue to benefit from any associated rights.
Still on the selling of shares, it may be thought by the selling of shares this would essentially result in a change to the employment status, after all these (shares) were provided in exchange for certain employment rights!! This however would not be the case, a change in status could only occur where an actual change of contract is provided.
Costs to consider
Although this new employment status is an additional option open to the individual and businesses alike it will be interesting to see how this progresses. An important point to remember is that although this arrangement would mean the relinquishing of certain employment rights this type arrangement would not protect a business from potential discrimination claims. Discrimination claims on average are not only costly in terms of monetary value to a business but an allegation of discrimination can impact on business reputation. A further cost to the business which will be unavoidable is the burden of covering the costs for independent legal advice. Without this an employee shareholder employment contract will not take legal effect. The cost for advice would not only apply for new hires but for as existing employees too, whether the position is accepted or not.
Carillion Advice Services