Employee Shareholder Contracts now in force!

A new type of employment contract – the Employee Shareholder Contract – came to life on 1st September 2013 (as part of the Growth and Infrastructure Bill). UPDATED 2016.

Under this new contract employees give away some of their employment rights in exchange for receiving shares between £2,000 – £50,000 in their company (and benefiting from tax advantages on these shares).

The details are:

  • Employers would have to arrange for employees to receive free independent legal advice before deciding to give away some of their employment rights for shares (the employer must pay for this advice)
  • Employees would then have a seven day ‘cooling off period’ to decide if they are sure if they want to take up the offer
  • Employers must give their employees a written statement with full details of the shares and the rights they are giving up; including details where the employee has voting rights and details of any restrictions on the shares’ transferability
  • The employer must issue or allot to the employee fully-paid-up shares in the company (or its parent company) with a value of no less than £2,000
  • Existing employees will be protected from detriment if they refuse to switch to the new contract. If they are dismissed for refusing to agree to become an employee-shareholder they will be automatically unfairly dismissed (so will not need 2 years service to bring a claim). They also cannot be disciplined or suffer any other detriments, for example a pay cut, for refusing to agree to this contract
  • An employer could require new recruits to accept employee-shareholder status. However, a job-seeker who refused the offer of this contract would not forfeit social security benefits by doing so
  • Employees must not be asked to give up any other rights than allowed by this change in the law. Currently, many Employers offer their employees shares in their company and this can continue, so not all employees who have shares in their employer’s business will be employed under the new contract; employees would have to agree to this.
  • Capital Gains Tax will be exempt from profits made where the employee sells shares that they acquired under this agreement (up to £50,000 of profits). The first £2,000 of shares will be exempt from Income Tax and NI Contributions.

The rights that employees ‘lose’ under this new contract are:

  • Unfair dismissal (except where it is automatically unfair or discriminatory)
  • statutory redundancy pay
  • the right to request time off for training
  • the right to request flexible working (unless they make a request within 14 days of returning from a period of parental leave)
  • they will have different rules around maternity and other family-related leave – adoption, additional paternity leave (they would be required to provide 16 weeks notice of their date of return from this type of leave, up from the current 8 weeks notice that is needed for maternity/adoption leave and 6 weeks for additional paternity leave)

Employees will still remain employees under this contract though, in all other senses.

Why introduce these new contracts?

The Government is trying to encourage growth and allow more flexibility in managing employees and believes these new contracts may encourage companies to recruit more.

Some Employment Lawyers believe there will be more discrimination claims from those who cannot claim unfair dismissal.

A leading UK Employer Lawyers thinks the contracts may be potentially damaging to the economy:

“From the employee’s perspective, the economic climate is still uncertain and share performance is not guaranteed. […] Small businesses may be reluctant to give shares away[…] if this creates a combination of complicated shareholder arrangements and tax provisions, smaller businesses are unlikely to want to become involved because of an ironic increase in red tape and cost.”

What employers will need to consider if they want to introduce these contracts

  • Consider what rights attach to the shares and how to value the shares (particularly if the shares are not publically traded)
  • Consider what will happen when the employees’ employment ends or their employed is transferred to another employer under TUPE laws.
  • Draft an employee shareholders offer letter and contract. Amend existing policies.
  • What would happen in a redundancy exercise to employee shareholders, would they be the first to be dismissed?

The Department for Business, Innovation and Skills (BIS) have published guidance which is here.

In the 2016 Autumn Statement the Chancellor announced that the tax advantages (Income Tax relief and exemption from Capital Gains Tax) of Employee Shareholder Shares are to be removed for new issues that take place after 1st December 2016. And future legislation will close these Contracts to new participants (date tbc).

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