From 1 September 2013, employers will be free to offer permanent employment on the basis of the employee waiving certain employment rights. The premise is simple: the employer grants at least GBP 2,000 worth of shares with favourable tax breaks in itself or a parent company and in return the “employee shareholder” gives up key rights, including those to any claims for unfair dismissal, statutory redundancy payments and flexible working requests.
Whilst this cannot be imposed upon existing employees it could be imposed as the basis upon which an employer is prepared to take on future employees. An employee shareholder will still get the benefit of the full range of discrimination protection and against dismissals that are automatically unfair – where the principal reason is whistleblowing or on health and safety grounds, amongst others. The terms under which the shares are acquired and are ultimately disposed of are a matter for agreement between the parties. This includes factors such as timing, valuation and provisions for good and bad leaver scenarios – particularly relevant being possible forfeiture where an employee shareholder leaves to a competitor. Although initial indications suggest that employee shareholder status is unlikely to be taken up by most employers, it is something that may be of benefit in structuring remuneration packages for senior executives or those who would have received equity as part of their package in any event given the favourable tax treatment.
Q: To whom does it apply?
A: It can be offered to all employees, both new and existing, from 1 September 2013 onwards. Existing employees cannot have the changed status imposed upon them and must agree to it. They additionally have enhanced protection from dismissal and being subjected to detriment for a refusal to agree to the changed status. It can freely be offered to all new employees.
Q: Can existing employees volunteer to change status to Employee Shareholder?
A: Yes, provided the shares are granted to them, they enter into a new contract to reflect this and receive legal advice on the terms.
Q: Can an employer pick and choose who to offer this to in future?
A: Yes. An employer could choose to apply it across the board, to certain positions only or to certain grades only. Careful thought should be given (and documented) by the employer if it is going to pick and choose to avoid any suggestion of discrimination.
Q: What benefits does the Company obtain from this arrangement?
A: The main two benefits are the ability to reward employees in a very tax efficient manner and greater flexibility in restructuring with greater certainty of termination costs.
Q: What’s in it for the Employee Shareholder?
A: Mainly the ability to make tax free capital gains on up to GBP 50,000 of shares. For those that change jobs regularly and would not achieve their two years service qualification (or would not seek to rely upon unfair dismissal rights) they are giving almost nothing away.
Q: What does the employer have to offer?
A: The employer must grant at least GBP 2,000 worth, at actual market value, of fully paid up shares in itself or a parent company for which the Employee Shareholder is not required to pay.
Q: What are the logistics of making and accepting the offer?
A: Offers of employee shareholder status must include a statement explaining the employment rights that would be sacrificed and the rights attaching to the shares.
Prospective Employee Shareholders must receive advice about the offer from an independent solicitor, barrister, legal executive, union official or advice centre.
Employers must meet the reasonable costs incurred in receiving this advice, regardless of whether the offer is accepted.
Individuals agreeing to the offer will be entitled to a seven-day “cooling off” period from the day legal advice is received, to be absolutely sure they are happy with the decision. Employers are advised not to take on an individual before the seven days have passed in order to avoid any potential claims which might arise should they change their mind before the cooling off period has elapsed.
Q: Is there a maximum share grant?
A: No, but the capital gains tax exemption only applies to the first GBP 50,000 worth of shares valued at the date of grant.
Q: Does this give rise to an income tax charge to the Employee Shareholder on grant?
A: Subject to various anti-avoidance provisions, there will be no income tax charge for the first GBP 2,000 worth of shares (valued at actual market value) acquired in consideration of entering into an employee shareholder agreement. There is no tax relief on the first GBP 2,000 of shares if the employee has a material interest in the employing company or a company connected with it (broadly speaking a material interest is a 25% or greater interest). To the extent that the value of the shares received exceeds GBP 2,000 there will be an income tax charge and potentially a liability for national insurance contributions.
Q: There is no tax relief on the first GBP 2,000 of shares if the employee has a material interest in the employing company or a company connected with it (broadly speaking a material interest is a 25% or greater interest).
A: To the extent that the value of the shares received exceeds GBP 2,000 there will be an income tax charge and potentially a liability for national insurance contributions.
Q: How does the capital gains tax relief work?
A: As long as the value of the qualifying shares is GBP 50,000 or less immediately after acquisition, a disposal of the same shares will be exempt from CGT. If the value on acquisition exceeds GBP 50,000, the relief only applies to the appropriate portion of the shares acquired on the day when the limit was exceeded. These shares will be treated as issued before the others issued on that day, so that they qualify for the CGT exemption even though the others do not. Likewise here, however, if the employee had any kind of material interest as described in the answer above relating to income tax, then the shares will not be exempt for CGT purposes.
Q: Will the employee have to pay income tax on any costs reimbursed by the employer for advice on the offer of employee status?
A: No, not necessarily. There is an income tax exemption for advice about the terms and effect of the employee shareholder agreement (excluding tax advice). The income tax exemption only covers tax advice to the extent that it consists of an explanation of the tax implications of employee shareholder agreements generally.
Q: What rights does the Employee Shareholder have to give up?
A: They have to give up their rights: to request time off for study or training; to make a flexible working request (or, for those returning from parental leave, to make a request beyond the first 14 days after their return to work); not to be unfairly dismissed; to a statutory redundancy payment; and to give 16 weeks’ notice if they want to return early from statutory maternity, adoption or additional paternity leave.
Q: Are there circumstances where an Employee Shareholder could still make a claim for unfair dismissal or discrimination?
A: Yes, all discrimination rights are preserved, as is the right not to be dismissed for an “inadmissible reason” such as health and safety, whistleblowing, union activities, pregnancy or childbirth, or TUPE.
Q: What other rights will Employee Shareholders have?
A: Employee Shareholders will have a number of other rights under the new legislation. Existing employees who refuse to become employee shareholders will have the right to protection from dismissal or other detriment.
Q: How is the Employee Shareholder relationship regulated?
A: In addition to a normal contract of employment, we would recommend that there is a Shareholders’ Agreement which sets out the rights and obligations between the company and the Employee Shareholder.
Q: What terms apply to selling the shares?
A: This is a matter for agreement between the parties but should be covered in the Shareholders’ Agreement. It should include matters such as the circumstances under which the shares can be disposed of, the method and the valuation terms to be applied. The valuation could be different depending on the reason for the disposal – this is commonly known as “good leaver” and “bad leaver” provisions. No income tax will arise on a payment to buy back employee shareholder shares that qualify for the CGT exemption.
Q: If an Employee Shareholder disposes of their shares do they revert to being an ordinary employee?
A: No. The employer could agree this, though, if it wished and if it was appropriately documented.
Q: Could the Employee Shareholder be forced to sell their shares, for example
if the Company was sold?
A: Yes they could, under provisions known as “drag along rights”, but this
would need to be included in the Shareholders’ Agreement.
Q: Could the shares be forfeited if the employee is dismissed or goes to work
for a competitor?
A: Yes, provided the Shareholders’ Agreement includes these as circumstances
where the individual is a bad leaver, a nil or nominal valuation could be applied.
Q: What rights as a shareholder will the Employee Shareholder have?
A: In addition to rights under any Shareholders’ Agreement, the Articles of
Association may provide rights and the Companies Act 2006 also provides
certain rights, for example, in relation to unfair prejudice to minority