From 1 September 2013, employers can give their employees the opportunity to become an 'employee shareholder' - that is, give up some of their employment rights in exchange for shares in their employer which attract some tax breaks.
What does the employee give up?
If an employee becomes an employee shareholder, they give up a number of employment rights. The key ones are the right to claim for unfair dismissal (with some exceptions - such as in relation to discrimination or health and safety) and the right to a statutory redundancy payment.
Bear in mind that the right to bring an unfair dismissal claim only becomes available after two years of employment so new employees will be giving up less, in the first instance.
What does the employee receive in return?
The employee must receive shares worth at least £2,000 on the date of issue. The shares must be free and the employee must not give any other consideration for them (e.g. giving up other rights). The shares must be newly issued.
What is the procedure?
The legislation sets out a fairly detailed procedure, the main features of which are:
The employer has to prepare a summary of the rights the employee is giving up and the rights and restrictions on the shares.
The employer has to pay for the employee to receive advice on the proposal.
A cooling-off period.
Can an employee be forced to become an employee shareholder?
No – existing employees cannot be forced to become employee shareholders. But there is nothing to stop employers recruiting on the basis that new employees can only be employee shareholders.
What are the tax breaks?
The first £2,000 worth of shares can normally be received free of income tax and national insurance contributions but the shares are otherwise taxed in the normal way.
The employee does not have to pay capital gains tax when they sell up to £50,000 of shares which are acquired for becoming an employee shareholder.
Who will use the new regime?
From an employee’s perspective, becoming an employee shareholder is likely to be most attractive to:
more senior executives who are less likely to miss the rights they are giving up and are more likely to be paying capital gains tax;
employees of high-growth companies or private equity portfolio companies which are working towards an exit – since they are more likely to see substantial gains on their shares.
Lower-paid employees are unlikely to have to pay capital gains tax in any event (because of their annual capital gains tax allowance) and less senior employees also stand to lose more from giving up employment rights.
From an employer’s perspective, our impression is that companies are concerned that offering employees the opportunity to give up employment rights (or denying those rights to new employees) may reflect badly on their reputation as a good employer.
Some employers may be interested in curtailing the right to claim for unfair dismissal. But aggrieved former employees will continue to have plenty of other possibilities for seeking redress (e.g. discrimination claims) and the right to claim unfair dismissal only applies after two years of employment. So the benefit to the employer may not be as great as it first appears.
The income tax breaks are not generous and a more conventional tax-approved employee share plan may be a more appropriate way to enjoy similar (or even better) tax treatment. So employers looking for tax savings are likely to be focussed on the capital gains tax breaks.
Go to our Executive Remuneration Microsite for more information on employee shareholders and other topics affecting executive remuneration in the UK.
Alternatively, contact Jean Lovett, Nicola Rabson or your usual employment contact.