WELCOME TO CHARLES RUSSELL SPEECHLYS.
We would like to place strictly necessary cookies and performance cookies on your computer to improve our website service.
Otherwise, we'll assume you are OK to continue. Please close this message
From 1 September, 2013 a new employment status has been created (s.205A of the Employment Rights Act 1996). This is that of an "employee shareholder". To qualify the individual must be engaged under the terms of an employee shareholder contract and the employer must give, and the employee must receive, shares in the employer or its parent company. The shares must have a minimum value of £2,000 on receipt and there is no upper value.
There is no income tax or national insurance consequences of the grant of the first £2,000 of shares and no capital gains tax is chargeable when the shares are sold on a subsequent disposal of the first £50,000 of shares.
The new employment status can be offered to both existing or new employees. Existing employees cannot be required to change their employment status.
In exchange for the share benefits, the employee shareholder loses some employment rights:
Save for these exceptions, the employee shareholder has equivalent employment rights to normal employees.
There are a number of conditions that have to be met if employee shareholder status is to be secured. These are as follows:
Failure to comply with any of these conditions results in the individual not being an employee shareholder and they will be treated as a normal employee who will be able to bring an unfair dismissal claim. In the event the employee shareholder sells their shares during the course of their employment, their employee shareholder status will not be affected.
The new employee shareholder status has not been greeted with any great enthusiasm as there are a number of issues that will have to be considered by employers and employees. The following are important issues:
There are other issues that are not clear which will not encourage the use of the status. For example, if by consent the status changes, and the employee shareholder becomes an employee, will statutory continuity of employment be reinstated? If it does will it run from the date the status changes, or will the employee have to wait for 2 years before obtaining protection from unfair dismissal. It is possible to offer contractual protection to replicate the loss of statutory protection so in the event of redundancy a contractual payment equal to the statutory sum can be paid, but this is not so easy to achieve with regard to unfair dismissal protection.
Overall the proposed arrangements are not attractive and if they are to be adopted the employee will have to take account of the benefit of the shares and, in particular, the tax benefits of receiving the shares, in light of the rights given up and the costs associated with setting up and supporting the arrangements. The tax benefits are marginal unless the number of shares allotted are significant. Accordingly this status is likely to result in such arrangements becoming the preserve of senior employees to whom the loss of statutory employment rights is relatively unimportant (as their security is delivered under the terms of their service agreement) and where the tax saving is meaningful.
From the employer point of view employee shareholders are still protected from any action that is discriminatory so employers may not see it as a safe route with no risks on termination.
Given all of these issues, it is more likely this status will become the preserve of tax avoidance arrangements for senior executives in start-up businesses rather than a way of engaging employees as shareholders with a meaningful stake in the future of the business.
For more information please contact Alan Julyan, Partner
T: +44 (0)20 7427 6407