What are they?
They are employees engaged on special contracts who give up many of their employment rights, including those in relation to unfair dismissal and statutory redundancy payments. In exchange for being granted shares in the business valued at a minimum of £2,000 at the time of issue. Employees will enjoy a Capital Gains Tax exemption on disposal of the shares (with other limited tax breaks).
The Government envisages that this new right will see more companies use shares to recruit, retain and incentivise staff. This may be particularly attractive to smaller businesses.
Existing employees cannot be forced to take up employee shareholder status. Indeed, it will be automatically unfair to dismiss an employee for refusing such an offer. However, employers can still choose to offer only this type of contract to new recruits.
Crucially, for an employee shareholder contract to be valid, a number of precautionary steps must be taken:-
The employee must take independent legal advice on the rights they are giving up. This must be funded by the employer.
There will also be a seven day ‘cooling off’ period during which the acceptance will not be binding. Employers must also provide a written statement with full details of the rights being signed away and information about the shares on offer.
Are employee shareholder contracts a good thing?
Offering shares in a business may make employees feel more committed to the company. This may serve to bolster trust and promote growth of the business.
Start-ups and growing businesses with a proactive approach to staff engagement and potential for capital growth, maybe interested in the new contracts.
The new contracts may also be attractive to companies as a way of rewarding employees in a tax efficient manner. Indeed, some high-earners in receipt of high value shares, may consider tax savings to be far more important than the employment rights they will sign away.
There is a risk that withdrawing significant employment rights in return for shares could reflect poorly on a company’s reputation. The step away from flexible working and the increased notice periods for mothers returning from maternity leave, might be perceived as pushing against the progressive tide at a time when most businesses are seeking to appear more family-friendly.
Will you lose good potential recruits if their first involvement with the company is to be sent off to a solicitor and required to sign away their rights? This is a realistic possibility.
Employers should ensure that the written statement provided to employees not only sells the benefits of what is offered, but is also clear so employees enter the scheme with their eyes fully open.
There is also a danger of creating a two-tier workforce of those employees with and without shares. The increased administrative burden involved in managing the different financial, tax and legal arrangements may prove a headache.
Employers will also need to factor in the costs of implementation. The reasonable costs incurred by the employee in seeking legal advice must be met by the employer, even if an offer is eventually declined (which is not normally the case when an employee is sent off to receive advice on a settlement agreement).
We feel on balance that this new type of employee is worthwhile but may be best restricted to entrepreneurial companies with entrepreneurial employees. Providing the company is successful this could prove highly profitable for the employee shareholders.
Ray Best can help you protect your financial future. To find out more, simply click here!