A number of clients have recently expressed an interest in exploring alternative employment arrangements for their key staff; in particular there has been a focus on how best to incentivise and retain senior individuals or key talent on a tax efficient basis. One of the ways which we have been helping clients achieve these objectives is through the use of employee shareholder status.
Since 2013, when this scheme was first introduced, it has been possible for individuals to become employee shareholders. In short, an individual receives shares in their employer worth at least £2,000 in exchange for giving up some of their statutory employment law rights (most notably their rights to claim unfair dismissal and to receive a statutory redundancy payment).
It is a tax efficient way of incentivising employees because, provided the requirements are met, the shares will not result in any liability for income tax or national insurance contributions when they are received and will benefit from being exempt from capital gains tax when they are disposed of (so long as the shares were worth less than £50,000 when the employee received them). This is a very attractive way of incentivising staff, particularly those who are, in reality, unlikely to bring claims under the relevant statutory provisions.
In order to create an employee shareholder relationship, there are certain preconditions which must be met. Most notably, the existing employee or prospective employee must agree to the proposals after receiving a detailed written statement setting out their rights and they must receive independent legal advice on the terms and effect of the proposed agreement, which the employer must pay for (regardless of whether the employee ultimately decides to take up the offer of becoming an employee shareholder). They must be given at least 7 days to make a decision after they receive this advice. The employee shareholder must receive fully paid up shares in the Company worth at least £2,000 under this arrangement for the provisions to apply.
Once effective, the employee shareholder has only limited employment law rights; as mentioned above they forfeit their rights relating to unfair dismissal and a statutory redundancy payment but also in relation to other statutory rights such as the right to request flexible working. They will also have slightly different statutory rights in other areas, for example they have to give increased notice of their intention to return to work from maternity leave (16 weeks rather than 8 weeks) or after a period of additional paternity leave (16 weeks rather than 6 weeks).
We have been advising a number of clients on these sorts of arrangements, and expect this interest to increase as the economy continues to recover. Despite a slow uptake when it was first introduced, the Government now estimates that as many as 80,000 individuals a year will become employee shareholders.
In our experience this arrangement is being utilised by employees who feel they do not need or want the protection of unfair dismissal rights or the right to claim a statutory redundancy payment (perhaps because in reality they do not anticipate being with the employer for more than 2 years, or in other cases, where they trust their employer or know they would not want to use unfair dismissal rights). Other individuals are keen to enter into these arrangements because of the benefits of the tax efficient share arrangements, particularly in relation to the lucrative capital gains tax exemption when they come to dispose of their shares, which may be far more valuable to them than any risks associated with unfair dismissal.
From an employers’ perspective, we have seen this arrangement being utilised particularly by venture capitalists, private equity houses and start up/growth companies. These sorts of businesses may well already rely heavily on awarding equity to employees/prospective employees to recruit the right people, incentivise them to perform and ultimately, to retain key talent to ensure the continued success of their business.
If you think this sort of arrangement would benefit your business or if you would like to explore it to understand what is involved in more detail, please contact any member of the Employment Team.