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Employee Shareholder Status agreements explained

1st September 2013 sees the implementation of the new ‘employee shareholder’ status whereby employees can give up certain employment rights for shares. Read on to find out more about what it could mean for small businesses like yours.

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In exchange for shares worth between £2,000 and £50,000, an employee will be able to relinquish certain rights, including:

  • Time off for study/training
  • Flexible working (except shortly after returning from parental leave)
  • Not to be unfairly dismissed (unless automatically unfair/discriminatory)
  • Statutory redundancy
  • Notice before returning to work after parental leave increased from 8 to 16 weeks.

Legal requirements

If you want to offer Employee Shareholder Status, employees have to receive independent legal advice (ILA) paid for by the employer to ensure they know what it involves. Employers must also provide a seven day cooling off period following ILA.

Job offers can be conditional on applicant agreeing to become an employee shareholder, but you cannot impose an employee shareholder agreement on existing employees without consent.

Dismissal or detrimental treatment for refusing to become an employee shareholder is automatically unfair.

You will also need to provide a written statement of particulars which sets out the rights relinquished and share restrictions. If an employee has shares worth less than £2,000 they will still have full employment rights.

Who is the scheme aimed at?

  • Limited companies (not LLPs/partnerships)
  • Fast-growing SMEs
  • Highly skilled employees mobile in the jobs market
  • High earning managers seeking to benefit from Capital Gains Tax (CGT) exemption who can afford up front tax costs
  • Companies working towards exit
  • Employees who move jobs frequently and are unlikely to achieve 2 years service.

What are the key advantages for businesses?

These agreements provide businesses with additional options to recruit, retain and incentivise staff, and are a possible alternative to cash bonuses.

From an employment point of view, it provides certainty against litigation, meaning businesses will be at reduced risk of costly employment tribunals. Businesses need to decide if this is worth the minimum £2,000 price tag.

It can also be more tax efficient for businesses, which can get a corporation tax deduction equivalent to the total value of the shares granted to the employee, and the employee, who receives CGT exemption on shares received.

Shares can also be restricted, so you don't need to offer entitlement to dividends or the right to vote to the employee.

Any key disadvantages?

There are some drawbacks businesses should be aware of, including but not limited to the following:

  • The employer has to pay PAYE/NIC charges upfront
  • Shares are not EIS-eligible
  • Entrepreneurs relief is only available if qualifying shares and 5%+
  • Valuation may be difficult in private companies
  • The cost of providing ILA to employees
  • It could create a two-tier workforce, with only some having access to rights
  • Participating businesses will need to amend articles of association and introduce shareholders agreement.

Businesses also have to take care with discrimination laws, for example, ignoring requests for flexible working/dismissal procedures.

Members of the Forum are reminded that they must call our helpline on 0845 130 1722 for support and advice before taking any action, including implementing Employee Shareholder agreements.

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