Employee shareholding schemes

New legislation has come into effect which will allow employees to become shareholders in a company in exchange for surrendering key employment rights. Significant tax reliefs are available for employees who enter into one of these schemes.

The provisions are expected to come into force in Autumn 2013.

The “Exchange”

Employees who enter into the scheme will “exchange” a number of their employment rights (such as right to request flexible working, statutory redundancy pay and providing additional notice when returning to work following maternity, paternity, parental or adoption leave) to enter into the scheme.   Working parents or those looking to start a family should be particularly mindful of the rights that they will be “exchanging” to enter into the scheme.

Under the scheme an employees will lose their right to claim unfair dismissal unless the claim arises from a breach of health and safety legislation, the Equality Act or one of the automatic provisions which activate a claim for unfair dismissal.

In exchange for the employment rights, employers will provide the employees with shares in the company. The minimum value of shares that must be provided to the employee has initially set at £2,000 of fully paid shares. There is currently no maximum limit on the value of shares that can be issued.

Employees will receive significant tax reliefs on the shares. No income tax or National Insurance will be payable on £2,000 worth of shares and there is a capital gains tax exemption for up to £50,000 on the disposal of shares.

Employers obligations

If you are considering setting up an Employee Shareholders Scheme you seek specialist legal advice.    Specific information must be provided to the employee before they can elect to join the scheme including details about the rights that they are sacrificing to join the scheme, the nature of shares that they are acquiring (voting rights, rights to dividends and what will happen if the company is wound up) or any restrictions on the shares (including any tag along or drag along provisions).

In order to be a valid scheme your employees must receive independent legal advice and the costs must be incurred by you.  Once the employees have received the legal advice then they have a seven day “cooling off” period before they can join the scheme.

Employers should be mindful that should an existing employee refuse to participate in the scheme then they should not be penalised for doing so.  You must not dismiss an employee on the basis that they have refused to join an employee shareholders scheme, and doing so could result in a claim being brought against you for unfair dismissal.   Employers can, however, offer new jobs with the condition that the employee adopts the shareholders scheme.

Since the scheme has not yet been implemented we do not know how these schemes will operate in practice.  It is important that you obtain the services of a good accountant who will be able to assist you from the outset with valuing the company and your shares.

Practical Guidance

Implementing the new employee shareholders scheme will be costly for many companies.  Employers will be responsible for their own legal costs and the independent legal costs of the employees.   It is recommended to have a valuation of your company so that the share values are accurate.

The benefits to the employer will initially be the incentive of the scheme for employees.   Companies which expect rapid growth may wish to implement the scheme to recruit good candidates. These schemes may be attractive to technology companies (especially app companies) where the overhead of employment costs can be reduced by entering into one of these schemes and offering an attractive alternative benefit to the employees.  Employers should be aware that on entering into the scheme with the employee the employee will attract some rights as shareholders. In addition from a financial perspective, the more shareholders that you have the further the dividends will have to be spread.

It is too early to predict whether employee shareholder schemes will reduce employment litigation.  Employees will continue to have protection from discrimination and unfair dismissal (e.g. when they are dismissed due to pregnancy, parental leave, time off for dependents, adoption leave, acting as a trade union representative, whistle-blowing) and can still bring such claims before an Employment Tribunals.

Finally, although the right to redundancy pay will be removed by opting into this scheme, an employees will still have a powerful negotiating tool for exiting the company since they will own shares which the company will want to reacquire.

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