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Employee shareholder contracts

Posted on 18th January 2013
Briefing note

The concept of employee shareholder contracts was announced in October 2012 by the Chancellor George Osborne. Despite the idea subsequently having very few supporters (with lawyers being identified as the only beneficiary) this new type of employment contract should go live in April 2013 as part of the Growth and Infrastructure Bill.

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Simon Quantrill Simon
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The idea is that employees give up significant employment rights in exchange for shares in their employer's company. Any growth in the value of the shares when sold will be exempt from capital gains tax. The Chancellor believes that employees are more productive and loyal if they are owners of the company. How far this is true is anyone's guess because there is little objective evidence to support George Osborne's hope that one way out of the country's financial difficulties is to create a new category of employee who has a tax free shareholding in the company they work for.
Employee shareholders must be given shares valued at least £2,000 and these are exempt from Capital Gains Tax. The original £50,000 cap has now been removed.

Employment rights for the employee shareholder

In exchange for the shares, employee shareholders will have the same employment rights as ordinary employees except for these modified rights:
  • No right not to be unfairly dismissed (except in health and safety cases, automatically unfair cases, or cases where the dismissal is discriminatory under the Equality Act 2010).
  • No right to a statutory redundancy payment
  • No right to request time off for study or training
  • No right to make a flexible working request
  • The employee must give 16 weeks' notice (instead of the normal 8) if they want to return early from statutory maternity, adoption or additional maternity pay.
Companies of any size will be able to use this type of contract, but the Department for Business Innovation and Skills has stated that it is principally intended for fast growing small and medium size companies that want to create a flexible workforce.

What are the concerns with this idea?

It is clear from the responses to the consultation that employers and employees alike are not impressed by this proposal. People do not like:
  • The complexity and costs associated with offering employee shareholder contracts in return for the forfeiture of key employment rights. As much as George Osborne has tried to keep his proposal free of both there is no getting away from it that, for a business that wants to adopt this new form of employee owner, the terms and conditions of the arrangement will need to be carefully documented. Trying to use a standard template is not going to work. The complexity and cost is likely to deter most employers from adopting the scheme.
  • There is a significant risk of disputes remaining, especially with discrimination claims covering sex, age, disability etc. It is discrimination claims that tend to be high value and thus worth making.
  • There is a risk of increased litigation about the share valuation at the time of dismissal or resignation. Whose valuation will prevail and on what basis? For example, if an employee has been awarded shares said to be valued at £35,000 and then on his or her redundancy the shares are said to be worth only £5,000 there is clearly a significant sum of money worth arguing about.
  • Removing rights for redundancy and unfair dismissal may well harm the employer's public relations and fail to impress potential employees who would rather work for a "good employer" with a social conscience.
  • George Osborne's plans overlook the fact that employees can already be given shares in a company as a reward or incentive without needing to give up their statutory rights. How many employees will find the offer of shares in return for the uncertainty of giving up established employment rights in return for uncertain Capital Gains Tax benefits in the future attractive? Individuals are already entitled to an annual Capital Gains Tax exemption of £10,000.
  • Has George Osborne also overlooked the fact that since last April 2012 employees have to acquire two years' service before being able to claim they have been unfairly dismissed?

In practice

In conclusion employee shareholder contracts have almost no merit and ought not to take up much of your time. Possibly for a very highly paid individual who has special skills or experience he or she may be persuaded to become an employee shareholder. In such circumstances I would not be surprised to see a high basic salary and a long notice period built into the contract!
The belief from the government that employers are not recruiting because of too much employment "red tape" is a fallacy. Whilst we all accept that employers are not recruiting at a sufficient level this is for many reasons, of which employment law is at the bottom of a long, long list. In fact the government's misconceived focus on employment "red tape" is arguably having a negative impact because if it keeps reinforcing the message that there is too much employment red tape they should not be surprised if employers start to believe it. Interestingly, in recent announcements there has been a notable change of tone. They now speak of a "perception" of red tape although this is certainly not how George Osborne continues to voice his concerns about employment law rights in the UK!

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