Trading Employee Rights for Shares in your Company

11th October 2012

This newsletter considers the Government’s proposals for employees to exchange some of their employment rights for shares in their employer.

The Chancellor of the Exchequer has announced plans for a new form of employment contract to be known as “owner-employee”.
The principle behind this concept is that new owner-employees would be able to exchange some of their UK employment rights for rights of ownership in the form of shares in the business for which they work. Any gains arising on a disposal of the shares will be free from capital gains tax.

This contract is aimed principally at fast growing small and medium sized companies that wish to create a flexible workforce. Companies of any size can adopt it, but it is likely to be less attractive to companies with an existing workforce. Some employees of established companies might wish to exchange employment rights for shares, but others might not, producing a result which is not best suited to encourage a strong team ethos.

Under the proposals, employees will be given between £2,000 and £50,000 of shares that are exempt from capital gains tax. In exchange, they will give up their UK rights on unfair dismissal, redundancy, and the right to request flexible working and time off for training, and will be required provide 16 weeks’ notice of a firm date of return from maternity leave, instead of the usual 8 weeks.

Owner-employee status will be optional for existing employees, but both established companies and new start-ups can choose to offer only this new type of contract for new employees. Companies recruiting owner-employees will continue to have the option of including more generous employment conditions in the employment contract if they so wish.

The Government proposes that there should be a consultation period to consider the details of the proposals. This will include the details of restrictions on forfeiture provisions to ensure that if an owner-employee leaves or is dismissed, the company is not able simply to recover the shares for nothing, but is able to buy them back at a reasonable price.

There is no reference in the announcement to the tax treatment of the original gift of shares. Unless that gift receives favourable treatment, there will be an up-front liability to income tax and possibly also National Insurance Contributions, which would make the proposal rather less attractive for employees (although it may actually increase tax revenues for the Government).

The announcement makes it clear, however, that employee-owners receiving full capital gains tax relief on the shares awarded as part of their contract will still be eligible for existing employee share ownership schemes such as the Enterprise Management Incentive.

The Government intends that companies should be able to use the new type of contract from April 2013.
This is an interesting idea, but, at this initial stage, we have seen only the bare bones of the proposal, and it is too early to pass much in the way of comment. What we can say is that it seems better suited to start-ups than established companies, and that we hope it does not form the central plank of the Government’s policy to extend employee share ownership.