June 24, 2013

Status Given Go Ahead

The Growth and Infrastructure Bill received Royal Assent on 25th April 2013, making it the Growth and Infrastructure Act.

The Act will introduce ‘employee shareholder’ employment status, enabling an employee to relinquish certain employment rights in exchange for shares in the employer’s business.

The first £2,000 of shares will not be subject to income tax. In addition, there will be capital gains tax exemption for profits up to £50,000.

What will this mean for employers?

The legislation is expected to be introduced on 1st September 2013. Once implemented, ‘employee shareholder’ status will become the third form of employment status in the UK alongside ‘employee’ and ‘worker’. This new status will mean that an employee will surrender the following employment rights in exchange for fully paid shares in the business:

  • The right to claim ‘ordinary’ unfair dismissal (although employees will still be able to make a claim for automatic unfair dismissal e.g. a claim arising from discrimination)
  • The right to receive a redundancy payment
  • The right to request flexible working arrangements
  • The right to request time off for study and training

The individual will also need to provide a longer period of notice (16 weeks instead of 8 weeks) if they wish to return to work early following any period of maternity, paternity or adoption leave.

The government believes that the new legislation will reduce regulatory burdens on employers and also provide them with more flexibility in recruitment, enabling them to grow in the current challenging economic climate. However, employers are under no obligation to implement the new employment status.

What safeguards will protect employees and job applicants?

A number of safeguards to protect employees and job applicants will be incorporated into the legislation. These include the following:

  • The employer must provide a written agreement which will contain full details of the shares and the individual’s rights e.g. whether they have voting or dividend rights. The agreement must be signed by both parties
  • The employee must seek legal advice from a professional person or organisation otherwise the agreement will automatically be invalid. The employer will be required to fund the costs of the legal advice, even if the employee ultimately decides not to accept the offer
  • The employee must be provided with a seven day ‘cooling off’ period where they will be able to withdraw from the contract
  • An unemployed individual who refuses an offer with employee shareholder status will not forfeit their right to benefits
  • Existing employees will be protected from detriment if they refuse to switch to an employee shareholder status contract

 

The purpose of the safeguards is to provide the individual with the time and resources to make a fully informed and considered decision. Individuals must fully understand the benefits and risks involved before agreeing to the arrangement.

Are the new provisions likely to be popular with employers?

It remains to be seen whether there will be much take-up of the new employment status. To date, the concept has not proved popular amongst the business community. In the Government’s own consultation, only five businesses out of 200 responses showed any interest in taking up the scheme.

New employee shareholders will still have protection against automatically unfair dismissals and from discrimination – and new starters do not acquire unfair dismissal rights until they have accrued two years’ service. The added legal costs are expected to discourage the majority of employers from engaging in the scheme. These upfront costs are also likely to outweigh the actual risk and cost of unfair dismissal.

Employee shareholder status could be attractive to some companies as a tax efficient method of giving shares to key employees. For many businesses however, the complexity and cost of carrying out the necessary share valuation could well be a further barrier.

 

Further help and advice

For Mooerpay clients, our Compliance Advice Line can provide support and advice on this topic – in addition to any other employment-related matter. Please call our advisors on 0845 073 0240 who will be happy to help.

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