Employee shareholders

Question

Accepted Answer

The process for offering or accepting a job on an employee shareholder basis is different to jobs offered on other employment contracts. The law sets out actions to undertake or consider for an employee shareholder job to have legal effect.

Use this information to help you decide:

if your company wants to take on an employee shareholder
if you want to become an employee shareholder

You must refer to HM Revenue and Custom’s (HMRC) guidance on the treatment of Income Tax and Capital Gains Tax on employee shareholder shares.

From 1 December 2016, the tax benefits associated with the employee shareholder employment status will not be available to new entrants. The government will legislate to close the status itself to new entrants at the next legislative opportunity.

Employee shareholder: what it is

Employee shareholder is an employment status. An employee shareholder is someone who works under an employee shareholder employment contract.

Your company must give, or as an employee shareholder you must receive, shares in the employer’s company or employer’s parent company. These shares must have a minimum value of £2,000 on receipt. There is no set upper value.

You must consult HMRC’s guidance on the treatment of Income Tax and Capital Gains Tax for details about tax reliefs and exemptions relating to these shares.

People who can apply for / accept an employee shareholder job

Anyone can apply for or accept an employee shareholder job. You do not have to apply for or accept an employee shareholder job if you do not want to. If you are a Jobseeker’s Allowance claimant and do not want to apply for an employee shareholder job, you do not have to.

If you are already an existing employee working in a company, your employer may ask you to change your employment contract to that of employee shareholder. You must still go through the same process outlined in this guidance. You don’t have to change your contract of employment if you don’t wish to. If you are currently an employee and your employer dismisses you or subjects you to any detriment because you did not accept the offer of an employee shareholder contract, you may present a complaint to an employment tribunal.

A company that may wish to employ an employee shareholder

Your company may be looking to attract an ambitious and high calibre individual, perhaps with a specific set of skills. In a competitive labour market, shares in a company may convince the right person that it is the best job for them.

An employee shareholder would have a stake in the company. This may lead to that individual feeling greater responsibility towards the company, improving their productivity, and going the extra mile to ensure it does well.

A person that may wish to become an employee shareholder

You may think that owning shares in the company you work for is a great opportunity, especially if there is the potential for the shares to increase in value. If you sell the shares you may be exempt from paying some Capital Gains Tax. You must read HMRC’s guidance on the treatment of Capital Gains Tax for details of the exemption. You may be happy to take the risk that the value of the shares could go down.

You may feel a company offering a stake in their business to be an employer who has the confidence in your skills and is offering you an opportunity to help make a good contribution to the business.

6 conditions that must be met to become an employee shareholder

There are 6 conditions that must be met for someone to become an employee shareholder – whether as a new hire or an existing employee. The employer and the individual share responsibility to meet these conditions.

The individual and the company must both agree that the individual will be an employee shareholder.
The employer must give the individual fully paid up shares in the employer’s company or employer’s parent company, and they must be worth at least £2,000.
The individual must not pay for the shares in any way.
The employer must give the individual a written statement of the particulars of the status of employee shareholder.
The individual must get advice from a relevant independent adviser on the terms and effect of the written statement. The company is required to pay for that advice whether the individual accepts the job or not.
The individual cannot accept or agree to an employee shareholder job until 7 days have passed following receipt of the advice. The 7 days begin on the day after the advice has been received.

If the individual or the company do not undertake or keep to all 6 of these conditions, the individual will not be an employee shareholder.

Employment rights of an employee shareholder

An employee shareholder has the following rights:

statutory sick pay
statutory maternity, paternity and adoption leave and pay
unfair dismissal rights where they are classed as automatically unfair reasons, where dismissal is based on discriminatory grounds and in relation to health and safety
minimum notice periods if their employment will be ending (eg if an employer is dismissing them)
time off for emergencies
collective redundancy consultation
TUPE
national minimum wage
not to have unlawful deductions from wages
paid annual leave
rest breaks
the right not to be treated less favourably for working part time or fixed term
not to be discriminated against

Both the individual and the employer must understand which rights an employee shareholder will not have, as this must be communicated in the written statement. These are:

unfair dismissal rights (apart from the automatically unfair reasons, where dismissal is based on discriminatory grounds and in relation to health and safety)
rights to statutory redundancy pay
the statutory right to request flexible working except in the 2 week period after a return from parental leave
certain statutory rights to request time off to train

In addition, an employee shareholder will have to give 16 weeks’ notice to their employer if they intend to return early from maternity, extra paternity or adoption leave.

An employer can choose to offer contractual rights that are more generous than those provided for in statute.

Actions to take when offering or accepting an employee shareholder job

There is a compulsory sequence of actions that must take place before an individual can accept or refuse an offer of employment as an employee shareholder. If these actions are not undertaken, or if they are not undertaken in the right order, the individual will not be an employee shareholder.

When a company offers an individual or an existing employee an employee shareholder job, they must provide a written statement of the particulars of the status of employee shareholder.
Once the individual or existing employee has received the offer of the employee shareholder job and the written statement, that individual must get independent advice on the terms and effect of that specific job offer.
The individual must take 7 calendar days to consider the independent advice received and whether they wish to accept or refuse the employee shareholder job. The 7 days begin on the day after the independent advice is received.
The contract will only have legal effect as an employee shareholder contract after the 7 days have passed.

Written statement: what to include

The written statement must include:

the employment rights that an employee shareholder does not have
that the employee shareholder must give a minimum of 16 weeks’ notice of an early return from maternity, extra paternity, or adoption leave
whether there are any voting rights attached to any of the shares being given
whether the shares carry any rights to dividends
whether the shares would, if the company were wound up, confer any rights to participate in the distribution of any surplus assets
if the company has more than 1 class of shares, and any voting or dividend rights, explain how those rights differ from the equivalent rights that attach to the shares in the largest class; if the shares offered are already part of the largest class of shares, then the explanation should refer to the next largest class
whether the shares are redeemable and if they are, at whose option
whether there are any restrictions on the transferability of the shares and what those restrictions are
whether any pre-emption rights are excluded in the case of the shares given to the employee shareholder
are the shares subject to drag-along or tag-along rights, and if they are, explain what that means

Drag-along and tag-along rules relate to minority shareholders, and whether they would have to sell their shares if:

majority shareholders have agreed to sell
minority shareholders need the majority shareholders to get the same offer to sell their shares if the majority are selling

The company could, if it wished, include more information than set out above, or include any other information that may be relevant or useful for the individual to know.

Relevant independent advice

The potential employee shareholder has a responsibility and a right to find a relevant independent advisor.

Independent advice can be given by:

a qualified lawyer
an officer, official, employee or member of a trade union whom the trade union has certified as competent to give that advice
a person who works in an advice centre, as long as the advice centre has certified the person as competent to give that advice
any person authorised to give legal advice by the Secretary of State – this is currently a Fellow of the Institute of Executives who is employed by a legal firm

An employee shareholder employment contract will not take legal effect if an individual does not get independent advice. It’s in the interest of the individual to understand the employee shareholder contract and its implications before they accept a job. If, after explaining this to the individual, that individual still refuses to get independent advice, that individual should not be offered the employee shareholder contract.

An employer must not use in-house lawyers or lawyers who have acted for the company, and must not insist the potential employee shareholder consults a specific lawyer or firm. The advice must be independent.

The company must pay the reasonable costs of obtaining the independent advice. The employer and individual should clarify what that would be at the outset. The company must pay for the advice for both new hires and existing employees, and in every case regardless of whether the job is accepted or not.

Action for individuals if offered an employee shareholder job

You are required by law to consider the contract you are offered before you accept it to ensure you understand it.

Make sure you’re aware of the tax implications by consulting HMRC’s guidance on the treatment of Income Tax and Capital Gains Tax.

Here are some things you should think about (it is not an exhaustive list).

Employment rights

Employee shareholders have a different set of employment rights to an employee or worker. Make sure you understand the employment rights you would and wouldn’t have and whether that would have any implications for you.

If you accept a job as an employee shareholder, your employment status will not change if you sell your shares whilst in that job. Your employment status can only change if you and your employer both agree to change it.

Shares

You must receive a minimum of £2,000 worth of shares. The company should be able to explain to you how it reached the valuation and provide you with further information to support this.

If you are not satisfied with the value of the shares you could request your own valuation (although this option will incur a cost) or refuse to become an employee shareholder at any time before signing the contract.

You must not pay anything or contribute in any way towards the shares you receive. The shares must be of the employing company or its parent company.

The shares offered must be ‘fully paid up’. This means that if the company becomes insolvent, as a shareholder you will not pay anything for the shares. However, it is unlikely you will get any return from the shares in the event of insolvency.

It will be up to the company to decide what type of shares they offer you. Shares do not always have voting rights or the right to receive dividends.

If your shares have rights to a dividend you should note that a dividend will only be paid if the company has profits to distribute and the directors choose to make a distribution. There may be times when a dividend is not paid.

The written statement will explain what type of shares you are being offered and what rights will be attached to the shares. The statement will also explain if this differs from the rights attached to those shares held by the majority of shareholders. If the shares offered are already part of the largest class of shares then the statement must explain how the shares differ from the next largest class.

You should be told whether you will be able to sell or gift the shares. For public companies traded on a stock exchange there may be a market for the shares, but shares in private companies are not usually traded on the open market.

For private company shares and non-listed public companies shares you are only likely to be able to sell to other employees or shareholders of the company or family and friends. The company could make it part of the agreement that the shares cannot be traded.

Tax

You must read HMRC’s guidance on the treatment of Income Tax and Capital Gains Tax for the consequences of receiving shares as an employee shareholder.

What you need to know if you leave the company

Your written statement should make it clear what will happen to the shares when you leave the company.

Your company’s articles of association may specify that your shares must be bought back by the company, or your contract may have a ‘buy back’ clause. This will explain whether the company or another person will buy back the shares and how the shares will be valued at the time of ‘buy back’.

If ‘buy back’ is not specified in the written agreement and you have not sold the shares, you will keep the shares on leaving the company and continue to gain from any rights or be restricted by any restrictions attached to the shares.

Action for companies if considering offering an employee shareholder job

Consider whether offering an employee shareholder job in your company is right for your business, and the implications associated with offering this type of contract.

Here are some things you should consider (it is not an exhaustive list).

Shares

You can only offer this type of employment contract if you are a company limited by shares. Your company must be a UK registered company, a European company (Societas Europaea), or an overseas company.

You must have shareholder authorisation to issue shares.

You must grant the employee shareholder shares in the employing company or its parent company.

You must not accept anything from the employee shareholder in return for the shares apart from them agreeing to enter into the employee shareholder employment contract.

It is possible for a third party to pay up the shares, for example this could be a trust or a director.

The shares must be fully paid up; therefore in the majority of cases the shares will have to be paid out of distributable reserves. The accounts will have to prove that the company has paid for the shares in full.

The Companies Act 2006 will still apply to allotting shares. Shares can be paid up in either ‘money’ or ‘money’s worth’. If a company is using ‘moneys worth’ then the company accountant must be content with the value attributed.

Check your articles of association to determine whether they allow for shares to be issued and whether directors have the power to allot the shares.

If you need to amend your articles of association to allow for the employee shareholder status to be offered, you will need to get agreement of the shareholders.

Remember that pre-emption rules will still apply, unless disapplied for this class of shares or by statute.

Your shareholders will need to consider the impact of issuing new shares. A new allotment may dilute the current shareholding and therefore impact on current shareholders.

Rights associated with shares given to employee shareholders

It is your decision to determine what rights (eg to vote, to receive a dividend) will be attached to the shares. Your company will need to consider the impact of the rights on both current shareholders and new employee shareholders.

The written statement you give to a prospective employee shareholder must explain the rights attached to the shares:

how these compare to other shareholders’ rights
how the rights compare with the largest class of shareholders, or the next largest class if the shares are offered in the largest class

Giving an employee shareholder shares with more generous rights is likely to ensure that those shares have a higher value than any with lesser rights held by other shareholders.

You may wish to inform existing shareholders of the rights attached to the shares being offered to employee shareholders eg if they include voting rights. The existing shareholders may find it harder to pass resolutions that govern the company.

An employee shareholder may be less likely to accept a job where the shares they receive have reduced rights compared with other shareholders in the company.

If you offer the employee shareholder voting rights, you need to be aware that the employee shareholder will have a say in how the company is run.

The written statement should explain whether the shares are subject to any ‘drag-along’ or ‘tag-along’ rules.

Once you have allotted employee shareholder shares there is no need to allot further employee shareholders the same type of share.

You must give the individual shares with a minimum value of £2,000 at the start of the employment contract.

The valuation must take account of any restrictions which would apply to the shares.

Explain to the prospective employee shareholder how you reached the valuation of the shares.

The value to be used to determine any tax or national insurance arising on either the company or employee shareholder at the point of issue or upon a later disposal of shares can be agreed with HMRC. You can find further information in HMRC’s guidance on exchanging shares for employee rights.

You may offer any value of shares above the minimum of £2,000 - there is no maximum value set, nor on the number of times you may wish to give shares. Note, however, that there is an upper limit on the value of shares received by an individual which are exempt from Capital Gains Tax. Further information can be found in the HMRC’s guidance on the treatment of Capital Gains Tax.

If the shares were not worth £2,000 at the time of issue, the individual could make a complaint to an employment tribunal (for instance for statutory redundancy pay or for unfair dismissal). The tribunal could find that the individual was not an employee shareholder, but was an employee with the attendant employment rights. Any employee shareholder reliefs and exemptions would not be due.

Trading shares and the end of the working relationship

Consider whether the shares can be transferred by the employee shareholder. The transfer of shares can be restricted by the company’s articles or by shareholder agreement.

For private companies there is unlikely to be an obvious market for these shares other than other shareholders or employees of the company, family or friends. As a company you will want to consider the implications of enabling an employee shareholder to sell or gift the shares to others.

If you decide that the shares can’t be sold or gifted by the employee shareholder, consider what will happen to the shares if the employee shareholder leaves. Decide whether the employee shareholder should be allowed to keep the shares or whether the company will buy back the shares, and if so what the purchase price will be. You must explain restrictions on the transfer of the shares in the written statement.