Employees to give up rights in exchange for shares?

The Chancellor has announced plans for a new type of employment contract under which employees will forfeit certain employment rights in exchange for CGT exempt shares in their employer’s business.  Initial details were published by HM Treasury on 8 October 2012.

Under the terms of this new employee-owner contract, employees would be offered shares to a value of between £2,000 and £50,000 in exchange for some of their UK employment rights.  The acquisition of these shares would continue to be subject to income tax and NIC (if appropriate), but on disposal would be exempt from CGT.

Employees would have to give up their rights on unfair dismissal, redundancy, and the right to request flexible working  and time off for training, and will be required to provide 16 weeks’ notice (instead of 8 weeks) of a firm date of return from maternity leave.

Employee-owner status will be optional for existing employees, but companies can choose to offer only this new type of contract to new joiners. Companies are able to insert more generous employment conditions in the contract of employment.

This new type of contract is intended for fast growing small and medium sized companies that “want to create a flexible workforce”, in that employers would be able to react more quickly to changes in the economic situation.

Employers will no doubt welcome the relaxation of certain employment rights, but they will need to consider carefully the implications of having their workforce as shareholders. Employees will likewise need to consider carefully the loss of employment rights – although this may simply be a factor in deciding whether or not to accept an offer of employment.  Given the current job market many individuals seeking employment may accept the limitation of rights; however, when the job market improves employers who have introduced employer-owner status may find it difficult to recruit staff.

It should also be borne in mind that if employers introduce more generous rights in their employment contracts, certain payments such as pay in lieu of notice, which might otherwise fall within the £30,000 exemption, could become taxable because they derive from the contract.

Employees will need to bear in mind that the shares are unlikely to be marketable except when the company is sold.  The position regarding leavers will also need to be considered by both employers and employees.  Practitioners will need to consider this new type of contract in conjunction with the existing EMI option scheme, with the added implications for employment rights.

We are still at the very early stages in relation to this proposal which is due to come into effect in April 2013.  We have yet to see any draft legislation and there will be consultation of ‘some of’ the issues – so watch this space!

If you would like further information in relation to the proposed employee-owner contract please contact the TaxDesk on 0845 4900 509 and ask for Paul Howard.