From 1 September 2013 employee shareholder status has been introduced in the UK. This allows an employer to enter into a contract with an employee whereby some employment rights are given up by the employee in exchange for shares in the employer’s company.

For the employee the first GBP 2,000 of shares are exempt from income tax and national insurance contributions, subject to anti-avoidance provisions. The disposal of shares worth up to GBP 50,000 that were acquired under an employee shareholder agreement is to be exempt from capital gains tax, subject to more anti-avoidance measures.

Under the contract the employer must agree that the employee is to be an employee shareholder; must issue fully paid up shares in the company worth at least GBP 2,000 to the employee; and must inform the employee in writing of the rights attaching to the shares and the employment rights that are given up by the employee. The employee must not be required to pay any compensation for the shares. The employee must be permitted to obtain advice from an independent advisor on the terms of the contract, paid for by the employer; and the contract can only be entered into after a cooling off period of seven days after the employee receives the advice.

Employees signing an employee shareholder contract no longer have the right to claim unfair dismissal, except where the dismissal is automatically unfair or based on discrimination; are no longer entitled to a statutory redundancy payment; cannot make a statutory request for flexible working, except immediately following a period of parental leave; and may not make a statutory request for study or training.

It is generally considered that this new employee shareholder status would not be suitable for the majority of employees, owing to the employment rights given up under the contract. It is most likely to be entered into by employees in fast-growing high tech companies for whom participation in the company and the tax relief on offer is valuable and the chances of alternative employment if needed are high.

An employer may not compel existing employees to enter into an employee shareholder contract and may not dismiss an employee or impose detrimental conditions on the employee for refusing to do so. Employers may however make a requirement that new employees sign an employee shareholder contract.