Owner-employee Contracts – A New Way Of Creating Employee Ownership?
The Chancellor of the Exchequer has announced plans for a new way of creating employee ownership, involving a form of employment contract under which the employee will become an “owner-employee”.
The principle behind this concept is that new owner-employees would be able to exchange some of their UK employment rights for employee share ownership rights, in the form of shares in the business for which they work. Any gains arising on a disposal of these employee 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 employee share ownership in this manner, 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 employee 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 and not offering employees ownership of their shares.
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 employee’s 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 to the employee of shares. Unless that gift receives favourable treatment, there will be an up-front liability to income tax and National Insurance Contributions, which would make the proposal rather less attractive for employees. It could also increase tax revenues, as free shares for employees are generally taxed on their value when acquired, unless delivered through a Revenue-approved Share Incentive Plan (SIP).
The announcement makes it clear, however, that owner-employees 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, approved share options, the SIP and other employee options and employee share ownership arrangements.
The Government intends that companies should be able to use the new type of contract from April 2013.
Dated: 19 October 2012
If you or your clients would like to learn more about employee share ownership, please contact:
Robert Postlethwaite firstname.lastname@example.org (mailto:email@example.com)
Stephen Chater firstname.lastname@example.org (mailto:email@example.com)
or call us on 020 7470 8805
Note for Editors:
POSTLETHWAITE is a law firm which provides specialist advice on employee share schemes, employee share ownership and majority employee ownership, including EMI share options, approved options, long term incentive plans, Share Incentive Plans (SIPs), ownership by employee trusts and a wide variety of other share schemes. We look after clients from all parts of the UK, with a particular focus on smaller listed and private companies.
For further information concerning employee ownership and employee share incentives, please contact Robert Postlethwaite on 020 7470 8805 11-15 Betterton Street London WC2H 9BP
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