New Type of Employment Contract Introduced

September 1, 2013

New Type of Employment Contract Introduced

The Growth and Infrastructure Act 2013 provides for a new type of employment status, the ‘employee shareholder' – with effect from 1 September 2013.

Employee shareholders will agree to surrender certain employment law rights in exchange for shares in their employer’s company of a value between £2,000 and £50,000. The first £2,000 of shares are not subject to Income Tax and there is an exemption from Capital Gains Tax on profits made on shares worth up to £50,000.

Employees working under the new contractual arrangements will have the same rights as other employees except for:

  • unfair dismissal rights (except where the dismissal is for reasons that are automatically unfair or relates to discrimination);
  • the right to statutory redundancy pay; and
  • statutory rights to request flexible working and training.

In addition, employee shareholders will have to give 16 weeks’ notice of their intention to return to work early from maternity or adoption leave, compared with eight weeks’ notice for other employees.

Whilst new staff can be required to accept employee shareholder status, existing employees cannot be forced to transfer to employee shareholder contracts and are protected against unfair dismissal or from detriment for refusing to switch.

Employers must provide employee shareholders with a written statement containing full details on the shares and the rights they carry. An employee’s agreement to work under such a contract will be invalid unless he or she has received advice from a relevant independent adviser, the reasonable costs of which are to be paid by the employer.

Employee shareholder contracts have so far received a lot of criticism and the general consensus is that they are likely to prove unpopular with employers and employees alike.

HM Revenue and Customs has information on the new employment status in its August bulletin and will shortly be publishing more detailed guidance on the applicable tax treatment.