Since September 2013 employers can offer employee shareholder contracts. This is a new form of employee status. Type “employee shareholder” into your chosen browser and you see no end of links which will tell you the ins and outs of the tax rules and the process that must be followed in order to implement such a contract.
Nowhere, it seems, is there any information reviewing the benefits of offering an employee shareholders’ contract. Yes there are legal implications and, yes, you have to follow a set process for the contract to be valid. But what about the benefits?
The biggest advantage to the employee is the ability to receive a minimum of £2,000 of shares in their employer’s firm without incurring tax or national insurance contributions on these shares. In order to receive the shares under this scheme employees do give up some employment rights including unfair dismissal, statutory redundancy pay and the ability to request flexible working. Being a cynic, I could say that this is just a way of ensuring employees don’t take the company to tribunal. However in order to implement the shareholders’ contract the company has to dilute the shareholder value for other shareholders. Why would any firm choose to do that?
Any shareholder in a business has a vested interest in ensuring that the business is profitable. Profit equates to dividends. It stands to reason that anyone with shares in the organisation is going to want to see the share price of their asset increase, as well as achieving dividends on a regular basis. Employee shareholders will be committed. Commitment can, with the right management support, lead to enhanced performance.
It is this commitment that can help drive small businesses forward. For any growing business considering the option of allowing employee ‘buy-in’, this scheme seems to provide a sound platform. For the employee, they gain a minimum of £2,000 shares within the organisation. As the business grows, so too will their shares. Should the employee choose to leave the firm they will receive the market rate for their shares and provided that this is under £50,000 they are exempt from capital gains tax. For the employee this is likely to be seen as quite a benefit. Whilst the company requires them to relinquish some employment rights, they become stakeholders in the firm with a vested interest in helping grow the company.
Even if an employee chooses to leave they are likely to have helped drive the business forward and will have played a part in that success. Many employees are likely to stay with the organisation if they see that further growth and self-benefit is possible.
There’s lots of research to suggest that company commitment through profit-sharing creates increased output. By offering staff the ability to benefit from increased profits there is likely to be greater commitment, greater trust and a greater pride in the organisation.
Where a small firm wishes to grow by offering employees the opportunity to ‘earn-in’, this scheme has merit. Once an employee has completed their probationary period (or after two years service) it may be appropriate to offer such contracts to key worker roles within the firm.
So, just another government ploy? I don’t think so. Used in the right way, I believe it can be a valuable tool for small business growth.