What IS an employee (this is not a silly question!)

Posted by RM2 at 15:48 on 6 Jul 2018

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If you’re running an employee share scheme, it’s obvious that it extends to employees. However, is it always obvious who your employees actually are?

If you’re using a tax advantaged share scheme, like the Enterprise Management Incentive Scheme (EMI) or Company Share Option Plan (CSOP), you get to choose which employees are included.– However, you will need to be careful that you are actually offering the scheme to people who are employees.

Similarly, if you're using a Share Incentive Plan (SIP), the law requires that it must make an offer of shares to all of your employees. If you inadvertently miss any out, then you’re not following the rules, and there’s a risk that you might scupper the whole plan.

Sometimes, you might think someone’s not an employee, but unfortunately this isn’t always straightforward in today’s world of zero hours contracts and the gig economy.

Why is it so complicated? Because, as stated in a fairly recent case (MDCM Ltd v Revenue & Customs Commissioners [2018] UKFTT 147(TC)), “there is no statutory definition of employment and so the principles established in case law apply”. So in this case, where there was a difference of opinion with HMRC as to whether someone was an employee or not, all of the following points were taken into consideration:

  • Whether another individual could be substituted for the “employee” (and whether, in fact, one was)
  • Whether he got sick pay or holiday pay
  • Whether he attended staff meetings
  • Whether his expenses were reimbursed and by whom (ie whether there was any financial risk)
  • Whether he was provided with equipment to carry out his work
  • How much control was exerted over the “employee” by the “employer”
  • Was there any notice period in the contract?

And, in case you think the above forms any kind of definitive checklist as to employment status – think again. The case report also makes it quite clear that “there is no single path to a correct decision. An approach which suits the facts and arguments in one case maybe unhelpful in another”.

The law can indeed be an ass. Let’s hope the recent government consultation on the question comes up with some answers to make it more straightforward for everyone. In the meantime, if you’re setting up a share plan, take care to identify your participants and make sure that you’re clear about whether they’re employees or not.

For more information about employee share plans, contact us on 0208 949 5522, enquiries@rm2.co.uk, or download one of our fact sheets.