Employee Shareholders

The Employee Shareholder Status scheme involves employees giving up some of their employment protection, including the basic right not to be unfairly dismissed and any statutory redundancy entitlement, in exchange for shares in the company employing them, to the value of at least £2,000. They pay nothing for these shares.
The Government’s idea behind the proposal was stated to be “greater flexibility of choice for employers” and “deregulated approach to employment law” but there are a great many detractors who feel that there is likely to be very little take up under the scheme.

There are tax breaks under the scheme to the extent that employees can acquire shares up to the value of £50,000 and pay no capital gains tax on any gain in value, and suffer no liability to income tax and national insurance contributions on the value up to £2,000.

Only organisations which have shares will be able to take part in the scheme. It will not therefore apply to the public sector or to charities, partnerships or businesses that are not incorporated. However, companies which have shares, or have parent companies with shares, can offer an Employee Shareholder Agreement to any employee without restriction whether they are already on the company’s books or have not yet started. It is the employer’s option whether or not to offer the agreement and the employee’s option whether or not to accept it, but it might be the only basis on which employment is offered. Either party can approach the other to enter into the agreement.

Surrender of rights
Employee Shareholders will still be employees and have a contract of employment in the usual way. The difference is that having entered into the agreement they will have surrendered the following employment protection in return for the grant of (at least) £2,000 worth of shares in the company:-

1. The right not to be unfairly dismissed. This is the general unfair dismissal protection which relates to the most common dismissals, those based on capability, conduct, redundancy, illegal employment or some other substantial reason. Automatic unfair dismissal protection which covers reasons such as pregnancy, whistleblowing, health and safety, and the exercise of a statutory right and which applies from day one of employment is not surrendered. Nor is protection against unlawful discrimination or any contractual rights.

2. The right to a statutory redundancy payment. This is the payment payable under the normal Government scheme. A contractual redundancy payment (such as an enhanced redundancy payment payable by some larger companies under contractual schemes) would not be affected, provided it is not merely discretionary.

3. The right to make a flexible working request (apart from when returning from parental leave when a request must be made within 14 days of return to work).

4. The right to request time off for study or training (which applies to companies of 250 or more employees).

There is another, rather odd change. In place of the right to give eight weeks’ notice of the intention to return early from maternity, adoption or additional paternity leave, the Employee Shareholder must give 16 weeks’ notice instead.

It is notable, therefore, that a lot of the employees’ protection is still retained. An employer must be careful, therefore, when dismissing an Employee Shareholder that the dismissal does not also amount to an act of unlawful discrimination. For example, if a female Employee Shareholder is unfairly selected for redundancy she will have surrendered her claim for unfair dismissal. However, if her selection is based on grounds that relate to her gender, then she may still claim for unlawful discrimination.

The shares given
For the employer to gain an effective surrender of rights under the agreement, the shares that he gives to the employee must be worth at least £2,000. If they are worth less than that the agreement will simply not be effective and the employees’ rights will not have been surrendered. The employer will perhaps err on the side of caution by giving the employee shares worth slightly more than £2,000 in order to ensure the desired result but he will need to have a professional valuation undertaken to establish the fair market value of the shares. If the shares are worth more than £2,000 then a liability to income tax and national insurance contributions will also arise, on the excess.

The employer and employee will be quite free to negotiate the value of shares to be exchanged. There is no upper limit, but the CGT exemption will only apply to shares initially granted up to £50,000 in value. There would appear to be no requirement under the scheme that the employee has to take independent legal advice on the implications of being an Employee Shareholder and the loss of legal protection, before becoming one.

When the Employee Shareholder’s employment terminates, they will be able to sell their shares back, when again a valuation will need to be undertaken.

Safeguards
To address concerns expressed about the Scheme and to get it through Parliament the Government introduced the following measures to protect potential employee shareholders:-

1. An offer of shares under the Scheme must include a statement from the employer explaining the employment rights that would be sacrificed and the rights attaching to the shares.

2. The individual must receive advice about the offer from an independent lawyer. The employer must pay the reasonable costs of that advice regardless of whether the offer of shares is accepted.

3. There must be a seven day “cooling off” period between the legal advice and the Agreement being made.

4. Employees will be protected from dismissal or other detriment for refusing to become an employee shareholder under the Scheme.

5. If an employee shareholder job is turned down Job Seekers Allowance will not be withdrawn.

 For more information please contact our Employment team on T: 0118 912 0257