Employee Shareholders

A number of companies have offered shares to their staff over the years. The business thinking behind that is to encourage and make staff become more involved and give them a greater personal interest in seeing the business succeed. This has worked well for a number of companies, and has helped to foster good relations between management and the staff. It should be noted that this had always been an opportunity for employees to take shares in addition to having their statutory employment rights, most notably the protection from unfair dismissal.

The Government has introduced a new legal status for workers, known as "Employee Shareholder". The introduction of this new status is different from the situation described in the paragraph above. Companies can still recruit people as employees in the traditional manner in which they will accrue the usual employment law protections in the traditional way. The new status of Employee Shareholder created by the Government, expalined in this article, is quite different. The Employee Shareholder acquires a certain minimum value of shares in the employer's business in return for losing certain statutory rights 9and the modification of some others), in particular the protection from normal unfair dismissal! The stated intention of the Employee Shareholder status was to give companies  flexibility as to how they hire their staff, and to help companies grow. The Government believed that the new status would benefit small and medium sized companies the most, particularly in the early stages of growth.

The rules on Employee Shareholder status came into effect on the 1st September 2013, following a difficult passage through Parliament, and a number of concessions were made by the Government in order to enable the legislation to get through all the stages to become law. Guidance has been published by HM Revenue and the Government on the scheme, as there are a number of essential steps and criteria that apply and must be met before an individual can become an Employee Shareholder.

Basically the scheme allows employees to give up certain employment law rights in return for at least £2,000 worth of shares in the employer's company. valuing shares in small unlisted companies is notoriously difficult. To assist in that exercise an employer can propose a share valuation to HM Revenue's asset and valuation team (before awarding shares under the scheme), which will, if possible, agree the valuation for tax purposes. There are a number of steps that have to be taken before an individual can become an Employee Shareholder. Those steps include providing a written statement to that person on the particulars of the status, the employment law rights that the individual will abandon in return for the shares, etc. It must also state if the shares will come with voting rights, and state if the shares have rights to dividends, and state any restrictions on the transfer of the shares,etc. In addition the individual must first obtain independent legal advice as to the terms and effect of the written statement, and must be allowed a "cooling off" period of at least seven days from receiving the independent legal advice to decide if he/she wishes to enter into the agreement. The EMPLOYER must pay for that advice EVEN IF the individual goes ahead and decides not to become an Employee Shareholder under the proposed agreement.

It is important to note that the status does not alter the individual's legal protection from discrimination, nor does it prevent the individual from obtaining most other employment law rights. Existing employees cannot be forced to change their status to that of an Employee Shareholder.

The requirements surrounding the process of becoming an Employee Shareholder are quite onerous. It is therefore our view that it is unlikely that the proposals will appeal to may of the small businesses that the Government hoped it would attract- especially as many new and small business owners will not want to give away shares in this manner. Similalry it is our view that few individuals will want to take up shares in return for losing protection from unfair dismissal (particularly as the maximum compensation for unfair dismissal is significantly greater than the likely value of the shares that their employer is likely to be prepared to provide under this scheme). It would seem that the group that may consider it will be those employees that are paid significantly higher than the maximum award for unfair dismissal and have valuable (and long) contractual notice periods which provide them with valuable protection from wrongful dismissal. For further comments see our News Article of the 30th April 2013.

If you need assistance in dealing with or preparing an Employee Shareholder agreement do not hesitate to contact us at Hallett Employment Law Services Ltd.