Employee shareholder status...made in heaven?

Howard Robson, Partner in our Employment Team, summarises the concept of employee shareholder contracts and advises what you need to do if you want to implement this within your business.

Why employee shareholder contracts?

In the same month that former Prime Minister Margaret Hilda Thatcher took up a non-executive directorship of Heaven PLC (or perhaps Hades (1979) Limited depending on your point of view) the Conservative led coalition government passed into law a measure which the Iron Lady would have undoubtedly endorsed.

The Growth and Infrastructure Act 2013 will introduce a hybrid status if an employee agrees to give up certain employment rights in exchange for shares in their employer’s business. This new status will sit alongside ‘employee’ and ‘worker’ status as an alternative to the established relationships that exist between ‘individual’ and ‘employer’.

The new status is intended to encourage employee engagement and commitment in the business as a joint enterprise alongside others with similar status. At the same time the status is expected to encourage recruitment and thus business growth without the risk of businesses facing expensive employment tribunal claims following dismissal.

What are the benefits of employee shareholder contracts for the individual?

They will receive at least £2000 worth of fully paid up shares in the company. This otherwise taxable benefit will be free of income tax and National Insurance deductions. In addition any capital value appreciation of up to £50,000 will be exempted from Capital Gains Tax. Above these figures normal tax will apply.

What’s ‘not to like’ in this arrangement? 

The employee shareholder agrees to surrender the right not to be unfairly dismissed, receive redundancy pay and a range of other employment rights. Some rights will remain such as not to be subject to discrimination or be dismissed in circumstances where the reason is deemed ‘automatically unfair’ such as dismissal for raising health and safety issues with the employer.

The employee shareholder will, whilst the proud owner of £2000 worth of shares, remain vulnerable to dismissal without process or justification.

Remember that old refrain ”the value of your shares may go up or down – other investment products are available”…

If the individual, after several years’ employment, is no longer in favour or not quite delivering what the employer wants then that employee has no right to require due process or justification before the relationship is ended.

If the employee shareholder is a victim of the employer’s insolvency, the Government does not underwrite the shares, notice monies, redundancy or indeed any other element that applies to conventional employees. The Government doubtless had an eye to reducing the tax-payers exposure on insolvency; but the employee will be the loser as well.

The other side of the coin is that the business can avoid a lengthy dismissal process for under-performance, discipline or redundancy. Currently they can face a potentially costly challenge in the Employment Tribunal for unfair dismissal even if they have acted with scrupulous fairness throughout.

With defence costs of £7K to £10K, even in straightforward cases, it’s understandable that the Government is seeking to reduce the costs burden on UK PLC.

What protection is available to potential employee-shareholders before they accept such status?

A potential recruiter will be entitled to offer only this status on a ‘take it or leave it’ basis.

During the House of Lords consideration of the bill, members were concerned that employees might be inveigled into waiving their rights with little understanding of the issues, or perhaps just in desperation to get a job, any job, and an income.

As a result the bill was amended so that the following protections will apply before employee-shareholder status is binding:

• The employee is entitled to a 7 day ‘cooling off’’ period after the offer;
• The employee must be given written details of what they are surrendering in accepting the contract;
• A written statement must be given setting out details of the shares being offered including dividend rights, voting and any other rights and restrictions;
• A job-seeker refusing employee-shareholder status will not automatically forfeit their unemployment benefits;
• The first £2000 of shares will be tax free;
• Existing employees will be protected from prejudicial treatment if they refuse to accept new employee-shareholder status.
• The employee must receive professional legal advice on the employment law consequences of the rights they are surrendering as well as on the shareholders agreement and associated rights;
• The cost of that advice is to be borne by the employer even if the individual decides against the idea.
• Advice on the share rights will be more costly than on employment rights; which could be costly for the paying employer.

The Department for Business, Innovation and Skills expects to implement the new status in the autumn of 2013.

The new status was passed into law despite widespread resistance from employee organisations and apathy from business voices. Despite the under-whelming endorsement from all sides the status will become active once the regulations have been issued.

How far this status will be taken up remains to be seen, will employees eyes light up at the prospect of £2000 of tax free shares or feel cheated when they realise that they can’t just sell them on e-bay and that they can be dismissed because they have a disagreement with their boss over a pay rise or for that matter a pay cut?

Lady Thatcher may have had a vision of a nation of shareholders, but whether this new layer of employment legislation will advance that goal or unnecessarily add to the already sagging shelves of employment laws remains to be seen.

It is essential that the shareholder agreement is appropriate for the business and minimises the risk of potential disputes following a termination.  With this in mind, if you are looking for early advice, or considering adopting employee shareholder status within your business, then contact Howard or the Commercial Team on 02380 717717 or email howardrobson@warnergoodman.co.uk.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.