As of August 2013 a new category of “employee shareholders” will gain company shares in exchange for certain employee rights

Following several weeks of wrangling between the two houses of the UK parliament, the government has now finalised the new “employee shareholder” reforms which are due to be implemented in Autumn 2013. The government has recently been championing employee share ownership as a good means of incentivising employees. However, the introduction of the new employee shareholder status was controversial as it was seen as a means for the government to attack protected employment rights.

The reforms will introduce a new category of employment status — an employee shareholder — with different rights to the existing categories of “employee” and “worker”. Essentially an “employee shareholder” will give up or accept curtailment of the following statutory employment rights in return for shares in their employer company worth between £2,000 and £50,000:

  • They will have no right to a statutory redundancy payment if they are made redundant;
  • The right to claim unfair dismissal will not apply unless the dismissal is automatically unfair or discriminatory on one of the protected grounds (age, race, sex, disability, sexual orientation or religion or belief);
  • They will only have the right to request flexible working when they return from parental leave and it will not be automatically unfair for an employer to dismiss an employee shareholder who requests flexible working in other circumstances. The government also proposes restricting the period of time in which a flexible working request could be made to within four weeks of return from parental leave; and
  • They will have to give 16 weeks’ notice of their intention to return early from maternity or adoption leave, instead of the current eight weeks.

The fact that employee shareholders will be required to forfeit these employment rights has sparked a lot of debate over the fairness of the new provisions. In order to pass the new rules, the government has had to make a number of concessions which protect the employee shareholder. In particular:

  • An individual must receive independent legal advice prior to entering into any contract to become an employee shareholder (e.g., from a lawyer or union representative). The employer must also pay the reasonable costs of this advice, whether or not the employee then accepts the role. If an individual does not receive independent advice before agreeing to become an employee shareholder, he or she will be an ordinary employee with all the associated statutory employment protections;
  • There will be a seven day “cooling off” period, during which any acceptance of employee shareholder status will not be binding;
  • Employers must provide a written statement with full details about the shares and associated rights to any individual who is considering becoming an employee shareholder;
  • Any jobseeker who refuses an offer with employee shareholder status will not forfeit their social security benefits;
  • The first £2,000 of shares will not attract income tax; and
  • Existing workers will be protected from detriment if they refuse to switch to an employee shareholder contract.

Of these concessions, the most burdensome is likely to be the requirement that the employee obtains independent legal advice in relation to any offer of employment as an employee shareholder. Some employers may be deterred by the extra cost and administrative delay that this could cause.

However, we anticipate the bigger stumbling block for employers when considering hiring employee shareholders will be the administrative burden involved in granting shares to their employees, particularly for private companies. As with existing employee shareholding arrangements, non-listed companies will have to value the shares on acquisition and disposal. In addition, employers will need to ensure they have arrangements in place to buy back the shares from departing employee owners, which may require establishing an employee benefit trust. These can be costly and burdensome administrative processes. Employers will need to consider carefully whether the reduced risk of certain employment claims balances out these costs.

In terms of tax treatment, the first £2,000 of shares issued to an employee shareholder can be issued free of income tax and National Insurance Contributions (NICs). This tax incentive — not part of the government’s initial proposal when it first introduced the employee shareholder concept in October last year — has since been included as an additional incentive for employers to adopt the employee-shareholder approach. Any increase in value of the shares between acquisition and disposal will be free of capital gains tax which will be attractive to employees (although will not save employers any money).

How popular the employee shareholder arrangements will be in light of the administrative considerations discussed above remains to be seen. Perhaps more importantly, the government has announced it intends to reform and “de-regulate” the UK Companies Act rules around share buy-backs to make it easier for employees to own shares and sell them back to their employer when their employment terminates. We anticipate these reforms may go further to promote employee share ownership than the introduction of the employee shareholder status