From 1 September 2013 new and existing employees can now give up certain employment rights in return for shares in their employer.   

We take a look at some of the matters employers will want to consider when deciding whether to make use of this new status.

Q: What is this new “employee shareholder status” all about? I’ve heard it means I never have to worry about unfair dismissal claims ever again…

A: It is not as simple as that, unfortunately! Employee shareholders are granted shares (for free) in their employer company (or in the employer’s parent company). In return, the employees agree to give up certain employment rights – namely:

  • ‘ordinary’ unfair dismissal rights;
  • rights to statutory redundancy payments;
  • certain rights to request to undertake study or training;
  • certain rights to request flexible working; and
  • the right to give 8 weeks’ notice to return early from additional maternity/paternity/adoption leave (instead, having to give 16 weeks’ notice).

This means that employee shareholders will not be able to bring claims against their employer to enforce any of the above rights, so your risk of an unfair dismissal claim is indeed reduced. 

Be careful though – employee shareholders only give up the right to bring ‘ordinary’ unfair dismissal claims. They retain the right to bring automatic unfair dismissal claims (for example, a whistleblowing dismissal claim or a dismissal claim relating to health and safety) and discriminatory dismissal claims.

The employee will also be entitled to all other employment rights – such as the right not to be unlawfully discriminated against, the right to the national minimum wage and rights under the Working Time Regulations.

It is therefore important to consider carefully the value and risk of the ‘excluded’ claims before entering into such an agreement, to establish whether granting free shares in this way is worthwhile for your company.

Q: How many shares would we have to grant to an employee shareholder for him to give up his employment rights? I read that we can only grant up to £50,000 worth of shares. Is that right?

You must grant a minimum of £2,000 worth of shares to the employee. There is no maximum limit – the matter is open to negotiation between you and the employee shareholder. 

Where the shares are worth less than £50,000, the employee shareholder will be able to dispose of those shares without being subject to any Capital Gains Tax. You are still able to grant shares in excess of that amount if you choose, although again it is important to make sure this is worthwhile for your company (average unfair dismissal awards are rarely in excess of this amount).  

There is no special process you have to go through to value the shares, but it is really important to make sure the valuation is accurate – if you over-value the shares, and you issue less than £2,000 worth, then the employee will not be an employee shareholder and will not have given up any of their employment rights. You may still face the risk of employment claims therefore. Seek professional advice regarding the valuation if required.

Q: Are there any other advantages for me, as employer? And why would an employee agree to this?

The principal advantage to employers is the reduction in the risk of claims, although it is important to be aware that the range of excluded claims is really very limited. 

Employers might also find that employee shareholders are more proactive and take a greater involvement in the company than ordinary employees do – these individuals have their ‘stake’ in the company and so have a greater interest in seeing it do well. Newer and smaller companies might find issuing shares particularly advantageous in increasing staff morale and incentivising workers in this way.  

There are disadvantages to employers, too, however. For example, in order for the status to be enforceable, the employee must take independent legal advice – which will be payable by the employer regardless of whether they ultimately accept the new status or not. And it is vitally important to make sure all the correct steps have been followed when entering into these contracts otherwise the arrangements will not be valid and employment claims will not be excluded. Consider also whether issuing more shares will decrease the value of existing shares, as this will have a big impact on whether this approach is appropriate for your company.  

Employees might be interested in the potential for the shares to increase in value (although of course they would have to also take the risk that the value might in fact decrease). Also, depending on the level of their shareholding, employee shareholders might find they have a real input into the company and the direction it takes – this might be more important to them than certain employment rights.    

Q: I am currently recruiting a business manager, and I want her to be employed as an employee shareholder – what do I need to do?

There are a number of steps which need to be followed for the new status to be enforceable (applicable whether you are offering the status to a new or existing employee):

  1. You need to provide the individual with a written statement, setting out all the relevant details of the proposed employment status. New section 205A(5) of the Employment Rights Act 1996 sets out a long list of matters which need to be included in this statement – including informing the individual of their proposed loss of employment rights, and setting out all details of the shares (e.g. whether they attract voting rights, whether there are any restrictions on their transferability, details of buy back options etc.). 
  2. Once the individual has received the offer and the written statement, she must take independent legal advice (in much the same way as someone signing a settlement agreement would do). The employer must pay for ‘reasonable costs’ in obtaining this advice, regardless of whether the individual ultimately accepts the job offer/signs the employee shareholder agreement.   
  3. Once she has obtained legal advice, the individual has a seven-day ‘cooling-off’ period. The arrangement will not be enforceable until after this time (even if signed straight away).

It is really important to follow these legal steps – failure to do so will mean the employee does not acquire the employee shareholder status, and so they will not have effectively signed away their employment rights.

Q: Are there any practical points I need to consider too?

As well as these compulsory legal steps, it is worthwhile following these practical tips when agreeing employee shareholder status:

  1. Get agreement: the individual must agree to the new status – they cannot be forced into accepting. Any detriment to or dismissal of an existing employee because they have refused to accept employee shareholder status will be unlawful. However, it is not unlawful to withdraw a job offer from someone because they do not accept the new status.   
  2. Make sure everything is in writing: this is a permanent change to an employee’s status and should therefore be documented correctly to minimise the risk of any future dispute. Seek legal advice on the wording of such agreement to ensure all relevant points are covered (even where these are not compulsory under section 205A) and it reflects the agreement between the parties.
  3. Plan in advance: think carefully about what type of shares you want to offer, and on what basis. Make sure that all necessary internal authorisations are in place to grant the shares, and consider whether your Articles of Association will need to be amended.  Only once all such practical matters have been considered and put into place should you think about making an offer to an individual. 
  4. Above all, think carefully as to whether this status is beneficial to you:  it appears from the press that there has been very little take-up so far of this new approach, and this may well be because employers expect that the value of reducing claims is much lower than the minimum value of shares which must be offered.