The UK Government has put in place legislation to create a new type of voluntary employee ownership arrangement, under which employees would give up some of their employment rights in exchange for shares in their employing company. The aim is to boost employee productivity and to remove the perceived barrier presented by a fear of employment disputes, which the Government believes is deterring businesses from hiring.

The Employment Rights Act 1996 will be amended by the Growth and Infrastructure Act 2013 to create a new type of employee — the “Employee Shareholder” who will give up the right to claim unfair dismissal in return for shares in the employer’s company. The Growth and Infrastructure Act 2013 received Royal Assent on 25 April 2013. The provisions of the Act on Employee Shareholder status will come into effect on 1 September 2013.

Features of the “Employee Shareholder” Status

Under the new scheme, any type of company (including non UK registered companies) will be able to issue shares to Employee Shareholders. However, the Government believes that fast-growing small and medium sized companies who want to create a flexible workforce will benefit most from this new type of relationship.

An Employee Shareholder will be given shares of between £2,000 and £50,000 that will be exempt from capital gains tax (CGT) when the shares are sold. Shares must be fully paid up and issued free of charge to the Employee Shareholder.

The Employee Shareholder will have different rights compared to a normal employee. Employee Shareholders will not have:

  • Unfair dismissal rights (except for reasons that are automatically unfair or that relate to discrimination);
  • The right to statutory redundancy pay;
  • The right to request flexible working (except on return from parental leave); and
  • The right to request time off for training or study.

Employee Shareholders will have to give 16 weeks’ notice of the intention to return early from additional maternity, additional paternity or adoption leave (compared to eight weeks’ notice for normal employees on additional maternity and adoption leave and six weeks for normal employees on additional paternity leave).

There will be no restriction on the type of shares to be issued to the Employee Shareholders. Both the employing company and its parent can issue shares to Employee Shareholders (so subsidiaries with little value in themselves can issue shares in a more valuable company). However, employers will need to satisfy themselves that they have issued shares that have a value of £2,000 at a minimum when they enter into contract with the Employee Shareholder. If the shares are not worth this amount, the individual may be deemed to be an employee, but not an Employee Shareholder.

The terms under which the shares are disposed of are a matter for agreement between the parties. Employers therefore will need to factor in timing, valuation and provisions for good and bad leaver scenarios. Before the enactment of the legislation, the Government made some concessions in relation to the introduction of this new status in response to consultation. The concessions include:

  • An agreement that someone shall become an Employee Shareholder is invalid unless, prior to entering into the contract, the employee has received advice from an independent legal advisor. Further, the employer has to pay the reasonable costs of that advice - whether or not the employee then accepts the role.
  • 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 the rights they carry.
  • The first £2,000 of shares will not attract income tax and national insurance.
  • Existing workers will be protected from detriment if they refuse to switch to an Employee Shareholder contract.

Impact

A key concern for employers is that the cost of introducing Employee Shareholder contracts may outweigh their benefits. Employers will need to consider how they value the shares and will need to put a valuation process in place when they employ an Employee Shareholder (e.g. board meetings to approve the valuation of the shares, an independent accountant’s evaluation and a paper trail detailing how the shares were valued). This kind of administrative burden together with the burden imposed by the concessions above may not encourage the take up of the new employment relationship amongst SMEs and unlisted companies.

The complexity of giving shareholder rights to employees is also another area of concern. Shareholders enjoy different rights to those of employees and have different remedies. Shareholders who feel they have suffered prejudice can bring claims requiring their shares to be bought out by the company at a valuation determined by the Court. It is also unclear as to what will happen to the Employee Shareholders when they cease to be shareholders. The complexity and uncertainty of dealing with corporate law formalities might deter both employees and employers from using this type of new employment relationship.

Judging from the response to the consultation, it seems that few employers will introduce this new arrangement, at least until some of their concerns are resolved. Clearly the Employee Shareholder arrangements will not suit every employer, but they may provide some employers with an additional option of structuring a remuneration package for employees in a tax efficient manner and reducing to a limited degree their exposure to employment claims.