Employee Shareholders

The relevant section of the Growth and Infrastructure Act 2013 came into force yesterday, which provides for a new category of employees called “employee shareholders”. 

The original proposals were hotly debated as they progressed through Parliament and several changes were made.  The legal position is now as follows:

  • A company may issue a minimum of £2,000 worth of shares to the employee in exchange for the employee giving up certain employment rights.
  • Any gains made on the first £50,000 of shares are exempt from capital gains tax.
  • The employee must give no consideration for the shares other than entering into the agreement.
  • The company must provide the employee with a written statement setting out (i) the rights the employee will be giving up and (ii) the rights which will be attached to the shares.
  • The company must pay the “reasonable costs” of the employee taking independent legal advice on the offer of employee shareholder status.
  • The employee may not accept the offer for a period of 7 days after taking legal advice, and the agreement will be invalid if s/he does so.

In exchange for the shares, employee shareholders will give up the following rights:

  • The right to claim unfair dismissal (except in health and safety cases, automatically unfair cases, or cases where the dismissal is discriminatory under the Equality Act 2010).
  • The right to a redundancy payment.
  • The right to request flexible working under the statutory procedure (save for employee shareholders returning from parental leave, who may make a formal request for flexible working within 14 days of their return to work).
  • The right to request to undertake study or training.
  • In addition, employees who participate in the scheme will be required to give 16 weeks’ notice of the date of their return from maternity, paternity or adoption leave rather than the standard 8 weeks’ notice.

It is still unclear how some aspects of the scheme will work in practice. In particular, there are no firm provisions setting out how shares will be dealt with if an employee shareholder ceases to be employed by the company. Further legislation may be introduced to deal with this question and we will update you when there are any further developments.

Key considerations for employers

Employers should be aware that employees will not give up all employment rights as part of the scheme and it will still be open to them to bring claims of discrimination, for example.

Current employees cannot be forced to change their status to that of an employee shareholder, although an employer will be permitted to offer employment exclusively on an employee shareholder basis.

It will be necessary to consider any impact on the company’s articles of association and amendments may be required to those and perhaps to other corporate agreements.  You may need to take legal advice on this. Employers will also need to take care to ensure that the written statement accurately sets out the rights attached to the shares and that these are aligned with the articles of association.

Key considerations for employees

Individuals will need to consider how easy it will be to sell the shares at a later date, and consider the possibility that they may decline in value over time.