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Are any employers going to make use of employee shareholders?

17 May 2013

From 1 September 2013, a new status called "employee shareholder" will be available to employers as an alternative to traditional employees. However it seems unlikely that many employers will make use of the new status, given the administrative hurdles and other potential difficulties.

In order to make use of employee shareholder status, the employer will need to give the individual fully paid up shares in the employing company or its parent company worth at least £2,000. 

It will be unlawful for an employer to require an existing employee to convert to an employee shareholder or to subject them to detriment if they refuse. However, it will be permissible for an employer to recruit new staff as employee shareholders on a "take it or leave it" basis without offering the option of becoming a traditional employee.

Benefits for employers

In theory, the employer benefits because the employee gives up right to:

  • claim unfair dismissal in "ordinary" unfair dismissal cases - there are various exceptions including where the dismissal is discriminatory under the Equality Act 2010 or is because the employee has blown the whistle
  • claim a statutory redundancy payment, and
  • make a statutory request for flexible working or for time off for training.

The employee would also have to give additional notice (a total of 16 weeks) to return early from statutory maternity, adoption or additional paternity leave. Some employers may see potential value in aligning the interests of staff with those of shareholders.

Benefits for employees

  • The employee would receive the shares free of charge from the company (although tax may be payable by the employee). It is conceivable that an employee in a small but fast growing company might find that his or her shares increase in value substantially.
  • The first £2,000 of shares would be exempt from income tax and National Insurance in most cases.
  • Gains on up to £50,000 worth of shares would be exempt from Capital Gains Tax in most cases (although this would have no impact unless the individual had exhausted their annual exempt amount of gains, which is currently £10,900).

Administrative requirements

In order to appease parliamentary opposition to the proposals and ensure they became law, the Government had to make various concessions, as follows:

  • employers will have to provide individuals with a written statement which must contain particular information, including the rights the individual is giving up and details about the shares such as the rights they carry and any restrictions on sale,
  • an individual will need to obtain legal advice in order to become an employee shareholder. The employer is required to pay the individual's reasonable legal fees (even if the individual then turns down the role!), and
  • individuals have a 7 day "cooling-off" period during which they can withdraw their acceptance of the contract if they change their mind.

Proposals of limited practical use?

In addition to the administrative hurdles above, there are a number of other problems.

  • Employers might easily be misled under the new regime. It doesn't follow that simply because an employee doesn't have the right to make a request for flexible working, an employer would be safe to refuse to consider a request. The employer could still face discrimination claims, for example if the refusal is more likely to disadvantage women than men and cannot be justified.
  • Having given up their right to claim unfair dismissal, employee shareholders might be encouraged to resort to claims such as discrimination and whistleblowing. These claims are generally more costly for employers to defend and there is no cap on the compensation that can be awarded.
  • Employers might also find that they have to deal with disputes as a result of employees owning shares. These could involve how to value the shares, how shares can be sold or employee shareholders seeking to exert influence over the company's actions.

Overall, it seems unlikely that most employers will view the potential benefits of creating employee shareholders as worth the time, hassle and cost of working through the various obstacles. After all, it would take at least 3 years for a new recruit's statutory redundancy payment to exceed £2,000 and the odd "ordinary" unfair dismissal claim is normally relatively straightforward to deal with. Perhaps the biggest use of employee shareholder status will be as a tax saving device for those owning a relatively large (but, broadly, under 25%) stake in the company.

For more information please contact Christopher Bushnell, Associate

T: +44 (0)20 7427 6427