Employee shareholder status – will it work for you?

1 September 2013 saw the creation of an entirely new type of employee - the 'employee shareholder', but is it something that might work for your…

1 September 2013 saw the creation of an entirely new type of employee – the 'employee shareholder', but is it something that might work for your organisation?

What is it?

This new category enables employees to be engaged on special contracts under which they lose many of their employment rights, including those in relation to unfair dismissal and statutory redundancy payments. In return, they must be granted shares in the business valued at a minimum of £2,000 at the time of issue. Employees will enjoy a Capital Gains Tax exemption on disposal of the shares (with other limited tax breaks).

Crucially, for an employee shareholder contract to be valid, a number of precautionary steps must be taken. These were designed to protect the unwary employee. For example, the employee must take independent legal advice on the rights they are giving up. This advice must be funded by the employer. There will also be a 7 day 'cooling off' period during which the acceptance will not be binding. Employers must also provide a written statement with full details of the rights being signed away and information about the shares on offer.

Some employers have for some time offered staff a stake in their business. However, the Government envisages that this new right will see more companies use shares to recruit, retain and incentivise staff. This may be particularly attractive to smaller businesses.

Existing employees cannot be forced to take up employee shareholder status.  Indeed, it will be automatically unfair to dismiss an employee for refusing such an offer. However, employers can still choose to offer only this type of contract to new recruits.

Are employee shareholder contracts a bright new dawn for employers?

Offering shares in a business may make employees feel more committed to the company. This may serve to bolster trust and promote growth of the business. In theory the new contracts will also save money for employers who will no longer be liable for statutory redundancy payments or risk awards from unfair dismissal claims. There is also a saving of management time to be made as employers will no longer have to consider flexible working or training requests, as these rights are also lost by an employee shareholder.

Start-ups and growing businesses with a proactive approach to staff engagement and potential for capital growth, maybe interested in the new contracts. In particular, if a business is considering giving away shares as an incentive to employees in any event, employee shareholder status presents an opportunity to get something in return.

The new contracts may also be attractive to companies as a way of rewarding employees in a tax efficient manner. Indeed, some high-earners in receipt of high value shares, may consider tax savings to be far more important than the employment rights they will sign away.

The pitfalls and problems

Following its stormy passage through Parliament, it is clear that the employee shareholder scheme is already suffering from an image problem. There is a risk that withdrawing significant employment rights in return for shares could reflect poorly on a company's reputation. The step away from flexible working and the increased notice periods for mothers returning from maternity leave, might be perceived as pushing against the progressive tide at a time when most businesses are seeking to appear more family-friendly.

Will you lose good potential recruits if their first involvement with the company is to be sent off to a solicitor and required to sign away their rights? This must be a realistic possibility.

The risk of reputational damage may be best managed by good communication. Employers should ensure that the written statement provided to employees not only sells the benefits of what is offered, but is also clear so employees enter the scheme with their eyes fully open.

There is also a danger of creating a two-tier workforce of those employees with and without shares. The increased administrative burden involved in managing the different financial, tax and legal arrangements may prove a headache.

A key driver behind the introduction of employee shareholder status was to promote flexibility by reducing the costs of dismissal.  The ability of a company to dismiss employee shareholders unfairly does look like it achieves this. However, in practice, this may prove to be a false premise.  Employee shareholders can still bring discrimination claims.  They can still claim they were dismissed or treated detrimentally for making a public interest disclosure (whistle-blowing).  They can still claim breach of contract and be entitled to notice pay, as well as many less common dismissal claims still applying. Dismissing an employee-shareholder may be easier in some ways, but the risk of these claims will still mean that a process and good reasons will be required to be able to defend them if they arise.

Employers will also need to factor in the costs of implementation. The reasonable costs incurred by the employee in seeking legal advice must be met by the employer, even if an offer is eventually declined (which is not normally the case when an employee is sent off to receive advice on a settlement agreement). Adding in the costs of ensuring the documentation and valuation is right and that may dissuade many potential users of these contracts.  If the valuation of the shares does not stand up to scrutiny then the employee may retain their rights in any event, creating a situation which may be the worst of all worlds for the employer.

Could you use them?

Employee shareholder status will not be attractive to all businesses and in practice may not be attractive to many. However, for some, it may provide an innovative new take on the employment relationship and, for others, may be an added benefit to the issuing of shares which were going to be issued in any event.

This article was originally published on the website of HR Zone on 9 September 2013.View the original article.

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