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Briefing Note

Employee shareholder contracts

Of all the recent changes to employment law, the introduction of employee shareholders has received almost no support from employers. It was a bad idea when originally announced and remains so. The Department for Business, Innovation and Skills, however, has recently published its guidance on employee shareholders and this article gives a summary of what’s important.

Background

On 1 September 2013 new legislation came into force allowing existing or new employees to become employee shareholders. The idea behind the concept of an employee shareholder is that an individual receives at least £2,000 worth of shares in his or her employer (or a parent company) in return for giving up some employment rights.  Any growth in the value of the shares when sold will be exempt from capital gains tax. The Chancellor believes that employees are more productive and loyal if they are owners of the company.

The guidance can be found here.

Below is a brief overview of the main points.

Definition of employee shareholder

Both existing employees and new employees of a company can agree to become an “employee shareholder”.

The employee has to agree with the company that they will become an employee shareholder. No one can be forced into being one. Agreement can only be given after having received a written statement from the company setting out the particulars about the status of the employee shareholder and the rights which attach to the shares.  The employee must also have taken independent legal advice.

The agreement between the employee and the company need not be in writing although both parties would be mad not to commit to writing.

The company needs to issue or allot to the employee fully paid up shares in the company, or a parent company, which have a value on the date of issue or allotment of not less than £2,000.  There is no upper limit on the value of the shares that may be issued or allotted.  The employee is not allowed to give any consideration for the shares other than entering into the agreement to become an employee shareholder.

An employee cannot accept or agree to be an employee shareholder job until seven days have passed following receipt of the independent legal advice.  The seven days commence on the day after the advice has been received.

Rights of an employee shareholder

An employee shareholder gives up the right to claim unfair dismissal, a statutory redundancy payment or the right to work flexibly.  However, they still retain the right not to be automatically unfairly dismissed; dismissed for a health and safety reason and the right to claim discrimination including the fact that they have been dismissed for a discriminatory reason.

Terminating an employee shareholder agreement

There are two ways in which the employee shareholder arrangement can be terminated.

The first way is that the employer and employee agree that the employee can cease to be an employee shareholder and become a simple employee.  Interestingly, the guidance from BIS suggests that even if the employee sells their shares they will remain an employee shareholder unless the parties agree to change the employment contract.

The second way is that the individual’s employment terminates.

If the individual’s employment terminates they may still be a shareholder.  The agreement between the individual and the company should provide for what happens to the shares when an individual leaves the employment of the company.  However, there is nothing preventing the agreement providing for the fact that an employee may retain his shares even after his employment has ended.

Comment

The general consensus of opinion appears to be that there will be very little take up of employee shareholder status.

The concept is not a very inviting prospect for an individual. In becoming an employee shareholder an individual gives up some fundamental basic employment rights.  In return they are issued or allotted shares worth £2,000.  However, shares in private companies are difficult to value.  As yet no decision has been made for the price at which the company may buy back shares held by employee shareholders.  Consequently, an employee may give up fundamental employment rights in exchange for shares which turn out to have no or very little value.

Additionally, employers may be put off by the fact that they may still be liable for some employment claims such as discrimination which can be the most expensive type!  There are also costs associated with the process.  The employer will be liable for the individual’s reasonable costs in obtaining independent legal advice.  This is the case whether or not the individual becomes an employee shareholder.  There may also be costs involved in valuing the shares at the time of issue or allotment and at the end of the relationship.

Simon Quantrill, in his original article on this subject, summed it up “in conclusion, employee shareholder contracts have almost no merit and ought not to take up much of your time”.

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