myerson-employment

Published July 2013

One of the further changes on the horizon is the introduction of employee shareholder status (previously called employee ownership).

Despite a negative response to consultation, the Government has now decided to go ahead with its proposal which means that, as of 1 September 2013, employees will be able to give up some of their employment rights in exchange for shares in their employer. Employees will be specifically protected from suffering a detriment or being dismissed for refusing to become an employee shareholder.

The key features of employee shareholder status are that:

  • The employee receives a minimum of £2,000 worth of fully paid up shares in their employing company;
  • The first £2,000 of shares will be free of income tax and national insurance contributions; and
  • The first £50,000 of gains will be free of capital gains tax (“CGT”) subject to certain anti- avoidance provisions.

In return for the shares, the employee gives up the right to:

  • A statutory redundancy payment;
  • Claim unfair dismissal (except where the dismissal is automatically unfair);
  • Request flexible working (except where the request is made shortly after returning from parental leave); and
  • Request time off for training.

Employees will also be required to give more notice of their proposed date of return from maternity/paternity leave.

Requirements for Employee Shareholder Status

In order to effect employee shareholder status, the company must provide a written statement to the employee which sets out specified information such as whether any voting or dividend rights apply to the shares.

In a similar way to a settlement agreement, the employee must then take independent legal advice on the terms and effect of the proposed agreement. The reasonable costs for this advice must be paid by the company, regardless of whether the employee actually decides to become an employee shareholder or not.

There must also be a seven day “cooling off” period (from the date the employee receives the advice) before any agreement can be entered into. If the employee is not given seven days to consider the advice or, if they accept the position before the seven days is up, the agreement will not be effective.

In practice

It is surprising that the Government is going ahead with this plan as the concept has been unpopular from the start. From an employee’s perspective, it is unlikely that £2,000 of shares sufficiently compensates for the potential value of employment rights they will give up.

From the company’s perspective, it could prove very costly to ensure that it has the right to issue or allot the new shares, to properly value the shares, to draft the necessary documentation and to cover the employee’s reasonable legal fees. On top of this, employee shareholders retain the right to pursue claims of automatic unfair dismissal (for example in relation to pregnancy and maternity, TUPE and whistleblowing) and discrimination claims.

It remains to be seen how many employee shareholders will be created. With the potential exception of senior employees who may make some gain from the CGT exemption, it seems unlikely there will be many takers.

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