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Will the benefits of the new employee shareholder status outweigh the costs for companies?

From September 2013, the Growth and Infrastructure Act 2013 amends the Employment Rights Act 1996 introduces employee shareholder status and employers will be permitted to give shares in their business to new employees, who in return will give up some very fundamental employment rights.

Although new hires can be required to join companies on an ’employee shareholder’ basis, existing employees cannot be forced to change their status.

Employees will give away the rights to sue employers for unfair dismissal and to statutory redundancy payments. In addition, they will forfeit rights to request flexible working and time off to study or train. Employees will not lose the right to make claims for discriminatory dismissals and/or dismissals related to whistleblowing or other automatically unfair reasons.

Pregnant and adopting mothers who are “employee shareholders” will also be required to provide their employers with 16, rather weeks (not the current 8 weeks) notice of when they intend to return from maternity, additional maternity or adoption leave.

In return, the employer must give the employee fully paid up shares worth a minimum of £2,000 in either the employing company or its parent. Offering less than £200 invalidates the requirement that the employee waive their rights.

In order to address concerns surrounding these measures and protect employees’ interests, employers must also:

    • ensure that employees or prospective employees receive independent legal advice before accepting the offer. Employers must meet the reasonable costs of this advice.
    • explain to employees the rights they are giving up;
    • provide details of the shares being offered and the rights and restrictions attached to them;
    • allow a 7 day cooling off period, and ensure that employees or prospective employees receive independent legal advice before accepting the offer.

Tax Advantages

Shares awarded under the new arrangements enjoy generous tax reliefs. The first £2,000 worth of shares may be given to the employee free from income tax and NICs. Any gain that employees make when disposing of the shares is then exempt from capital gains tax (provided that the shares were not worth more than £50,000 when they were acquired).

Comment

Employers will need to consider whether the types of employee they are looking to recruit will want the new status. It is likely to be more attractive to senior employees, who may be keen on the tax advantages and less concerned about retaining unfair dismissal and redundancy protections than more junior staff.

The benefits for the employing company include potential cost savings resulting from the reduced employment rights. In practice, however, savings are likely to be limited, given the exclusion of discrimination and whistleblowing claims from the scheme.

The disadvantages include the legal and administrative costs of implementing the scheme and advising prospective employee shareholders. In addition, if the company is not listed, valuing the shares given to employees may prove complex. If the £2,000 minimum threshold is not reached, the employee’s waiver of rights will be rendered ineffective.

Increasing share ownership can raise other issues. For example, companies will need to consider whether, and for how much, individuals’ shares can be bought back on termination of their employment. This can have an impact on the initial valuation of the shares, as well as requiring further ongoing valuations.

The new status is most likely to appeal to companies with significant potential for capital growth that are already using employee share schemes to incentivise and reward key personnel, and have experience of dealing with share valuations. Many other employers may take the view that the benefits of giving employees shares in return for reduced employment rights do not outweigh the costs and other difficulties of putting in place such arrangements – particularly for lower paid employees.

 

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