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The creation of a new employment status - `Employee Shareholder Status`

06 June 2013 #Employment


The Government proposed the creation of new employee shareholder contracts via the Growth and Infrastructure Bill. After two initial rejections and then gaining concessions from the Government, the Bill has become law after the House of Lords accepted the further concessions and the Bill received Royal Assent on 25 April 2013.  Implementation of these changes, however, is likely to be on 1 September 2013.

This new employment status will be the ‘employee shareholder status’ which will become the third form of employment status, alongside `employee` and `worker` taking effect as a new form of equity-linked employment contract.

So what does this mean?

In exchange for opting out of certain employment rights, employees will become owners of a stake in the business they work for by being given shares in the employer company worth at least £2,000.  Any profit on employee shareholder shares not exceeding £50,000 in value at the time of acquisition will be exempt from capital gains tax when the shares are sold.

This new status would only apply to new recruits prepared to enter into these contracts. Existing employees cannot be forced to take up employee shareholder status.

The employer therefore would have the flexibility to offer the employee shareholder status to new recruits, should they (the employer) decide to do so. 

The downside, however, is that in exchange the employee shareholder will lose certain rights which a `standard` employee would have, including those in relation to:

  • Unfair dismissal
  • Redundancy
  • Certain statutory rights to request flexible working; and
  • Time off for training

However employee shareholders will still be protected from `automatic` unfair dismissals, such as those stemming from discrimination or as a result of whistleblowing.

The concessions that were proposed and agreed are as follows:

  • A provision that there will be a seven day `cooling off` period, during which any acceptance of employee shareholder status will not be binding.
  • A written statement must be provided which would set out the rights that the employee is giving up, with full details about the shares and the status of the rights those shares attract.
  • Prior to entering into the contract, the individual has received advice from a relevant independent advisor (i.e. a lawyer, CAB, law centre, union etc). The employer would have to pay the reasonable costs of that advice - whether or not the employee then accepts the role. The agreement would be invalid if advice is not sought prior to the agreement.
  • Any jobseeker who refuses an offer with employee shareholder status will not forfeit their social security benefits.
  • The first £2,000 of shares will not attract income tax.
  • Existing employees will be protected from detriment if they refuse to switch to an employee-shareholder contract.

`Employee shareholder` status has been proposed as a third form of employment status, alongside `employee` and `worker`, taking effect as a new form of equity-linked employment contract. In exchange for giving up certain employment rights, employees will become owners of a stake in the business they work for by being given shares in the employer company worth between £2,000 and £50,000. Any profit on employee shareholder shares not exceeding £50,000 in value at the time of acquisition will be exempt from capital gains tax when the shares are sold.

Will this new type of employment contract be used extensively?  It seems unlikely. An employer would need to consider the additional costs incurred for the independent advice. This could put some employers off. 

At the same time, the employee would need to weigh up the potential value of shares (which could end up being nominal) against losing unfair dismissal rights.

In addition, the ‘employee’ will retain other key employment rights, i.e. to bring claims for discrimination or possibly to argue that their dismissal was for an automatically fair reason, e.g. whistleblowing or pregnancy. To be clear, an employee-shareholder contract does not offer the employer bullet proof protection against unfair dismissal claims.

What an employer would need to consider and weigh up is the actual cost and risk of a “routine” unfair dismissal claim (eg unfair redundancy) compared to giving away equity in the business and covering the upfront costs of legal advice. It should be remembered that an employee would need two years continuous service to claim ordinary unfair dismissal in the first instance.

Hence, both employer and employee may consider the offer of ‘standard’ employee status as the better and less risky option compared to employee shareholder status.

Sita Anand
Carillion Advice Services

Clarkslegal, specialist Employment lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Employment matter please contact Clarkslegal's employment team by email at employmentunit@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.

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