Employee Shareholders – The Basics

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Posted in:HR and Employment|September 6, 2013 | Join the mailing list

A brand new employment status – Employee Shareholder – has been introduced from 1st September 2013.  Some think that this new status will be a valuable tool to incentivise and motivate employees, while others believe it will be just a way
for employers to avoid certain employment rights. 

For Nigel Crebbin, Employment Partner, the answer lies somewhere between the two extremes: "This could be a useful model which would suit certain employers and some employees.  Analysing the potential benefits against cost implications will
be important for companies to see if it is an appropriate model for them.  It won’t suit everyone, and it remains to be seen whether there will be a good take-up.  But if companies find it does lead to improved financial and employee performance, then undoubtedly
word will soon spread."

The Concept
 
Employee shareholders give up certain employment protections in return for receiving at least £2,000 worth of fully paid up shares in their employing company.

Employee shareholders will not have:

• protection from unfair dismissal (except where the dismissal is for an automatically unfair reason, such as, for example, health and safety, working time and whistleblowing)

• the right to a statutory redundancy payment

• certain rights to request flexible working

• certain rights to request time off to study or train

Employee shareholders also will have to give longer notice (16 weeks) of their intention to return early from maternity, adoption and additional paternity leave.

The Conditions

The following conditions must be met for someone to be an employee shareholder:

• both the employee and employer must agree to the arrangement

• the employer must provide the employee with a written statement setting out details such as what employment rights are being given up, whether the shares will have voting rights, whether there are provisions for buy-back of the shares in
certain circumstances

• the employee must receive advice from a relevant independent adviser (such as a solicitor) on the terms and effect of the proposed arrangement and the reasonable costs of that advice must be paid for by the employer (even if the employee
does not ultimately accept the proposal of employee shareholder status)

• there has to be a 7-day cooling off period period (starting on the day after the employee receives the advice) before the employee can accept the offer of employee shareholder status

• the shares given to the employee must be fully paid up and worth at least £2,000 and there must be no payment in any way from the employee to the employer in return for the shares.

There are certain tax breaks for employees on the receipt and later disposal of the shares, and corporation tax relief is available on the acquisition of the shares and on payment of the costs of the independent legal advice.

Existing employees can refuse to accept new employee shareholder contracts and must not be subjected to any detriment for doing so. However, offers of employment to new employees can be conditional upon them accepting employee shareholder
status.

Food for Thought

Before offering employee shareholder contracts, companies will need to consider:

• how to value the shares (and properly document this in case of any future dispute as to whether the shares were in fact worth the required £2,000) 

• whether the company’s articles of association permit the company to issue the shares (and how to amend the articles if necessary)

• the need to obtain the approval of existing shareholders

• the need for distributable reserves, since the shares must be fully paid up

• what rights (such as voting rights) does the company want to attach to the shares

• what arrangements need to be made for the end of the employment relationship in terms of what then happens to the shares (such as good leaver/bad leaver provisions, pre-emption rights and valuations)

With all bases covered and appropriate legal documentation in place, employee shareholder status could be a useful tool for business, although who will adopt it first is anybody’s guess.

For more information about any of the above or for practical commercial advice on this or any other aspect of employment law, please contact Nigel Crebbin of the Berg Employment Team on 0161 833 9211 or email him at
nigelc@berg.co.uk.

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The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Berg or any of its partners or employees. Professional
legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

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