Employee-Shareholder contracts move a step closer

The government’s controversial employee-shareholder status looks to be a step closer after the House of Lords voted through proposals on April 24 2013.

The legislation was twice rejected by the House of Lords and has only been approved after the government made significant concessions with a view to protecting prospective employee-shareholders.

It means that the new employment status could come into force in September this year as originally intended.

Rationale behind the new legislation and how it will work

Under the new rules, employee-shareholders will not have certain statutory employment rights – such as the right not to be unfairly dismissed – in return for shares in their employing company worth between £2,000 and £50,000. Any gains on these shares will be exempt from capital gains tax when sold.

The proposal was first announced by George Osborne in October 2012. He hailed it as a way of introducing flexibility for employers and encouraging employees to have a stake in the business for which they work, while at the same time providing them with a tax break. He hopes it will promote growth by encouraging businesses to hire new employees by reducing associated risks and administrative burdens.

However, the reaction from both employers and workers has been less than enthusiastic. Employees dislike the loss of some basic employment rights including: protection from unfair dismissal; the right to a redundancy payment; the right to request flexible working or time off for training; and a different regime for early return from maternity leave.

Criticism of the legislation

Entrepreneurs are concerned that significant employee shareholding could make management decisions more difficult. Similarly they may not wish to share the rewards of business growth with employees. More established businesses have focused on the potential difficulties of having staff with different employment rights and the impact on trust between employers and employees.

Some of the gloss has also been taken off the proposals with news that employees are not permitted to pay for the shares, so income tax and national insurance will be due on their value. On the flip side, if the business does badly, the employee may end up with valueless shares and no job – and no redundancy or unfair dismissal rights either.

There’s also the issue of share valuation and the complexities of setting the system up, particularly for smaller businesses and start-ups. It may only serve to increase administration.

The revised proposals

The legislation now requires that individuals receive a written statement with full details of both the employment rights they will not have and the rights and restrictions attaching to their shares, for example, dividends, voting, winding up, redemption, how different classes of shares are treated and transfer restrictions. There will also be a seven-day cooling-off period.

In addition, before entering into the contract, the individual must have advice from a ‘relevant independent adviser’, for example, a lawyer, a union, the Citizens Advice Bureau or a law centre. Furthermore, the employer has to pay the reasonable costs of that advice, whether or not the employee accepts the role, something that could again increase administration and costs.

It is not yet clear how many companies will want to take advantage of the new employee-shareholder status. Those that do implement it will need to navigate carefully around the statutory protections introduced at the last minute, as well as the intricacies of handling employment and shareholding rights.

For more advice on employee-shareholder contracts, or any other employment law matter, please contact our Employment team on 01772 258321.