Employee shareholder status

In March we reported on ‘A new kind of employee ownership’. Since then, further detail has emerged.

The idea of ‘employee shareholder’ status, which comes into force this autumn, is that an employee gives up certain employment rights in exchange for company shares. The most significant rights surrendered are unfair dismissal protection, redundancy payment and flexible working request rights. Discrimination protection will still remain, as will protection against dismissal on grounds which are deemed automatically unfair (pregnancy, trade union membership and whistleblowing).

The House of Lords insisted on the introduction of various protections against employees being coerced into such an arrangement – for instance, the requirement to obtain independent legal advice at the company’s expense, and a ‘cooling off’ period.

Employee shareholders must be given at least £2,000 worth of shares, and this first £2,000 will effectively be free of national insurance and income tax. Up to £50,000 worth of shares can be given without attracting capital gains tax.

Strangely there are no restrictions on the type of share – they need not carry voting or dividend rights, pre-emption rights, or any right to share in the company assets on winding up. Employee shareholders may have to forfeit their shares if they leave the company. There is no requirement for employers to pay those shares, although the Secretary of State can impose regulations. It is likely that most employers will want to pay a fair value to ‘good leavers’.

So the shares could be of limited value. There is, however, a requirement for employees to be given full details of the rights attached to the shares before they sign up, and a comparison with the rights attached to the majority class of shares.

Will it be attractive to staff or employers? The CGT exemption is not a great incentive for staff. Highly-skilled employees who are mobile in the jobs market are most likely to accept. However, the arrangement might encourage them to leave after a period of rapid growth (peak share value).

The arrangement might be attractive to start-ups and early stage companies. However, the valuation of shares in such companies can be difficult and costly, which could be off-putting as it will have to be done at the offer and exit stage. An over-valuation on entry could lead to an employee arguing, down the line, that he did not receive £2,000-worth of shares and, therefore, still technically retains all his employment rights.

Our prediction is that the new status will not be widely used, other than as a CGT-avoidance measure by people who would have been shareholders anyway; and hence it will not have the Government’s desired effect of encouraging companies to grow their workforces.

Matthew heads our employment law team. He handles the full range of contentious and non-contentious employment law issues for clients. His particular specialisms include complex staff restructurings and employment issues concerning business transfers. Matthew is recommended by independent legal directory Chambers and Partners which describes him as ‘solutions-focused’ and ‘a solid and respected practitioner noted for his technical abilities’. He trained and worked at a City of London law firm.

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