Employee Shareholders

EmploymentNew1

The concept of becoming an employee owner was first floated by the Chancellor, George Osborne, in October 2012. After a bumpy ride through Parliament, and huge controversy around its implications, employee shareholder status finally became legally effective this month. Section 205A of the Employment Rights Act 1996 permits an employee to waive some (but not all) of his/her employment rights in return for receiving shares in the company, thus becoming an “employee shareholder”.

The minimum share allocation is £2,000 and up to this level there is no income tax charge. Any gains made on the first £50,000 of shares attract no capital gains tax.

There are clearly significant tax savings in becoming an employee shareholder, but the employee must give up certain employment rights in exchange for these savings. Are companies going to offer this benefit to their staff? How valuable is it to the employer and the employee?

What rights does the employee give up?

The protective rights waived by the “employee shareholder” are as follows:-

  1. The right not to be unfairly dismissed;
  2. The right to a redundancy payment;
  3. Other subsidiary rights relating to requesting time off for study/training, requesting flexible work and returning early from statutory maternity, paternity or adoption leave.

Importantly, the right not to be discriminated against is not waived. This is a significant carve out from the rights given up because discrimination claims attract the highest awards of compensation.

Procedure

Procedurally, the process of becoming an employee shareholder is a little cumbersome in that the employee must provide a detailed written statement to the employee explaining the rights being sacrificed and the rights attaching to the shares.

The employee must also receive independent legal advice (similar to entering into a Settlement Agreement, formerly a Compromise Agreement).

Analogous to being sold a financial product, the employee has a seven day cooling off period from the day legal advice is received.

A good deal for employees?

The trade off is a simple one: shares in return for rights. All depends, of course, upon the value of the shares offered. The average successful unfair dismissal claim is worth around six months’ net pay. For an employee earning £2,000 net per month, this equates to £12,000. The employee must also factor in the real likelihood that they may never need to enforce their employment rights (e.g. they may resign or may be dismissed in a perfectly fair and legitimate way – i.e. on the ground of genuine redundancy, after a reasonable process has been followed). Accordingly, one would imagine, a share offering of some £5,000 would prove attractive. Whether the employer would be willing to volunteer £5,000 worth of shares is another matter.

For senior employees in highly paid positions, tax efficient equity participation will outweigh waiver of employment rights. The benefits under their contract of employment will be more valuable financially, than the value of any unfair dismissal /redundancy payment entitlement.

A good deal for employers?

It is thought that this development in the law will be of obvious relevance to those employers who already offer shares to their workforce. Going forward, why not extract a waiver of employment rights as the quid pro quo for such shares?

The development will also be of interest to employers wanting to devise attractive remuneration packages to incentivise senior staff in their organisation. As explained above, for highly paid employees, their contractual benefits are usually more valuable than potential unfair dismissal/redundancy payment entitlements.

If a company and an individual are considering entering into an employee shareholder agreement they should carefully consider the tax and employment law issues and the choices relating to shares and options. Used correctly, this could be an attractive option for both employees and employers.

If you have any queries or would like to discuss any of the issues raised in this update, please contact Stephen Hopkins or Pam Sidhu in the Employment Team.