Bernadette Daley: Employee shareholders – dealing with the HR aspects

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You may be forgiven for thinking that we already had a confusing set of labels for different types of workers – employees, workers, agency workers, consultants, the self-employed. As of 1 September 2013, we have a new category – the employee shareholder. HR practitioners need to be familiar with this new status, so that they can help evaluate whether it might work for their organisation and, if it does, to decide how to implement and manage their employee shareholders.

Why do we have a new category of employee?

The Government’s aim is to encourage growth and allow more flexibility in managing employees. It believes that restricting access to certain employment rights, in return for shares, will encourage companies to recruit more, give them more freedom to hire and fire employees and encourage greater involvement in the employer’s business.

How do you become an employee shareholder?

An employee needs to agree to give up certain rights in return for shares with a market value of at least £2,000:

  • Time off for study or training
  • The ability to request flexible working (with an exception for parental leave)
  • Unfair dismissal
  • Statutory redundancy pay

Longer notice periods (16 weeks) will apply when returning from maternity, adoption or paternity leave. Automatically unfair dismissals, such as unlawful discrimination, are not included in the above. Employees cannot be required to pay for the shares; they must be awarded fully paid up shares. Importantly, the BIS Guidance makes clear that, if an individual sells their shares, this would not change their status as employee shareholders; that needs to be done via a change to their employee shareholder contract.

What does the process involve?

The employer must set out in writing what rights are being sacrificed and what rights attach to the shares. The BIS Guidance provides a full list of the information to be provided.

The employee must take advice about the offer from an independent solicitor, barrister, legal executive, union official or advice centre. The employer must pay for the reasonable costs incurred in getting that advice, even if the employee does not agree to become an employee shareholder. What is ‘reasonable’ is not defined. The employee must also be given a 7 day cooling off period from when they receive that advice, to decide whether to accept.

What happens if employees do not agree?

Existing employees are protected from dismissal or unfavourable treatment if they do not agree. However, offers to new hires can be conditional on them agreeing to become employee shareholders, which means they have to agree, if they want to take up employment.

What are the advantages?

Employees will have reduced rights and, therefore, may be considered easier to manage. The Government believes that this flexibility will encourage more recruitment.

Having employee shareholders may result in greater participation in the business, although there are no set rules on what rights or entitlements these shareholders should enjoy. Employees have the potential upside of an increase in share value and may be entitled to dividends, although this is not compulsory.

The new status also has tax advantages as gains made on the first £50,000 of shares are exempt from CGT, provided the value of the shares when acquired was £50,000 or less. There is no upper limit on the amount of shares that can be awarded but as the potential CGT saving applies to shares valued up to £50,000 when awarded, this may place an effective cap on the share award.

What are the disadvantages?

Employers will either need to introduce a new scheme for this new shareholder, or amend an existing scheme, consider what rights attach to these shares, how to value them (particularly if shares are not publically traded) and what will happen when the employee’s employment is terminated. If no provision is made for buy-back of the shares, the individual will retain them, together with any rights or benefits that attach to them, even if their employment terminates.

Whilst there is a potential upside if shares increase in value, there is the corresponding downside if they reduce in value. £2,000 worth of shares may not adequately compensate employees for the loss of workplace rights.

Companies have also expressed concern about how they would manage this new workforce. Would this mean that, in a redundancy selection exercise, all employee shareholders are dismissed first? This illustrates an added complexity – whilst they would not have ordinary unfair dismissal rights, employee shareholders would still be entitled to be consulted with as part of any collective redundancy exercise. HR practitioners will need to consider all aspects of an employee’s management to assess any changes required.

Employment lawyers have also predicted more discrimination claims from those who cannot claim unfair dismissal, which could mean they prove no easier to deal with than other employees.

What should HR practitioners do now?

Consider whether this might work for your organisation. If not, no further action is needed as this is a voluntary process.If you go ahead, you will need to:

  • Decide who this will apply to
  • Decide what arrangements will apply – including how you will value shares, what rights attach to them, what will happen when employees leave, how much you will pay towards the employee’s advice on the offer
  • Develop an employee shareholder offer letter and contract, setting out the arrangements, and make any required changes to share scheme rules
  • Outline the process to obtain employee agreement
  • Consider and amend your existing policies and practices, if changes are needed for this new employee category.

For further information, BIS Guidance was issued on 1 September 2013 (www.gov.uk/employee-shareholders) and HMRC guidance is available on www.hmrc.gov.uk/employeeshareholder.

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