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Employee Shareholders

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Employee Shareholders

An Employee Shareholder is a special type of employee. Employees are not usually allowed to agree to give up certain employment rights, but Employee Shareholders specifically do just that.

An Employee Shareholder trades at least £2,000 worth of shares for some of their employment rights. On the face of it, this doesn’t look like a very good deal for the employee. The rights they give up include the right to redundancy pay and the right to claim ordinary unfair dismissal, both of which can easily be worth more than £2,000. In addition they lose the right to request flexible working (with exceptions), the right to request time off for study, and must give a longer notice to return from family leave than “normal employees”.

Why would an employee wish to enter into such an agreement? Well, there are tax benefits in being an Employee Shareholder, specifically that the employee will be deemed to have paid £2,000 for their shares for income tax purposes, and that up to £50,000 of shares (valued at the time they are acquired)  is exempt from Capital Gains Tax at disposal. Unsurprisingly with things related to taxation and shareholding it’s complicated. Get advice at an early stage.

How do you create an Employee Shareholder? The employee must agree to being a shareholder, and they must have taken advice. Specifically they must have been given a written statement, taken independent advice, waited seven days and then agreed. The written statement must give details of the rights they are giving up, details about the shares and voting rights and details about whether the shares are transferrable or redeemable.

While you cannot force an employee to become an Employee Shareholder (to dismiss someone for not agreeing would be an automatically unfair dismissal) it appears you can offer a job to an applicant on the basis that they must become an Employee Shareholder.

So do employers get a good deal out of making someone an Employee Shareholder? The most obvious saving is in redundancy pay – at a time when the employer is going to want to save money then that could be valuable. What about the other rights given up? They may not be as useful as they appear.

One of the advertised benefits of Employee Shareholders was a more flexible workforce – without the right to claim Unfair Dismissal Employee Shareholders could be more easily sacked. But Employee Shareholders will still have the right to claim Automatically Unfair Dismissal (for example for whistleblowing or asserting a right under the Employment Rights Act) or dismissals that are discriminatory under the Equality Act, so employers certainly can’t wield the axe with impunity.

Similarly the removal of the right to request flexible working to all but those returning from parental leave (the exception is there because of European Law) is not as helpful as it may appear. Most of those asking to work flexibly are mothers who might have rights under sex discrimination law. Fathers who really want to request can take a week of parental leave and request.

Employee Shareholders were advertised by the (then coalition) government as being a way of cutting through red tape, while giving ordinary employees a share in the company they were working for thus encouraging their hard work. The reality is that they have been used mostly by higher-paid employees who were going to get shares anyway, in order to take advantage of the tax perks. Some have even had their lost rights returned to them through contract.

Employers should take advice before offering it as an option – as well as making sure the agreement is enforceable there are issues around share valuation and company law which may cause problems. Employee Shareholder agreements will be useful in the right circumstances.