Employee Shareholder

A new type of employment status came into effect in England, Wales and Scotland on 1 September 2013, “the employee shareholder”. Employee Shareholder status is not currently in place in Northern Ireland. 

 The new legislation is aimed at providing businesses with greater flexibility in the way they engage staff and how they manage their employer obligations, particularly in relation to dismissal. 

An employee shareholder is an employee who has agreed to have different employment rights, in return for being issued shares in the employer’s company. 

To be an employee shareholder, the following conditions must be met:

• the employee and employer agree that the employee will be an employee shareholder
• the company issues or allots shares of a minimum value of £2,000 to the employee
• the company provides the employee with a written statement of particulars of the status of employee shareholder, explaining the rights that attach to the employee shares
• the employee gives no consideration other than by agreeing to become an employee shareholder

Tax implications

Shares acquired under an employee shareholder agreement on or after 1 December 2016 are subject to income tax and capital gains tax.

Where an employee shareholder agreement was entered into before 1 December 2016, shares acquired up to the value of £2,000 were not subject to income tax and National Insurance Contributions when they were acquired. With regard to agreements entered into before 1 December 2016 profits made by the employee on disposal of up to £50,000 worth of shares will be exempt from capital gains tax. However for those agreements entered into on or after 17 March 2016 and before 1 December 2016 there is a lifetime limit of £100,000 on gains eligible for this capital gains tax exemption.  

Written Statement of Terms & Conditions / Contract of Employment

Employee shareholders have the right to be issued with a written statement of particular of employee shareholder status and the rights attaching to their shares.

This written statement must explain:

• the specific employment rights that do not apply to the employee shareholder
• the different notice periods that would apply in the case of the employee shareholder in relation to maternity, adoption and additional paternity leave.

The written statement must also provide specific information about the rights that attach to their shares. This includes, but is not limited to, details of whether:

• any voting rights attach to the shares
• the shares carry any rights to dividends.
• the shares would (if the company were wound up) confer any rights to participate in the distribution of any surplus assets.
• there are any restrictions on the transferability of the shares.
• the employee shares are subject to other rights.

Excluded statutory employment rights

An employee shareholder has the same statutory employment rights as an employee, with the following exceptions. Employee shareholders must give up the right to:

• request time off work to undertake study or training
• request flexible working (but this right does remain in limited circumstances on returning from parental leave)
• make a claim for ordinary unfair dismissal
• a statutory redundancy payment.

Where protection from unfair dismissal remains

Employee shareholders exclusion from the right not to be unfairly dismissed is only in cases of ordinary unfair dismissal, that is to say cases where dismissal is on the grounds of conduct, capability, redundancy, some other substantial reason or statutory ban. Employee shareholders retain the protection from unfair dismissal where the dismissal is for the following reasons:

• a discriminatory reason in breach of the Equality Act 2010
• a reason that would be automatically unfair
• in cases of health and safety.

Working families

Employee shareholders retain the majority of rights available to working parents.

However, where an employee shareholder wishes to return to work early from a period of maternity, adoption or additional paternity leave, the notice requirement is extended to 16 weeks.

Employee shareholders are generally excluded from the right to make an application for flexible working. However there is a limited exception where an employee shareholder is returning from a period of parental leave.

Employee shareholders returning from a period of parental leave are entitled to make an application for flexible working within a period of 14 days of returning to work. If such a request is made, the employer must comply with the statutory flexible working procedure.

Discrimination

Employee shareholders have the same protections from discrimination under the Equality Act 2010 as other employees. Employers therefore, must ensure that employee shareholders are not treated unfavourably on the grounds of any protected characteristics.

Particular care must be taken when dismissing an employee shareholder to ensure that the reason for the dismissal is not discriminatory under the Equality Act 2010. An employee shareholder would still have the right to pursue a claim of unfair dismissal in those circumstances.

Validity of the Agreement

 In order for an employee shareholder agreement to be valid, the following requirements must be met before the agreement is made:

• the employee must receive independent legal advice as to the terms and effect of the agreement
• any reasonable costs incurred by the employee receiving advice must be paid by the employer
• a period of seven days has passed since the day on which the individual receives advice.

What are considered 'reasonable costs' is not defined in legislation. The employer has this obligation whether or not the individual agrees to become an employee shareholder.

In most cases the employer will, therefore, pay the full cost incurred in the employee receiving advice unless there is a basis to argue that the particular cost is not reasonable. In any event, given the potential flexibility available to employers who successfully negotiate an employee shareholder agreement, the employer is more likely to pay the costs in full to help secure the employee's agreement.

Detriment and Dismissal

Existing employees are under no obligation to become employee shareholders.

An employee has the right not to be subjected to a detriment by the employer on the grounds that the employee refused to become an employee shareholder.

An employer must not, therefore, treat an employee unfavourably on the basis of such a refusal. For example, it would be unlawful to refuse training or promotion opportunities if the reason for this was on the grounds of the refusal to become an employee shareholder.

Similarly, an employee will have the right to claim unfair dismissal if the reason, or the principal reason, for the dismissal was that the employee refused to become an employee shareholder. Such a dismissal will be automatically unfair.

The employer can however, make an offer of employment to a new employee conditional on the individual agreeing to become an employee shareholder.