How to Keep and Incentivise Staff – The Employee Shareholder

What is it and where does it come from?

The Chancellor, George Osborne, announced proposals for a new type of employee ownership arrangement. The suggestion was that employees would give up some of their statutory employment rights (see below for more details), in particular the right to claim unfair dismissal and the right to a statutory redundancy payment, in exchange for shares in their employing company as a way to provide more flexibility to employers to secure the right staff.

Employers can offer employees £2,000 worth of shares (free of tax and NI) and there is a capital gains tax exemption on the disposal of the shares provided they were worth no more than £50,000.
In practice it seems that the reason people have been entering into Employee Shareholder arrangements has not been to free employers up from the risk of employment claims, but to enable employees who were already going to receive shares to benefit from the tax breaks.

So, how do you become an Employee Shareholder?

You must be an existing employee or agree to be recruited as an Employee Shareholder.

Companies must provide their employee with a written statement of the particulars of the status of an Employee Shareholder and, specifically, the rights the employee will not have as an Employee Shareholder. The individual is then required to seek independent legal advice on the terms.

The individual should agree to become an Employee Shareholder having received the particulars and obtained legal advice. The company does not have to provide a separate agreement to record the individual’s agreement to the change, but clearly this would be a sensible approach.

The company issues or allots to the individual fully paid up shares in the company, which have a value, on the day of issue or allotment, of no less than £2,000. Anything less than a value of £2,000 and the individual will not be an Employee Shareholder. The valuation of the shares is one of the key issues in the rules around Employee Shareholders.

The only consideration given by the individual is entering into the agreement to become an Employee Shareholder. If the individual is found to have given any other consideration (ie, money) they will not be an Employee Shareholder.

What does the employer get in return?

Unfair Dismissal

Certain actions of employers may be regarded as unfair dismissal of an employee and certain actions may be regarded as automatic unfair dismissal. For an employee to bring an unfair dismissal claim against an employer, the employee has to have at least 2 years service to qualify. However, for automatic unfair dismissal, the employee enjoys the protection from day one of her employment. Automatic unfair dismissal occurs, for example, where a dismissal is connected with pregnancy or maternity leave, or for a health and safety reason, or in connection with working hours, rest periods and rest breaks.

The main right which is waived when an employee becomes an Employee Shareholder under the Employee Shareholder Scheme, is the right not to be unfairly dismissed. However, the employee does not waive his right for an automatic unfair dismissal claim under the Employee Shareholder Scheme. Other rights which are waived include the right to request time off to study, or for training and the right to request flexible working.

Statutory Redundancy Payment

Employee Shareholders also wave their right to a statutory redundancy payment (at the date of writing this blog up to £13,920 depending on age and service).

Not all rights are waived

Clearly not all employment law rights are waived by employees who are entering the Employee Shareholder Scheme. As mentioned above, there is no waiver of the automatically unfair dismissal but also there is no waiver of the protections against dismissals in breach of the Equality Act 2010 (ie., for discrimination) and dismissals for suspension in connection with health and safety grounds.

Importantly, employees have the right not to be subjected to a detriment on the grounds that they have refused to accept an offer to become an Employee Shareholder and will be regarded as automatically unfairly dismissal (where no 2 year service required) if the reason for their dismissal is that they refused to accept an offer by the employer to become an Employee Shareholder.

An employee who cares

Apart from less onerous employment rights set out above, the employer gets an employee who has a vested interest in the business. As an Employee Shareholder, the individual will truly care about how the business performs as they stand to benefit from a profitable business. This undoubtedly will boost productivity, meaning your business will flourish with a team of dedicated and motivated individuals.