Employment Alert: Rights for Shares

The amended employee shareholder provisions of the Growth & Infrastructure Bill have been approved, following a number of concessions on the part of the Government to answer concerns raised by the House of Lords. The Bill has received Royal Assent, and is now called the Growth & Infrastructure Act 2013.

The new employee shareholder status is likely to come into existence on 1 September 2013. Employers will be able to offer individuals shares worth a minimum of £2,000 in exchange for certain rights (such as the right to claim unfair dismissal or a statutory redundancy payment). The first £2,000 of shares will not be subject to income tax. Any gain on the first £50,000 worth of shares will not attract Capital Gains Tax on disposal of the shares.

For the employee shareholder status to be valid:

  • the employer must provide a written statement to the individual which sets out:
  • the fact that they are waiving certain rights; and
    • the fact that they are waiving certain rights; and
    • prescribed, detailed information relating to the shares that are being offered.
  • the individual must take independent legal advice on the effect of the employee
    shareholder status; and
  • the employer must pay the reasonable costs of this advice, regardless of whether
    the individual accepts the role.

Having taken the advice, the individual then has a seven day cooling off period in which to reconsider their position. Accordingly, the agreement will not become binding until after the cooling off period has elapsed.

If an individual in receipt of benefits refuses an employee shareholder role, they will not lose their benefits. An existing employee who refuses to accept new employee shareholder terms will be protected: any dismissal on the grounds that they have refused to sign the new agreement will be automatically unfair.

Despite the concessions, a number of questions still remain. It is unclear what will happen to an employee shareholder’s shares (and, indeed, their employment rights) on a TUPE transfer. If an employee complains that their original shareholding was not worth £2,000, it is not clear if they will therefore be able to claim that they are entitled to employment rights. It is also not yet clear whether departing employees will have the right to sell the shares on exit, and, if so, whether the employer will be obliged to purchase them if other shareholders refuse.

Significant concerns have been voiced about the ease with which private companies will be able to value their businesses; if they have to do this every time they recruit an employee shareholder, this could be very costly. Further, if there is a dispute as to the valuation, the cost of defending shareholder disputes in the High Court is likely to be far more than the cost of defending Employment Tribunal proceedings. In any event, employee shareholders will still be able to bring claims for unlawful discrimination and whistleblowing.

Many commentators have noted that the scheme is administratively burdensome and appears to satisfy neither employers nor employees. However, if you are interested in exploring whether this may be right for your business, please contact the Employment team at Mishcon de Reya or call +44 20 7440 7000.