Are There Any Winners With ‘Employee Shareholder’ Status?

The Growth and Infrastructure Bill has been meandering its way between the Houses of Commons and Lords. One of the more controversial aspects of the proposed legislation has been the concept of Employee Owner Status which was announced by the Chancellor of the Exchequer last autumn.

The main aim of this part of the legislation is to introduce in law a new type of employment contract which creates the concept of an ’employee shareholder’. The Government’s view is that this new concept will provide businesses with more flexibility in the way that they are able hire their staff and will help them to grow in the current challenging economic climate.

The main purpose of the proposals are that Employers can offer new Employees fully paid up shares in its undertaking with a value of no less than £2000. There is no maximum value on the shares that can be allocated to employee shareholders, however the exemption of Capital Gains Tax in the event of a sale of the shares for example upon the termination of the employment will only apply to shares with a value of up to £50,000 on acquisition.

In exchange the employee shareholder would be required to give up the following employment rights:

  • The right to claim unfair dismissal after two year’s continuous service, other than where a dismissal is automatically unfair;
  • Rights to a redundancy payment which again require two year’s continuous service.
  • Rights to have flexible working requests considered by the business.
  • Rights to request to undertake study or training.

In addition there will also be an increase to 16 weeks in the notice period that is required from an employee returning from maternity or paternity leave or adoption who has employee shareholder status.

Any agreement to enter into this type of arrangement must still be confirmed in writing, for example by issuing a minimal Statement of Terms and Conditions for Employee ownership status within 8 weeks. This must be signed by both parties.

The reaction to the employee shareholder proposals has been negative overall from employers as well as employee organisations. The are 9 main concerns as we see it:

  • The general overall complexity and associated cost of implementing employee shareholder status and share valuations.
  • The proposed loss of the employment rights is likely to lead to an increase in discrimination claims which remain unaffected by these proposals.
  • There is no requirement for employees to seek any prior advice. As such, there is a risk that employee shareholder status could be imposed on employees who do not understand the impact on their employment rights and who do not appreciate the risks associated with owning shares.
  • That employees will be left with shares with little value in the event that the business becomes insolvent.
  • It is a charter for accountants and tax lawyers to make money by drafting a variety of new share schemes designed to minimise tax due.
  • That the new proposals could increase tax avoidance generally to benefit senior employees of the business.
  • Parts of the proposals are very likely to lead to increased litigation and perhaps may be subject to legal challenge where attempts are made to compromise EU-driven employment rights.
  • Any shares over the value of £2000 that are awarded will be subject to income tax and national insurance deductions that must be paid upfront by the Employee.
  • Small businesses may not be in a financial position to offer employee shareholder status at all, especially where £2000-worth of shares represents a significant percentage of the share capital of the business.

Interestingly, job applicants who reject the offer of employee shareholder-style contracts may lose any entitlement to welfare benefits, if the Government gets its way.

It is now likely that these new style contracts of employment will not become operative until this autumn at the earliest. There will be considerable uncertainty and confusion in their implementation which will almost certainly lead to plenty of case law.

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