Employees to swap employment rights for shares

Year Published: 2013

In 2012, the Chancellor announced proposals for a new type of employee ownership arrangement, under which employees would give up some of their employment rights in exchange for shares in the company which employs them.

The provisions were introduced as part of the Growth and Infrastructure Bill. Following a tortuous passage through Parliament, the bill received Royal Assent on 25 April 2013 and became the Growth and Infrastructure Act 2013. It was announced in the 2013 Budget that the new scheme would be introduced on 1 September 2013.

The Act will insert a new section 205A into the Employment Rights Act 1996 providing that an employer and employee can agree that, in consideration of the individual becoming an “employee shareholder” (instead of just an “employee”), the company will issue or allot a minimum of £2,000 worth of shares to the individual, with any gains made on the first £50,000 of shares being exempt from capital gains tax.

These shares are allocated in return for the employee agreeing to give up their rights to:

  • Unfair dismissal (except in health and safety cases, automatically unfair cases, or cases where the dismissal is discriminatory under the Equality Act 2010).
  • A statutory redundancy payment
  • The right to make a flexible working request
  • Requesting time off for study or training
  • Providing 8 weeks’ notice of a return to work from maternity, which will be increased to 16 weeks’ notice.

Under the new scheme, employers will not be able to force existing employees into this contractual arrangement, however this can be offered to them. The scheme can be implemented with new employees who start work after September 2013. Companies of any size can take part in the scheme and employers can offer this exclusively to new recruits if they wish.

This scheme will effectively create a new contractual relationship of ‘employee – owner’ in which an employee can take shares of a business in return for sacrificing some of their legal rights.

There are a number of concessions that were required before the legislation was passed:

  • Existing employees can be offered the option to move to employee shareholder status, however will be protected from any detriment if they refuse to move over
  • There will be a 7 day cooling off period during which the employee can withdraw their acceptance to the scheme and the status will not be binding in that period
  • The first £2000 of shares will be given free of income tax
  • Employers must provide the employee with the full details about their shares and the rights they have accordingly
  • Any job seeker who refuses an offer which attracts employee shareholder status will not forfeit their social security benefits

Points to consider

The new legislation will have a fundamental impact on the following areas:

  • Recruitment
  • Employee retention
  • Employee status
  • Termination of employment
  • Flexible working arrangements which would significantly impact on the female workforce
  • Tax liabilities
  • Employment tribunal traffic

Businesses must consider whether this is a viable option to them and how the shares will be valued. For those businesses listed on the stock exchange the value of shares would be easy to calculate, however, no method of calculating the value of shares for unlisted companies has yet been formulated. Employers would also need to consider who would want to buy the shares of an unlisted company where the value is in question. This may prove costly on both parts, with accountants and lawyers battling over the share value, which could ultimately force the employee into accepting significantly lower sums for their shares as an alternative to entering into expensive legal action.

Risks foreseen

If employers are proposing to offer this scheme exclusively for new recruits they will need to establish whether this will assist them in recruiting and retaining the best candidates for the job. Employees will need to consider whether they are willing to forego their employment rights in return for shares in a new company. Will there be a requirement for the production of accounts to be presented to candidates in order to assist them in deciding whether to accept the offer of employment under these terms?

Clearly the value of the shares would depend highly on the performance of the company itself and therefore could give rise to poorly performing companies providing shares to employees in order to avoid redundancies and ultimately provide them with no financial benefit if the company ceases to trade. Will these employees be entitled to claim redundancy pay from the insolvency service after they have sacrificed their rights in employment law for worthless shares?

Employees must be provided with information on a regular basis in regards to company performance and the likely value of their shares. Will there be a tendency for employees to “get out while the going is good” and use the system to make themselves profits? Experts, specialists, niche roles and highly skilled much sought after employees could essentially play the jobs market in a similar manner to the stock market “employ low and resign high.”

If the employee –owners are only contracting out of the above rights there is however still a risk of increased litigation in other areas of employment law, such as discrimination or equal pay, either as a means of leverage in relation to the value of shares or to attempt to obtain a commercial settlement from the employer. There is a risk that an employer who terminates an employee – owner contract may become engaged in a legal battle over share value and also an employment tribunal for an unfounded claim.

For further information on employment matters, contact our Employment team.

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