Why do we have a new category of employee?
The Government's aim is to encourage growth and allow more flexibility in managing employees. It believes that restricting access to certain employment rights, in return for shares, will encourage companies to recruit more, give them more freedom to manage and encourage greater involvement in the employer's business.
How do you become an employee shareholder?
An employee needs to agree to give up certain rights in return for shares with a market value of at least £2,000:
- Time off for study or training
- The ability to request flexible working (with an exception for parental leave)
- Unfair dismissal
- Statutory redundancy pay
Longer notice periods will apply when returning from maternity, adoption or paternity leave.
What does the process involve?
The employer must set out in writing what rights are being sacrificed and what rights attach to the shares. The employee must take advice about the offer from an independent solicitor, barrister, legal executive, union official or advice centre. The employer must pay for reasonable costs incurred, although what is 'reasonable' is not defined, and be given a 7 day cooling off period from when they receive that advice.
What happens if employees do not agree?
Existing employees are protected from dismissal or unfavourable treatment if they do not agree. However, offers to new hires can be conditional on them agreeing to become employee shareholders, which means they have to agree, if they want to take up employment.
What are the advantages?
Employees will have reduced rights and, therefore, may be considered easier to manage. Having employee shareholders may result in greater participation in the business, although there are no set rules on what rights or entitlements these shareholders should enjoy. Employees have the potential upside of an increase in share value.
The new status also has tax advantages as gains made on the first £50,000 of shares are exempt from CGT, provided the value of the shares when acquired was £50,000 or less.
What are the disadvantages?
Employers will either need to introduce a new scheme for this new shareholder, or amend an existing scheme, consider what rights attach to these shares, how to value them (particularly if shares are not publically traded) and what will happen when the employee's employment is terminated. Whilst there is a potential upside if shares increase in value, there is the corresponding downside if they reduce. £2,000 worth of shares may not adequately compensate employees for the loss of workplace rights.
Companies have also expressed concern about how they would manage this new workforce. Would this mean that, in a redundancy selection exercise, all employee shareholders are dismissed first? HR practitioners will need to consider all aspects of an employee's management to assess any changes required.
Employment lawyers have predicted more discrimination claims from those who cannot claim unfair dismissal, which could mean they prove no easier to deal with than other employees.
What should HR practitioners do now?
If you go ahead, you will need to:
- Decide who this will apply to.
- Decide what arrangements will apply - including how you will value shares what rights attach to them, what will happen when employees leave, how much you will pay towards the employee's advice on the offer.
- Develop an employee shareholder offer letter and contract, setting out the arrangements, and make any required changes to share scheme rules.
- Outline the process to obtain employee agreement.
- Consider and amend your existing policies and practices, if changes are needed for this new employee category.
Bernadette Daley (pictured) is a partner in the employment group at Mayer Brown International
