Clause 27 of the recently passed Growth and Infrastructure Act creates a new “employee shareholder” employment status, under which employees sacrifice certain employment rights in return for at least £2,000 worth of fully paid shares in their employer. No income tax or NICs will be due on the first £2,000 of shares at the time they are received by the employee, and gains made on up to £50,000 worth of shares are exempt from capital gains tax.
The rights that employees would give up in exchange for shares are:
- Most rights against unfair dismissal
- Rights to payments in a redundancy situation
- The right to make a request for flexible working
- Certain statutory rights to make a request to undertake study or training
There are also amended notice periods where the employee shareholder notifies the employer of their intention to return to work during any maternity, paternity or adoption leave period.
An existing employee cannot be forced by their employer to become an “employee shareholder”. Even where the employee does agree, a process must be followed for the change in status to be effective:
- The company must give the individual a written statement defining the status of employee shareholder and giving extensive details of the rights attached to the shares being issued.
- Having received the statement, the employee must receive legal advice from a “relevant independent adviser”. This advice should cover the terms and consequences of becoming an employee shareholder, including details of the rights they will be giving up. It must also address the shareholding itself – including, for example, explanation of the voting, dividend and other rights attached to the shares being offered and the terms under which they can be redeemed or sold. Where there is a cost to the advice provided, the company must meet the reasonable cost, even if the individual chooses not to proceed with the agreement.
- To give the individual ample opportunity to consider the consequences, seven days must elapse after the advice is given before the agreement can be finalised.
Business minister Michael Fallon said the new shares for rights scheme will allow employees in fast-growing start-up companies to share in the success of their business: “Younger companies at the beginning of their lives will be able to use this status at a time when they might not be able to pay their staff more than competitor companies, or those already established in the marketplace”.
Employees of an entrepreneurial mindset potentially gain a meaningful tax-efficient benefit in exchange for sharing risk. As they might otherwise have been self-employed, it’s been argued that individuals like these might see the rights they are giving up as being of limited value. While the £2,000 of shares is a minimum value for a shares for rights agreement, there’s nothing to stop companies offering a higher value of shares to make the offer more attractive – and therefore to attract the best new employee shareholders who can help drive the business forward. Employees with this type of stake in the business, just like with traditional share incentive schemes, are likely to be more engaged and productive.
For the employer, as well as a further means of attracting staff with an entrepreneurial mindset, there is reduced fear of being taken to employment tribunal, which the government believes is deterring businesses from hiring new staff. If the shares for rights scheme did help to encourage employment, there’s obvious benefits for business across the UK economy.
However, at its worst, the scheme has been described as a licence for unethical employers to exploit their workforces. Unions, trade bodies and employer organisations alike have lined up against the proposals and, given the negative coverage, there is the potential for initial reputational damage for companies who choose to operate the new employee shareholder status – as well as further damage if claims of coercion arise in the future. If employers wish to offer an incentivising stake in their business, critics argue, there are a number of share incentive schemes already available that do not require workers to sacrifice basic rights.
Clearly, the employee shareholder status would not suit everyone. Many employees are more risk averse and also have less capacity for risk – particularly regarding the prospect of redundancy. Many more, who sometimes shun other employer share schemes, will fear having all their eggs in one basket – where if the company fails they’ll loss both their job and the shareholding they’ve acquired in exchange for employment rights. In established companies with less immediate potential for share price growth, the potential reward which the worker would receive via shares for rights is likely to be lower than in a small, high-growth company.
While an existing employee cannot be forced to adopt the new status, there appears to be nothing to prevent a new role being advertised only on an employee stakeholder basis – in that case, the only choice an applicant has would be not to apply for the role. If the individual has few employment options available, they may effectively be forced to accept a role with reduced rights. Alternatively, if talented individuals do have options available, they may choose to avoid businesses where the reduced rights of employee shareholder status is the only one on offer – meaning that by operating shares for rights a company could be restricting the pool of good job candidates it can attract.
In smaller companies, where the shares for rights scheme is most likely to be of any benefit, valuing the shares each time an employee shareholder agreement is entered into will present its own challenges. Agreeing a value, which must be consistent with that under the Taxation of Chargeable Gains Act 1992, is likely to involve time and expense. There will be other expenses involved for companies in using the scheme, alongside the cost to the owners of the business in diluting their equity stake. Putting together documentation and undertaking the agreement process itself will take time. Companies must meet the reasonable costs of legal advice for employees, whether or not they then agree to the employee shareholder status. If a company then has both employees and employee shareholders working for it, details will need to maintained for each separately so that the differing rights of each group are taken into account in redundancy situations and when requests for flexible working or study and training are made.
We’d love to hear from employers about whether you’ll consider operating the new shares for rights scheme. Do the statutory rights of employees deter you from hiring new staff? Or are there other, more important reasons that the government needs to tackle instead?