I was invited to join the BBC’s Your Money programme (video below) to discuss the introduction of employee shareholders under the Growth and Infrastructure Act 2013.  Although the provisions are introduced from 1 September 2013, there remains some uncertainty about how they will change we work and how many employers will embrace them.

In essence, this is a “rights for shares” scheme that allows employees to give up some of their employment rights in exchange for shares in their employer company.

Any company with share capital can enter into an agreement with an employee to allow them to become an “employee shareholder”.  An employee shareholder will receive fully paid-up company shares that have a value of no less than £2,000 on the day of issue.  There is no restriction on the maximum value of shares that can be offered.

In exchange for the shares, an  employee shareholder will give up the right to:

• not be unfairly dismissed (subject to certain exceptions);
• a statutory redundancy payment;
• request to undertake study or training; and
• request flexible working.

In addition, the notice that employee shareholders will be required to give their employer before returning to work after maternity, parental, paternity, or adoption leave will be increased from 8 to 16 weeks.

Employee shareholders will still be entitled to claim unfair dismissal where their dismissal breaches the Equality Act 2010 or health and safety legislation or is automatically unfair such as in cases of whistleblowing.

An existing employee has the right to refuse to accept an offer to become an employee shareholder and must not suffer a detriment for refusing to accept such an offer or be dismissed.   However, employers can make a job offer contingent on a new applicant agreeing to become an employee shareholder.

The procedure

Each employee or applicant to whom an offer has been made must be provided with information including details of:

• the employment rights the employee shareholder gives up;
• the rights attached to the shares; and
• whether there are any restrictions on the transferability of the shares once given.

This information must be included in a written agreement upon which the employee receives independent legal advice paid for by the employer (whether or not the agreement is eventually signed).  Further, employees and applicants must then be given a seven-day cooling-off period, during which time they can withdraw their agreement.

Future uncertainty

Only time will tell how many companies take up the employee shareholder opportunity.  They were envisaged to encourage growth in smaller and medium sized businesses and start-ups.  However, there may be little incentive for employees who will be immediately liable for income tax and National Insurance Contributions for any share allocation over £2,000.  Alternatively, employer owners will be giving away a stake in their business for rights which often aren’t live for the first two years of employment or in smaller businesses.

For established businesses, there may be the difficulty of managing a two-tier workforce and considerations about how to manage situations such as transfers of businesses, redundancies and existing share schemes which they may still be contractually obliged to provide.  How the buy-back of shares may be managed on termination is also not clear.

In reality, we should expect to see the law developed and nuanced through case law as and when problems and questions do arise.  Until then, I fear only the brave or foolish will embrace employee shareholder status as the new way of working.  But I am a risk averse lawyer, I suppose.