Following much debate, on 24 April 2013 the House of Lords finally gave its approval to employee shareholder status which will now take effect from Autumn 2013. This means that in return for a grant of a minimum of £2,000 worth of shares an 'employee shareholder' gives up certain key rights including unfair dismissal, a statutory redundancy payment and flexible working.

The approval did however come at the cost of an added safeguard for employee shareholders including a last minute concession regarding the provision of legal advice for the prospective employee shareholder. An agreement that someone will become an 'employee shareholder' will be invalid unless, prior to entering into the contract, the individual has received advice from a relevant independent advisor (i.e. a lawyer, CAB, law centre, union etc.), in a similar manner as with a Compromise Agreement. And just as with a Compromise Agreement, the employer must pay the reasonable costs of seeking that advice - but in this case whether or not the individual goes on to accept the contract. This provision is likely to cost the employer several hundred pounds per prospective employee shareholder and potentially a much greater amount for senior executives where there is significant value in the shares granted and complex terms encapsulated in a Shareholders' Agreement.

The Government has also announced that it will to introduce an exemption within the benefits in kind legislation to ensure that the cost of the legal advice will not lead to an income tax charge to the individual.

The requirement for independent legal advice is in addition to the safeguards already imposed by the Lords, namely:

  • there must be a seven day 'cooling off' period, during which any acceptance of employee shareholder status will not be binding;
  • employers must provide a written statement with full details about the shares and the rights they carry; and
  • existing workers will be protected from detriment if they refuse to switch to an employee shareholder contract.

As a result employee shareholder status must be entirely optional in nature. It also means that the relative benefits to the employer in terms of the reduced employment rights of offering employee shareholder contracts need to be weighed carefully against how many job applicants are likely to accept the offer, the legal and administrative costs of implementing the structure needed to operate it and the legal costs of advice for the employee shareholder.

As before though it may be that the greatest uptake is among senior executives, whose remuneration package has a significant equity component and who are keen to make full use of the full Capital Gains Tax exemption on grants up to GBP 50,000.

From what started out as a measure to promote growth and introduce a new class of entrepreneurial employee with reduced rights but a stake in the business in return looks like it may have become bogged down in red tape to the point that many employers may take the view it is more trouble than it is worth, certainly for lower paid employees.

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