Employee Shareholder Status – An Innovative Solution for Innovative Employers?

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After twice rejecting the Government’s proposals, the House of Lords has just finally voted to accept the much argued Clause 27 of the Growth and Infrastructure Bill, thereby paving the way for new legislation that will create a third type of UK employment status—Employee Shareholder.

Clause 27 – Employee Shareholder

The new employee shareholder status is aimed at small rapidly growing companies who want to create a flexible workforce without some of the constraints that are currently imposed by UK employment law.

Employee shareholders will receive a minimum of £2,000 of shares in their employing (or parent) company. In return, the employees will waive some of their employment rights as follows:

  • No right to claim unfair dismissal (except where the dismissal is automatically unfair or it is for a discriminatory reason);
  • No right to request flexible (part time) working arrangements (except soon after returning from parental leave);
  • No right to a statutory redundancy payment; and
  • No right to request leave to undertake study or training.

There’s no restriction on the type of shares that employers can issue and employers can require employee shareholders to forfeit their shares if they leave the company.

Conditions of the Scheme

Employee shareholder status is available to both new and existing employees; although companies are not able to force the status on existing employees (a dismissal for an employee’s refusal would be unfair). Companies can offer new employment, conditional upon the individual agreeing to be an employee shareholder.

The UK government had to make various concessions to the original form of employee shareholder that was proposed before the House of Lords would approve it:

  • Employee shareholders must subscribe for a minimum of £2,000 of shares (market value at time of becoming beneficially entitled) and the employee must receive independent legal advice before entering into an employee shareholder agreement. Employers are liable to cover the reasonable cost of this legal advice and without such advice the employee shareholder status will be void and the individual will be an ordinary employee (albeit with £2,000+ worth of shares). This is in effect an up-front compromise agreement (waiver of claims) which has not previously been possible. The employer is still liable to pay for the advice even if the employee ultimately decides not to take the employer up on the offer.
  • There is a seven day “cooling off” period following an offer of employee shareholder status from a company, during which time any acceptance by an employee of the status will not be binding and may be withdrawn.
  • Employers must provide a written statement explaining (i) details of the rights that the individual is giving up and (ii) full details about the shares and the rights they carry, including, amongst other things, whether they carry any voting and dividend rights.

How Useful is the New Employee Shareholder Status?

Whilst commentators are generally of the view that the new scheme will be of limited use (and as some have suggested, that this is really just an opportunity for the UK Government to show they are trying to promote growth by relaxing regulation), perhaps there is some merit in providing entrepreneurial rapid-growth companies with the opportunity to offer cheap equity to staff, without the fear of significant financial repercussions should the employment relationship turn sour.

The scheme effectively allows companies in their early stages to experiment by hiring different employees with an array of skills until the ideal workforce is assembled. The cost to the company is some equity (which is forfeited by the employee upon leaving the company in any event) and the cost of paying for a couple hours of legal advice—a far cry from the cost of litigating a tribunal claim three years into the employment relationship. Arguably however, the increase in the qualifying period for unfair dismissal claims from one year to two has already achieved a level of flexibility far greater than this new status will and does not involve providing employees with any shares. In any event we remain sceptical, in light of the protective provisions demanded by the House of Lords, as to how many employees will be persuaded to give up unfair dismissal protection worth a possible £75,000 in exchange for £2000 worth of shares in a potentially high risk venture.