16th May 2013

INFORMATION
UPDATE

 Issue No.  2013/09

 Sentient
              

 

EMPLOYEE SHAREHOLDER AGREEMENTS

The government’s proposal to introduce a new employment status category referred to as ‘Employee-Shareholders’ is now close to being implemented.  Having rejected it twice, the House of Lords finally voted to accept the relevant provisions of the Growth and Infrastructure Bill on 24th April following further concessions by the House of Commons.

Royal Assent has now been given and it is understood that the Department for Business Innovation and Skills (BIS) intend to implement this new type of Employee status in Autumn 2013.

As you might guess there is plenty of red tape within this legislation, some of which we touch on here.  Firstly, and rather obviously, an employer that is a sole trader, partnership or a limited liability partnership (LLP) cannot enter into an Employee-Shareholder agreement with an employee.  The employer must be a Limited Company to do this.

When this comes into law, a (Limited Company) employer could give shares in the Company (worth between £2,000 and £50,000) to a new recruit / employee who would then become an Employee-Shareholder.  In return the Employee-Shareholder would forfeit certain rights including:

  • unfair dismissal rights. NOTE: they would retain the right not to be automatically unfairly dismissed (e.g. dismissal on grounds of whistle-blowing, health and safety, asserting a statutory right) and not to be discriminated against;
  • redundancy pay;
  • the right to request flexible working;
  • the right to request time off for study/training;

Also included in the provision is a requirement for Employee-Shareholders to give more notice (16 weeks instead of 8 weeks) to their employer of their intention to return early from maternity or adoption leave. 

The Employee-Shareholder would also retain the right to bring a claim of harassment, victimisation, and/or discrimination because of or arising from their protected characteristic (e.g. age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, sex and sexual orientation).

As an incentive, the Government would charge no capital gains tax at all on the profit an Employee-Shareholder made on their shares.

The concessions made by the government include (in no particular order):-

  • The first £2,000 of shares given to the Employee-Shareholder will not attract income tax.
  • A jobseeker who refuses a job on an Employee-Shareholder basis will not automatically forfeit their unemployment benefits.
  • A provision meaning that the potential Employee-Shareholder cannot accept the offer within seven days of it being made.  This gives the potential Employee-Shareholder a 7 day cooling off period.  The employer remains free to refuse to offer the job to a prospective employee who does not want to take up Employee-Shareholder status.
  • The employer will need to provide a written statement setting out the rights that the employee is forfeiting by accepting the shares.
  • Existing employees will be protected from detriment if they refuse to switch to an Employee-Shareholder contract.
  • The employer will also need to provide a written statement setting out the details of the shares being offered; for example, whether:
  • they are voting or non-voting shares,
  • they carry a dividend,
  • they carry a right to a share in the company’s assets if it is wound-up,
  • pre-emption rights are excluded, and
  • they carry any drag-along and tag-along rights. 
  • The agreement that an employee shall 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).
  • The employer will have to pay the reasonable costs of that advice - whether or not the employee then accepts the role - if they would otherwise have been payable by the employee. If the employee does not receive independent advice before agreeing to become an Employee-Shareholder, then they will be an ordinary employee.

Phew… and of course we expect a few twists and turns along the way.  We can’t help thinking  that for most small and medium sized businesses this ‘idea’ which by definition, waters down the shareholding, will be of little interest.  That said, if it is something you wish to explore or wish to discuss in more detail please contact us.

Need help with preparation of Shareholder Agreements?  Call us, we will be happy to provide you with a quote.


 

 

 

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