Hogan Lovells believes new shareholder employee status will have limited appeal

Elizabeth Slattery, employment partner at Hogan Lovells, has commented on the introduction of a new ‘employee shareholder’ status, which will become available for use on 1 September 2013. The law firm believes that the status will be right for some businesses but not necessarily for all.

To recruit someone as an employee shareholder an employer must give them at least £2,000-worth of shares in the company. Although shareholder employees will not be able to claim unfair dismissal or a statutory redundancy payment, and have less favourable statutory rights than other employees in some respects, their shares are given advantageous tax treatment. Up to £50,000 of the shares will not be subject to capital gains tax (CGT) on disposal.

Before they can enter into an employee shareholder agreement, individuals need to take independent legal advice, paid for by the employer. Once the advice is received the agreement takes effect only after a seven-day cooling-off period.

Slattery said: ‘The new employee shareholder status may be attractive for some businesses and employees, particularly companies with a prospect of significant growth. Employees in those companies may see a “rights for shares” trade-off as worthwhile.

‘However, it is unlikely to be a status that large numbers of employers are going to want to adopt for their staff, either because they do not want to be seen to be asking employees to give up basic statutory protections, or because the administration of employee shareholder contracts is seen as too bureaucratic.’

Louise Whitewright, employee share incentives partner at Hogan Lovells, added: ‘Even for those companies likely to adopt the new status because of the tax breaks available to employees, there will be significant tax and corporate issues to overcome.

‘HMRC guidance will be available in due course and a process is in place for tax valuation, which will help. However, the new status is likely to be confined to private equity companies with few employees and the flexibility to implement what is, in effect, a new form of employee share plan. It is likely to be used in combination with other reliefs already available to such companies.’

Slattery said: ‘Although employee shareholders will have fewer statutory rights than “ordinary” employees, it must be noted that they are not being asked to give up the statutory rights about which employers are typically most concerned.

‘Employee shareholders retain some important protections such as the right not to be discriminated against. They will also be able to bring claims of “automatic” unfair dismissal – such as being dismissed for reasons related to pregnancy or taking family leave, or for blowing the whistle on corporate malpractice. Employee shareholder status certainly does not obviate the risk of employment-related claims.’

Practical points to consider when deciding whether to use employee shareholder status

  • Employers need to balance the cost of paying for the employee’s legal advice and the cost of providing the shares (including valuation costs) against the benefit of not facing various statutory claims
  • Particularly for small companies, valuing the shares given to the employee may be difficult. If the shares turn out to be worth less than £2,000, the individual will not have employee shareholder status and will retain their normal employment rights. There will also be tax and corporate issues for the company
  • Existing employees cannot be forced to become ‘employee shareholders’. If an existing employee is dismissed because they refuse to become an employee shareholder, the dismissal will be automatically unfair
  • The main benefit of the new status for an employer is avoiding an unfair dismissal claim. However, employees are still able to bring discrimination or automatic unfair dismissal claims, which are typically more expensive to defend or settle in any event