It remains unclear where the new employee shareholder idea originated, but as Lord Forsyth has suggested, it "has all the trappings of something that was thought up by someone in the bath".
Regardless of where the idea was born, from 1 September it will become a reality and may require employees forfeiting certain employment rights in return for shares that benefit from special tax treatment.
The Growth and Infrastructure Act 2013 allows an employer to offer shares in its business to potential or current employees in exchange for giving up certain employment rights. The minimum value of shares will be £2,000. The first £2,000 will not be subject to income tax or national insurance contributions and any gain on the first £50,000 worth of shares will not attract capital gains tax if you sell them.
Employee shareholder status is open to prospective and existing employees. But a current employee cannot be forced into becoming a shareholder and no one can take action against you for refusing to accept a shareholder proposal.
However, an employer can choose to offer a job to a new employee solely as an employee shareholder. Jobseekers on benefits who refuse an employee shareholder role will not lose their benefits.
What rights does a worker relinquish to gain these shares?
Employee shareholders will have no right to claim unfair dismissal, unless the dismissal is automatically unfair – this applies to situations where, for example, you are sacked for becoming pregnant, joining a trade union or whistleblowing.
Employee shareholders will also lose their right to statutory redundancy payment and to request flexible working unless they are returning from parental leave. If this is the case, they will have 14 days from the date of their return to make a request. Employee shareholders will need to give 16 weeks' notice to return from maternity, adoption or additional paternity leave – double the notice of an ordinary employee. They also won't be able to request time off for training.
An employer who wishes to employ someone on these terms has to provide the employee or job applicant with a written statement setting out the rights they will lose and about the shares offered. This is to ensure that the employee or candidate is fully informed before they dive headlong into a world with limited employment rights. This will also include information about the rights and restrictions attached to the shares. While such information may be decipherable by the boardroom executive, it is unlikely that it will be easily understood by the ordinary man or woman in the bath.
Employers must provide independent legal advice about the terms and possible effects for employees or candidates who are considering the move. This advice is paid for by the employer. Once the individual has taken the advice, they have a seven-day cooling-off period to consider their position.
One of the most important and problematic parts of the process is valuing how much the shares being offered are worth. If this is done incorrectly and the shares are actually worth less than £2,000, they will not qualify for a tax advantage. This means the employee will pay income tax on the shares and the employer could be faced with the individual claiming they never relinquished their employment rights.
Wherever this idea was first conceived, it has received little support. There are going to be difficulties with share valuations, which in themselves are costly, not to mention the possibility of lengthy and costly disputes if they are wrong.
Aside from the beneficial tax treatment of the shares, it is difficult to see the benefit to the individual of becoming an employee shareholder. Indeed, the abandonment of these rights has wider implications, potentially placing employee shareholders in a more vulnerable position than their colleagues. If a business is restructuring an employee shareholder could be the first out, as they will have no unfair dismissal rights nor will they be entitled to any statutory redundancy payment.
Vanessa Hogan is a senior associate in the employment department of Hogan Lovells.
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