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Employee shareholders – what you really need to know

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From 1 September 2013, you’ll be able to restrict your employees’ rights on unfair dismissal and redundancy thanks to the introduction of section 205A of the Employment Rights Act 1996 which allows you to offer staff positions as employee shareholders.

This will introduce a new type of employee ownership arrangement.  Under this arrangement an employee could agree to give up certain employment rights in exchange for at least £2,000 worth shares in their employer.

Which employment rights would your staff give up?
An employee shareholder would have the same rights as any other employee, apart from the following:

  • No right to request time off for study or training.
  • No right to make a flexible working request, aside from those employee shareholders returning from parental leave who may be able to make a request under certain circumstances.
  • No right not to be unfairly dismissed (except in health and safety cases, automatically unfair cases, or cases where the dismissal is discriminatory under the Equality Act 2010).
  • No right to a statutory redundancy payment.
  • The employee must give 16 weeks’ notice if they want to return early from statutory maternity, adoption or additional paternity leave.

To ensure your staff are fully aware of what’s on offer, and don’t feel unduly pressurised to accept the role of employee shareholder, a number of other provisions will come into force:

  • Protections from dismissal or other detriment for existing employees who refuse to become employee shareholders.
  • Jobseeker’s allowance cannot be withdrawn if an employee shareholder job is refused.
  • An offer of employee shareholder status must include a statement explaining the employment rights that would be sacrificed and the rights attaching to the shares.
  • The individual must receive advice about the offer from an independent legal advisor. The employer must meet reasonable costs incurred in receiving this advice, regardless of whether the offer is accepted.
  • Individuals agreeing to the offer will be entitled to a seven-day “cooling off” period from the day legal advice is received to the day they make their decision about whether or not to participate.

Why you mustn’t get this wrong
You may decide that on balance it is a good idea to offer employee shareholdings. But if you do then you must make sure and follow the correct procedure.

This is because if you get it wrong then your employees could end up keeping all their employment rights and the shares if:

  • You do not get the share valuation right
  • You do not provide them with a compliant written statement of details of the arrangement
  • The employee does not seek independent financial advice
  • The agreement is finalised before the cooling off period of seven days after they have taken advice

Which employees are likely to benefit most?
It is unlikely that lower paid workers who are concerned mainly with job security and cash will be interested in giving up their employment rights in return for shares, although some might be tempted by the offer.

However, the arrangement is likely to appeal to higher level executives who are less likely to miss the rights they are giving up and may feel they have a stronger grasp on the company’s financial stability and growth plans, and so will see more benefit to the shares.

Equally, if you are planning to sell your company and are likely to see share values rise as a result, employees might well be tempted to take a gamble.

How can your company benefit?
If you are concerned about the cost of pending redundancies or if your business or industry sector regularly struggles with unfair dismissal claims then this might be in your interest.

However, new employees cannot actually sue you for unfair dismissal until they have worked for you for two years anyway and they can still bring dismissal claims on other grounds such as discrimination before that time period is up. So deciding to offer shares purely with a view to avoid dismissal claims might prove a futile exercise.

What is more, as you can see from above, the system seems fairly complex and this may deter a number of employers and employees from utilising this provision.

Would you like to find out more?

If you want advice and assistance on any part of employment law, including employee shareholders and how changes to legislation may affect your business, please contact  the FB Support team in 01332 226149 for a confidential chat.

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