The employee-shareholder contract: what it means to you

New rules introduced in September 2013 mean that your employer is now able to offer you shares in the business, but it also means forfeiting some of your employment rights. How will this work and what will it mean to you as an employee?

What is an employee-shareholder contract?

A new employment contract was launched on 1 September 2013 which applies to both current and new employees. This permits employers to offer shares to employees on the condition that they relinquish certain existing employment rights. 

How much are the shares worth and will I have to pay tax on them?

The minimum value of the shares that you can be offered is £2,000, with no upper ceiling. Shares offered under the new contract are exempt from national insurance contributions and tax, and if the shares increase in value, then the first £50,000 of the value of shares is exempt from capital gains tax. The HMRC have further details on the treatment of tax under these new contracts, click here to read. 

What employment rights will I lose?

The employment rights that you will lose might be important. They include:

• Except under special circumstances, you will no longer have the right to launch a claim for unfair dismissal.
• You will no longer be entitled to statutory redundancy pay.
• Apart from parental leave, you will lose the right to request flexible working.
• You will lose the right to time off for training and study.
• The notice period you will need to give if you want to return to work following maternity and paternity leave will increase to sixteen weeks for its current eight weeks. 

However, it is worth noting that although these are provisions by the law, your contract terms can in fact make allowances for the above. It's best to speak to a local employment lawyer if you are unsure about your contract. 

Those are a lot of rights to lose, but what rights do I keep?

Your rights to claim for discrimination remain intact, and you can still claim for unfair dismissal if the reason is in a category considered to be automatically unfair, for instance membership of a trade union; specific issues concerning health and safety; whistle blowing; or asserting a legal right. 

There will be no changes to minimum notice periods or minimum entitlements to holiday, sick and maternity pay.

Can my employer insist that I accept an employee-shareholder contract?

If you are an existing employee then your employer cannot force you to change your employment contract, nor can they discriminate against you if you decide not to accept an employee-shareholder contract. 

However if you become a new employee, then your new employer can insist that you accept it as part of the formal job offer. 

What happens next?

Your employer is obliged to put all of the details of the proposed contract in writing including full information on the shares that you are being offered including your shareholder rights and how you can sell or redeem them. 

Under the new law, the biggest advantages that employees have are stated on the HMRC website: 

“An employee shareholder employment contract will not take legal effect if an individual does not get independent advice…

An employer must not use in-house lawyers or lawyers who have acted for the company, and must not insist the potential employee shareholder consults a specific lawyer or firm.

The company must pay the reasonable costs of obtaining the independent advice...”

Under the above clauses, you must consult an independent legal advisor about the offer and the costs of this must be met by your employer. This is in favour of employees as you would not have to be out of pocket to see a solicitor. Once you have received legal advice, then you have seven days before you have to make a final decision. 

Tip: If you do look for legal advice, try and make sure that your consultant or solicitor specialises in contracts of employment. 

Why has the Chancellor introduced those rules?

The main reason for introducing the employee-shareholder contract is to create a more flexible workforce and to increase the number of jobs. It is believed that employers will be more likely to take on new workers if they know that they are not going to have to deal with employment claims in the future. 

It is also believed that if employers have shares in the business they will be more likely to participate positively in it. If the business does well, then the value of their shares is likely to increase. If your business would like to consider employee shareholder contracts, speak to one of our employment law solicitors for advice about your options. 

What are the major disadvantages to employees?

As indicated above, you will lose many of your employment rights and your job might be less secure. And although your shares might increase in value, they could decrease in value, meaning that you have lost out on both counts. 

Furthermore, if some employees accept the contract and others do not, it is possible that those who have lost their employment rights will be more likely to be selected first in the case of redundancies. 

Where can I find an independent legal advisor?

If you have been offered an employee-shareholder contract then you must speak to an independent legal advisor and your employer must meet all reasonable costs for this. If you need a local legal expert then you should consider talking to us. You can find your nearest QualitySolicitors branch here.