Bosses should evaluate benefits of employee shareholder contracts

03 Sep, 2013

Business owners need to carefully evaluate the pros and cons of a new kind of employee contract that risks incurring business costs before deciding to offer it, says law firm The Wilkes Partnership.

Available from this month, the new employee-shareholder contract allows staff to give up some of their employment rights in exchange for a minimum of £2,000 worth of company shares. Introduced by the Government in an effort to encourage businesses to hire workers by removing the risk of being taken to employment tribunal, there are fears that demand from businesses and their staff will be much lower than predicted.

Pam Sidhu (pictured), employment law expert at law firm The Wilkes Partnership, explains: “While on first look there are some benefits for business in having employees give up certain employment rights and in theory become more engaged in the company, there is also a series of disadvantages that need to be taken into consideration.”

Employment rights that employee-shareholders give up include the right to claim unfair dismissal, the right to statutory redundancy payments, and the right to request flexible working and time off for study or training. In exchange for this, businesses will issue shares of at least £2,000, with each employee receiving Capital Gains Tax exemption on gains made from the first £50,000 worth of shares.

Pam Sidhu continues: “The decision to offer these contracts should not be taken lightly, as there is a lot of red tape surrounding this employment status. Firstly, businesses are obliged to provide independent legal advice to any employee they offer this contract to, with the company footing the bill for this regardless of whether the contract is accepted.

“There are also certain key employment rights that these employees would retain that don’t help to make things easier for employers, including the right to claim for unlawful discrimination. At tribunal, it is this specific type of case that often ends in the most substantial costs for businesses. There are also a raft of questions raised by this introduction, such as what happens if the employee shareholder sells their shares during employment and how small businesses should go about deciding on a value for their shares.”

The new employee-shareholder status is completely voluntary, with it left up to a business on whether it will offer the contracts. It is then up to existing employees to decide whether to accept the offer of a new employment status, with businesses given the option of offering only this type of contract to new recruits. Legal expert Pam Sidhu concludes: “Instead of the SMEs this scheme was intended to help, take up is much more likely to be from senior employees in large organisations, many of whom will already hold shares as part of their remuneration packages.”

Businesses considering the offer of this type of contract are urged to seek legal advice to allow them to fully understand both the up and downsides of this new employment status.

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