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Share and share alike: Becoming an employee shareholder

Alison Coleman

Improving morale - the carrot or the stick?

Alison Coleman explores the pros and cons of employee shareholder status and the impact it will have both on the business and the individual

With employee shareholder status officially on the statute book, the Government hopes to encourage small and medium-sized companies to create a more flexible workforce, as employees are encouraged to give up statutory protections in exchange for new rights that align their interests with those of the business owners.

Opinions are divided on the merits of the scheme and potential take up levels, and also how it will impact on those in management positions who opt for it.

The offer of an opportunity to become an employee shareholder with the attendant tax benefits is solely at the discretion of his employer, as is the number of shares offered in return for giving up certain employment rights, although shares must be worth no less than £2,000, explains Barbara Allen, head of employee incentives at Stephenson Harwood LLP.

She says: “In exchange for no less than £2,000 worth of shares, the individual will not have the right to make an ordinary unfair dismissal claim; receive a statutory redundancy payment; request to undertake study or training; or request flexible working.
 
“Although managers who are employee shareholder seems to be giving up a wide range of employment rights, they will still retain many valuable protections, for example, bringing claims for discrimination, including for age, gender and sex, and for an automatically unfair dismissal, for example arising from whistle blowing or health and safety issues." 

Existing managers cannot be forced to accept the new employee shareholder status so they need to weigh up the potential financial benefits of acquiring shares in their employing company or its parent as against waiving certain of their employment rights. 

The potential tax savings that come with employee share ownership may be of greater interest to those in senior management roles, particularly those in organisations with good growth potential. They are also less likely to be concerned about waiving statutory employment rights, as they tend to have stronger contractual protections, and are more likely to receive a material equity interest in return.

The issue of employee share ownership has divided the business community. While the vast majority of business owners resisted the idea, those in favour say that having a stake in the business has an overall positive effect on the motivation of those who are shareholders.

However, Dr Colin Green from Lancaster University Management School has carried out research which found that rather than a happy family of co-operation and shared goals, shareholding and profit-sharing among employees leads to more dissatisfaction with bosses and each other.

The study looked at the experiences of 6,500 people in the UK and their relationships at work. Green argues that the findings are evidence of how profit sharing increases the incentive for workers to pressure each other - 'my pay is now dependant on your working effort and productivity' - and for bosses and supervisors to pressure workers. 

"Workers tend to see their boss’s pay as being a direct result of their effort, and that co-workers are more likely to exert pressure on each other by complaining to their supervisor, 'dobbing in' perceived low effort," he says.

Flexible working is another point of contention. It can be a challenge for businesses, but most employers will do what they reasonably can to accommodate it, however, one of the rights given up under the share ownership scheme is the right to request to work flexibly. 

Kate Russell, managing director of Russell HR Consulting says: "While the right is open to all qualifying employees, it’s likely that women will suffer disproportionately and even if this right is renounced, there would be nothing to stop a woman bringing a sex discrimination claim, as discrimination rights fall outside the scope of rights given up. So a company’s adoption of the scheme may discourage many prospective applicants, create difficulties for existing employees when their circumstances change and will not necessarily limit workplace difficulties. Why not go for profit share instead?


"If I was a manager being faced with one of these contracts, I would be looking for contractual robustness to protect my interests, for example, I would want some form of contractual redundancy arrangement. These terms create fragility and uncertainty. As an incoming employee I may not be able to negotiate that. As a manager of people working under this type of contract I would have to take steps to familiarise myself with the new contract and adjust my management approach accordingly. There may also be the risk that employees who are not satisfactory re fast-tracked out because they can’t claim unfair dismissal and this may lead to unfairness."


Key issues for the individual offered employee shareholder status are:

  • Ensuring all the mandatory steps have been followed
  • Checking the initial share valuation is robust – has it been approved by HMRC’s Share and Assets Valuation team?
  • Being clear what employment protection is being relinquished and its significance; in the first two years of employment the downside is significantly less
  • Understanding the rights that attach to the shares, when, how and to whom they can they be sold including whether there are drag along and tag along rights
  • Securing the right independent legal advice – the advice will need to cover employment, corporate and tax issues


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