- 15 minute read
- Last updated: 28th November 2019
An individual’s employment status will help to determine their rights within the workplace, as well as your responsibilities towards them as their employer.
Below we look specifically at employee shareholder status, with guidance for employers on what this means and what conditions must be met to acquire this status – including the nature of the written statement of particulars as required under the rules, as well the relevant independent legal advice required in advance of any employee shareholder agreement being reached.
This article covers:
- What do we mean by employee shareholder status?
- Employee rights
- Pros and cons of employee shareholder status
- Conditions to be met
- Written statement of particulars
- Independent advice
- Bringing employee shareholder status to an end
An employee is someone who works under a contract of employment, ie; an agreement setting out the terms and conditions governing the working relationship between the employer and employee, including the rights and responsibilities between the parties.
An employee shareholder, on the other hand, is someone who works as an employee, but who also owns at least £2,000 worth of shares in the employer’s company or parent company. As such, the employee shareholder will be working under what’s known as an employee shareholder employment contract.
Employee shareholders enjoy many of the same employment rights as employees, including the following:
- To a minimum notice period in circumstances where their employment is brought to an end, for example, where they are dismissed
- To be paid the national minimum wage
- To protection against unlawful deductions from wages
- To the statutory minimum level of paid annual leave
- To statutory sick pay
- To statutory maternity, paternity, adoption and shared parental pay and leave
- To the statutory minimum length of rest breaks
- To not work more than 48 hours on average per week
- To protection against unlawful discrimination
- To protection from reporting wrongdoing in the workplace, ie; whistleblowing
- To not be treated less favourably for working part-time
- To time off for emergencies.
However, it does not follow that those with employee shareholder status enjoy all of the same statutory rights as the standard employee. For the employee shareholder, some of their rights will be relinquished in exchange for their shares. As such, employee shareholders will not benefit from the following:
To protection against unfair dismissal, save except dismissal on the grounds of discrimination and in relation to health and safety, or where the dismissal is classed as automatically unfair.
To request flexible working, save except in the two weeks after returning from parental leave.
To certain statutory rights to request time off for training.
To statutory redundancy pay, although an employee shareholder does have the right to collective redundancy consultation and transfer of undertakings (TUPE). TUPE is to protect an employee’s terms and conditions when the business is transferred over to a new owner.
In addition, and in contrast to other employees, shareholder employees must provide their employer with sixteen weeks notice of an early return from maternity leave, additional paternity leave and adoption leave.
Shares in a company, or parent company, can be an excellent way of incentivising high calibre candidates to accept a job role, or to encourage existing employees to take additional responsibility for the success of the business, especially where the shares allow an individual employee to benefit directly from any profit.
However, it will be up to you as the employer to decide what type of shares you offer potential employee shareholders. These shares may be of any type and can carry a range of rights, including rights to dividends and restrictions on transfer.
Needless to say, where you offer shares with limited rights, an employee is less likely to accept a job, or agree to work on an employee shareholder basis, not least because they will be giving up various statutory employment rights in return for their shares.
That said, however, in the event that you elect to offer shares with generous rights, you will need to consider the implications of this on existing shareholders as this is likely to ensure that the shares on offer have a higher value than any with lesser rights held by other shareholders. Further, you may wish to inform existing shareholders of the rights attached to the shares being offered to employee shareholders.
In particular, where the shares being offered to a prospective employee shareholder have voting rights attached, existing shareholders may find it harder to pass resolutions that govern the company. This may give the new employee shareholder too much say in how the company is run, so caution should always be exercised in respect of the extent of any rights being conveyed.
Anyone can apply for and accept a job with employee shareholder status. If, however, rather than recruiting externally you are looking to make changes to the basis upon which your existing workforce is employed, your employees do not have to accept any change to their employment contract to become an employee shareholder if they do not choose to do so.
Moreover, if you seek to dismiss an employee, or subject that individual to any detriment, in consequence of them refusing to change their existing status to that of employee shareholder status, you may become subject to a complaint to the employment tribunal.
Further, when offering employee shareholder status to your employees, there is a compulsory sequence of actions that must be followed. Indeed, the process for offering or accepting a job on an employee shareholder basis is entirely different to jobs offered for other types of employment contract.
There are essentially six conditions that must be met for someone to acquire employee shareholder status, and for this to take legal effect, whether as a new recruit or existing employee. These are as follows:
Both you and the employee must agree that they will become an employee shareholder.
The employee must be given fully paid up shares in the company, or parent company, and they must be worth at least £2,000 on receipt, although there is no set upper value. To be fully paid up, this means that if the company becomes insolvent, as a shareholder the employee will not pay anything for the shares.
The employee must not pay for the shares or contribute in any way towards the shares they receive. You must not accept anything from the employee shareholder in return for the shares, save except from them agreeing to enter into the employee shareholder employment contract.
The employee must be given a written statement of the particulars of their employee shareholder status (see below).
The employee must receive advice from a relevant independent adviser on the terms and effect of this written statement. As the employer, you are required to pay for that advice, regardless of whether or not the individual accepts the job.
The employee must take seven calendar days to consider the independent advice received, and cannot accept or agree to a job on an employee shareholder basis until seven days have passed following receipt of the relevant advice.
The employee shareholder employment contract will only take effect after the seven days have passed. Furthermore, in the event that some or all of the requirements set out above are not met, not least the requirements for legal advice and a cooling-off period before an employee is able to give up their statutory rights, that employee will not acquire employee shareholder status.
The written statement of particulars setting out the basis of employee shareholder status must include information both about the limited nature of the employee shareholder’s employment rights, as well as the rights that attach to the shares themselves.
In particular, although this list is not necessarily exhaustive, the written statement of particulars must contain the following:
A list of the statutory employment rights that an employee shareholder does not have under their contract of employment and, additionally, that the employee must provide a minimum of 16 weeks’ notice of an early return from maternity, extra paternity or adoption leave.
An explanation as to the type of shares that are being offered and what rights will be attached to these shares, for example, whether they carry rights to dividends or any voting rights, or whether they can be transferred. In contrast to shares for public companies that can be traded on the stock exchange, shares in private companies are not usually traded on the open market.
An explanation as to why, and in what way, the shares offered differ from the rights attached to those shares held by the majority shareholders. In the event that the shares offered are already part of the largest class of shares, the statement must explain how those rights differ from the rights that attach to the shares in the next largest class.
An explanation as to whether or not the shares are subject to any drag-along or tag-along rules. These rules relate to minority shareholders, ie; whether they would have to sell their shares if the majority shareholders have agreed to sell, or whether they need the majority shareholders to get the same offer to sell their shares if the majority are selling.
An explanation as to what will happen to the shares when an employee shareholder leaves the company. The company’s articles of association may specify that the shares must be bought back by the company or, alternatively, the employee shareholder contract may include a buy-back clause setting out how the shares will be valued at the relevant time.
It is open to you, as the employer, to include additional information in the written statement of particulars that may be deemed of use to the employee in their consideration of accepting or agreeing to employee shareholder status.
It is also open to you to offer contractual rights that are more generous than those provided for by statute for employee shareholders.
It is in the interests of the prospective employee shareholder to understand the nature of employee shareholder status and its implications before they accept a job on this basis. As such, as with the other mandatory requirements for an employee shareholder contract, if an individual does not get independent advice, the contract will not take legal effect.
However, even though the employer must pay the reasonable costs of obtaining independent advice, the employee has the responsibility to find a relevant advisor. Moreover, as the employer, you must not recommend a particular lawyer or firm, nor insist that the candidate use an in-house lawyer or anyone otherwise connected to the company. The advice must be wholly independent.
Independent advice can be given by a qualified lawyer selected by the employee, a trade union official certified as competent to give that advice, as well as any other person certified as competent to give the advice or authorised to give legal advice in this capacity.
In the event that the prospective employee shareholder refuses or fails to obtain the necessary advice from someone qualified to give that advice, you must not proceed with the employee shareholder contract.
In order to bring employee shareholder status to an end, both you and the employee would need to agree to this. However, any such agreement to terminate this status, and replace it with a new arrangement, must make it absolutely clear that this is the intention.
In the event that an employee disposes of their shares, where the rights attached to the shares allow for them to be transferred, either by way of sale or gift, the employee shareholder status of that individual will not change. A change of employment status would still require a change of employment contract agreed by both parties.
Typically, this would involve an express statement in writing confirming that the employee shareholder contract is coming to an end, together with a replacement agreement setting out the new terms and conditions upon which the employment relationship will be based.
In circumstances where the employee shareholder decides to leave their employment with the company, or their contract of employment is otherwise brought to an end, save except where there is a buy-back provision, the employee will continue to benefit from any rights attached to their shares.
DavidsonMorris are experienced human resource consultants and specialist employment lawyers. We work with employers to provide HR expertise in areas such as employee benefits and remuneration.
If you have a query about employee shareholder status in your organisation, contact us.