The new employee shareholder status came into effect on 1st September 2013 offering a new kind of flexibility to employers in the terms of employment they offer to an individual. Employers must bear their own obligations in mind in relation to using this status and ensure the procedural requirements are met.

An individual taken on on an employee shareholder basis cannot claim unfair dismissal and is not entitled to receive a statutory redundancy payment. This clearly reduces the employer’s liability in the event of termination of an employee’s employment and means that certain dismissal procedures may be circumvented if the contract provides the employer with this right.

In exchange for the loss of employment rights, the employer must provide the employee shareholder with at least £2000 worth of fully paid shares. If shares of a lesser value are issued, the individual will not be an employee shareholder and will therefore retain their employment rights.

Limited companies who, in the past, have not operated share purchase schemes will need to consider the terms and conditions they want to attach to the shares e.g. whether will they carry voting or dividend rights; whether there will be any buy back or transferability provisions etc. These particulars need to be provided to the individual before he accepts the position.

Limited companies who currently operate in shares will already have terms and conditions set up. It is likely then that they will also have a mechanism in place for valuing the shares. This is a very significant element due to the risk attached to an inaccurate valuation.

The employee shareholder will be deemed to have paid for their shares but the employer must receive nothing in return. Upon termination, an employer who has provided that shares must be bought back by the company who must consider how they will finance the purchase.

Employee shareholders are legally required to obtain independent legal advice on the effect of the status on their employment rights. The employer is required to pay the reasonable costs of this advice regardless of whether the individual decides to join the company on those terms or not.

Any agreement to join on the employee shareholder status is not legally valid in the period of 7 days after the advice has been received. Employers should therefore prevent agreement from taking place within that period in order to ensure legal employee shareholder status.

Although giving up the right to claim unfair dismissal, employee shareholders retain the right to claim automatic unfair dismissal and discriminatory dismissals. They can also bring a claim of discrimination during the course of the employment. All other employment rights, and the enforcement of these, remain available to the employee shareholder.

Employee shareholders are also subject to adjusted rules in relation to giving notice of early return from maternity, adoption and additional paternity leave. They have a severely restricted right to make a request for flexible working and they are not entitled to request time off for study or training.

If you would like any further information regarding Employee Shareholder Status, then please contact our Advice Service on 0844 892 2772.

By Nicola Mullineux