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Employee shareholders approved after House of Lords accepts final concessions

'Employee shareholder' proposals are set to become law after the House of Lords accepted further concessions which will see individuals required to obtain advice from a "relevant independent advisor" before entering into a contract.25 Apr 2013

The creation of the controversial new employment status, under which individuals will be able to opt out of certain employment rights in exchange for shares in their employer company, has been subject to 'ping pong' between the House of Commons and the House of Lords to agree on the final wording of the legislation.

The Government had previously introduced a seven-day 'cooling off' period into the scheme, giving an employee additional time to decide whether to accept the offer of an employee shareholder job. Companies making an offer of a job under one of the new contracts will also have to provide written statements setting out the rights that the employee is giving up, and the type of shares that will be granted in exchange. The legislation was also amended to make it clear that jobseekers would not be forced to take an employee shareholder job or risk losing unemployment benefits.

Share plans expert Matthew Findley of Pinsent Masons, the law firm behind Out-Law.com, said although the Government will now succeed in implementing its proposal this was nothing more than a "pyrrhic victory".  "The idea has never been considered likely to become mainstream and the need for individuals to be provided with independent advice at the expense of the employer is likely to be the final nail in the coffin in that regard," he said.

Employment law expert Christopher Mordue of Pinsent Masons went on to explain that, although the concessions were "understandable", the cost of providing independent legal advice to every candidate could discourage employers, many of whom had already dismissed the proposed new contracts as "unappealing or irrelevant".

'Employee shareholder' status has been proposed as a third form of employment status, alongside 'employee' and 'worker', taking effect as a new form of equity-linked employment contract. In exchange for giving up certain employment rights, employees will become owners of a stake in the business they work for by being given shares in the employer company worth between £2,000 and £50,000. Any profit on employee shareholder shares not exceeding £50,000 in value at the time of acquisition will be exempt from capital gains tax (CGT) when the shares are sold.

In exchange, an employee shareholder will not have certain rights which a 'standard' employee would have, including those in relation to unfair dismissal, redundancy and certain statutory rights to request flexible working and time off for training. Employee shareholders will still be protected from 'automatic' unfair dismissals, such as those stemming from discrimination or as a result of whistleblowing. Existing employees cannot be forced to take up employee shareholder status, but employers will be able to choose to offer only the employee shareholder status to new joiners.

The new amendment states that, after receiving the "statement of particulars" from a potential employer, an individual must receive independent legal advice. The seven-day 'cooling-off' period will run from the date that the advice is given, and any acceptance by the individual will have no legal effect until this period has passed.

Advice can be given by a legal professional, certified trade union official or a certified adviser in an advice centre, and the adviser cannot be employed by or connected with the company. Any "reasonable costs" of providing the legal advice must be met by the company, even if the individual does not accept the job offer.

Presenting the amendment to the House of Lords, Viscount Younger said that nobody would be "compelled" to apply for or accept one of the new contracts.

"The package of amendments ensures that individuals entering into employee shareholder status are given the opportunity to fully understand the employee shareholder contract, the benefits and the risks involved," he said. "The package ensures that the individual will have the space, the time and the means to receive and weigh up the information in order to make an informed decision that is right for them."

Experts from Pinsent Masons said that it was "unlikely" that the new type of employment contract would be used extensively by employers.

"It has always been the case that the only group of people for whom this might be appealing are those in  start-up companies and for senior employees in unlisted companies for whom unfair dismissal rights are of limited concern and where the special tax treatment will be particularly attractive," said share plans expert Matthew Findley. "The additional cost of independent advice will put off some of those who would otherwise have used the arrangement in this way, which is probably what the House of Lords wanted to achieve given the extent of opposition to the proposal and current attitudes to 'unacceptable' tax planning." 

"It is important to remember that this scheme is of very limited value to employers in minimising the risks of employment disputes on termination –those offered employee shareholder status will be advised by their independent lawyer that they will retain the vast majority of their employment rights, especially the ability to make discrimination claims or to argue that they have been dismissed for reasons which are automatically unfair, such as pregnancy," employment law expert Christopher Mordue said.

"For most employers, the upfront costs of providing this legal advice to all new recruits, and risk of losing the candidate, would outweigh the actual risk and cost of unfair dismissal claims," he said.