The concept of employee shareholders was first introduced by the government in October 2012, with legislation in place by 1 September 2013.
But what is an employee shareholder? Put simply, they are employees who are given a minimum of £2,000 of shares in the company and who, in return, give up some of their employment rights.
Sounds straightforward, but unfortunately it’s not as easy as that…
£2,000 in shares?
The shares have to actually be worth £2,000, which means that the company will have to be valued. This means incurring the cost of a valuation.
For smaller companies, particularly start-ups, £2,000 might be a significant proportion of the share capital, resulting in potentially giving up some control of the company, or upsetting investors.
Give up employment rights?
Not all employment rights are forfeited; the main ones given up are ordinary unfair dismissal and statutory redundancy payment, which only apply after two years’ employment anyway. An employee shareholder can still bring a discrimination claim, and certain “automatic” unfair dismissal claims.
As you’d expect, there’s specific paperwork that has to be signed. The employee shareholder must be given a written statement of particulars confirming what employment rights they’re giving up, and what rights they have as a shareholder.
Once they’ve received this paperwork, the employee shareholder must take independent legal advice, which the employer must pay for.
You will need to check that the articles of association allow the company to have employee shareholders, and that all company law requirements are complied with when issuing new shares. In addition, the articles of association may need to be updated and/or a shareholders agreement prepared governing the rights and responsibilities of all shareholders.
What happens when an employee leaves? Whilst they have limited employment rights, they will continue to be a shareholder of the company. Their shares will need to be valued (another cost to be factored in) and someone will need to buy the shares. This assumes that you have provisions in place that require the shares to be transferred on exit, and that the company or the other shareholders have the funds to buy the shares.
Is it all bad?
There are quite a lot of costs involved in setting up an employee shareholder system which may mean that for very small companies, they are not cost effective. However, there are tax advantages, and you would expect an employee shareholder to be more committed to the company, as they have a vested interest in its success.
If you would like more information about employee shareholders, then please contact Harriet Broughton of Gregg Latchams Limited on 0117 906 9463 or firstname.lastname@example.org.