The pros and cons of employee shareholder status

The pros and cons of employee shareholder status

As outlined in George Osborne’s proposal in October 2012, companies can now offer shares with a minimum value of £2,000 to their employees. The idea is to help small and medium-sized businesses grow whilst giving employees the chance to invest in the company they work for.

It’s no surprise that the proposal has taken a lot of criticism. In fact, before the extra safeguards were offered, the original scheme was rejected twice by the Lords.

So, what are the benefits and pitfalls to you as an employer or employee? Here are the main pros and cons to give you a better idea.

How does it affect employers?

On the face of it, it seems really simple. You give your employee shares, they waive their employment rights. But it’s more complicated than that.

From a corporate perspective, there’s a lot for employers and existing shareholders to think about. What percentage of shares are you going to give away? What rights should attach to the shares? Are you going to have voting shares? Are the employees going to be entitled to dividends? And so on.

And, as a majority shareholder, you have to make sure the right structure and protections are in place to protect yourself. If you don’t, you could leave yourself open to possible claims from your minority employee shareholders in the future.

There are also the costs to think about. The updated proposal states that any company looking to offer shares to their employees on this basis must offer them free legal advice, regardless of whether they take up the scheme or not.

On the plus side, the proposal does make it more flexible for employers in terms of how they manage their employee shareholders. For example, if you need to make redundancies, you won’t have to pay out a redundancy payment to them. And you won’t have the danger of having a claim brought against you for unfair dismissal.

How does it affect employees?

The proposal gives employees the chance to own a stake in the company they work for in return for waiving some of their employment rights. The minimum value of shares you can take is £2,000, which is income tax-free. Anything over this and you’ll pay income tax on the excess.

There’s no maximum as to the value of shares you can take. But any value of shares up to £50,000 on acquisition will be exempt from capital gains tax. So, if and when you sell your shares in the future, you won’t have to pay capital gains tax on the increase in the value of the first £50,000 worth of shares given to you. This is the biggest benefit to employees looking to take up the employee shareholder status.

After you get free legal advice, you’ll have seven days to decide whether to take up the offer. What you need to weigh up is whether giving up your employment rights is worth the investment. Among other things, you won’t be entitled to request flexible working. You won’t have a right to a redundancy payment if your employer lets you go. And you won’t be able to bring a claim against them for unfair dismissal, except in very limited circumstances.

What do I think?

The key to making this proposal work is striking the right balance between the employer and the employee. And this won’t be easy.

Employers may be put off by the costs involved in setting the scheme up. As well as putting the right protections in place for themselves, they’ll have to meet the costs of giving legal advice to any employee looking to take up the offer. But this has to be balanced against the gains in terms of protection from certain employment claims.

The employee has to take into account the rights they’ll be giving up in return for a shareholding, which could be enough to put them off. But, in some cases, a job offer may only be available on an employee shareholder basis. So it may be a choice between the job on offer or no job at all.

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