Employee Shareholder Status: Complete UK Guide

An individual’s employment status will help to determine their rights within the workplace, as well as your responsibilities towards them as their employer. Those with employee shareholder status have received shares in their employer’s company in exchange for giving up certain statutory employment rights.

For employers, this type of employment status can be an effective way to align employee interests with the company’s success and potentially reduce costs related to redundancies and dismissals. However, there are key risks and considerations. Employers must ensure that employees fully understand the implications of accepting this status, particularly the loss of significant employment rights. Providing independent legal advice to employees is not only advisable but legally required to prevent future disputes.

In this guide, we look at what employee shareholder status is, with guidance for employers on what this means in practice.

 

Section A: What is Employee Shareholder Status?

 

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.

 

Section B: Employee Shareholder Status Rights

 

While employee shareholders gain an ownership stake in the company, they sacrifice certain employment rights that standard employees retain. This means employee shareholders in the UK have a different set of rights compared to standard employees. It’s important for both employers and employees to fully understand these differences before entering into an employee shareholder agreement.

 

1. Retained Employment Rights

 

Employee shareholders enjoy many of the same employment rights as employees, including the following:

 

a. Right to Statutory Annual Leave: Employee shareholders retain the right to the statutory minimum level of paid annual leave.

 

b. National Minimum Wage: They are still entitled to be paid at least the national minimum wage.

 

c. Protection Against Unlawful Discrimination: Employee shareholders have the same protection against unlawful discrimination as other employees.

 

d. Health and Safety Protections: They are entitled to the same health and safety protections in the workplace.

 

e. Statutory Sick Pay: Employee shareholders are still eligible for statutory sick pay.

 

f. Time Off for Emergencies: They retain the right to take time off for emergencies involving dependents.

 

2. Forfeited Employment Rights

 

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:

 

a.Unfair Dismissal Protection: They do not have 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.

 

b. Right to Request Flexible Working: There is no right to request flexible working, save except in the two weeks after returning from parental leave.

 

c. Right to Request Time Off for Training: They lose the right to request time off for training or study.

 

d. Statutory Redundancy Pay: The right to statutory redundancy pay is forfeited, 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.

 

Employment Right	Description
Rights Retained by Employee Shareholders
Statutory Annual Leave	Employee shareholders retain the right to the statutory minimum level of paid annual leave.
National Minimum Wage	Employee shareholders are still entitled to be paid at least the national minimum wage.
Protection Against Unlawful Discrimination	Employee shareholders have the same protection against unlawful discrimination as other employees.
Health and Safety Protections	Employee shareholders are entitled to the same health and safety protections in the workplace.
Statutory Sick Pay	Employee shareholders remain eligible for statutory sick pay.
Time Off for Emergencies	Employee shareholders retain the right to take time off for emergencies involving dependents.
Rights Given Up by Employee Shareholders
Unfair Dismissal Protection	Employee shareholders typically give up their right to protection against unfair dismissal after two years, except in cases related to discrimination, whistleblowing, or health and safety.
Statutory Redundancy Pay	Employee shareholders forfeit the right to statutory redundancy pay.
Right to Request Flexible Working	Employee shareholders give up the statutory right to request flexible working.
Right to Request Time Off for Training	Employee shareholders lose the right to request time off for training or study for employees aged 18 and above.

 

 

Section C: Pros and Cons of Offering Employee Shareholder Status

 

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.

 

Section D: Acquiring Employee Shareholder Status

 

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.

 

Section E: Written Statement of Particulars

 

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.

 

Section F: Independent Advice

 

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.

 

Section G: Ending Employee Shareholder Status

 

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.

 

Section H: Summary

 

Employee shareholder status in the UK allows employees to receive shares in their employer’s company in exchange for giving up certain statutory employment rights. Typically, employees are granted shares worth at least £2,000, and in return, they forfeit rights such as protection against unfair dismissal after two years, statutory redundancy pay, and the right to request flexible working.

Employee shareholder status is entirely voluntary, and employees must be offered independent legal advice before accepting it to ensure they understand the implications of giving up these rights.

The scheme is generally well suited to smaller companies looking to incentivise employees with ownership opportunities while managing costs related to employment rights. However, it is important for both employers and employees to carefully consider the long-term implications of entering into such an agreement.

In particular, employers should consider the long-term impact on employee relations. If the shares do not meet expectations, employees may feel dissatisfied or disadvantaged by the arrangement. Clear communication, proper planning, and a thorough understanding of both the legal and practical implications are essential for employers considering the implementation of employee shareholder status. This approach ensures that the scheme benefits both the company and its employees while maintaining a fair and transparent work environment.

 

Section I: Need Assistance?

 

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.

 

Section J: FAQs

 

What is employee shareholder status?

Employee shareholder status is a scheme where employees receive shares in their employer’s company in exchange for giving up certain employment rights, such as protection against unfair dismissal and the right to statutory redundancy pay.

 

What rights do employees give up under this status?

Employees who accept shareholder status forfeit specific rights, including protection against unfair dismissal, the right to statutory redundancy pay, and the right to request flexible working. They may also give up the right to certain statutory rights related to training and time off.

 

What are the benefits of employee shareholder status for employers?

For employers, employee shareholder status can help align employees’ interests with the company’s success, potentially increasing motivation and retention. It can also be a way to reduce costs associated with redundancies and dismissals.

 

Are there tax benefits associated with employee shareholder status?

Yes, employees can benefit from tax advantages, such as exemptions from Capital Gains Tax on the shares received under the scheme, though specific conditions must be met.

 

Is it mandatory for employees to accept shareholder status?

No, employee shareholder status is entirely voluntary. Employees cannot be forced to accept it, and they should be offered independent legal advice before making a decision.

 

What are the risks for employers?

Employers face risks including potential legal challenges if the scheme is not implemented correctly, particularly if employees are not fully informed about the rights they are giving up. There may also be negative impacts on employee relations if the shares do not meet expectations.

 

Can an employee who has accepted shareholder status later revert to a standard employment contract?

Once an employee has accepted shareholder status, they generally cannot revert to a standard employment contract with full rights unless the employer agrees to a new contract.

 

What should employers consider before offering employee shareholder status?

Employers should carefully consider the long-term implications, ensure clear communication with employees, and provide access to independent legal advice to help employees make an informed decision. They should also plan for the potential impact on employee relations and the legal requirements of the scheme.

 

Section K: Glossary

 

Term	Definition
Employee Shareholder Status	A scheme where employees receive shares in their employer’s company in exchange for giving up certain employment rights.
Shares	Units of ownership in a company that represent a portion of the company’s capital.
Unfair Dismissal	Termination of an employee’s contract without a fair reason or without following the correct process, which employee shareholders waive protection against.
Statutory Redundancy Pay	A payment made to employees who are made redundant, calculated based on their age, length of service, and weekly pay, which employee shareholders give up.
Flexible Working	A right that allows employees to request changes to their working hours, times, or location, which is forfeited under shareholder status.
Capital Gains Tax (CGT)	A tax on the profit when you sell an asset that has increased in value, which employee shareholders may be exempt from on their shares.
Independent Legal Advice	Legal guidance provided to employees to ensure they understand the implications of accepting shareholder status, required by law before acceptance.
Voluntary Agreement	An arrangement that is entered into by choice, with no obligation; employee shareholder status is a voluntary agreement.
Employment Rights	Legal entitlements related to employment, such as protection against unfair dismissal, redundancy pay, and flexible working, which can be waived in exchange for shares.
Growth and Infrastructure Act 2013	The legislation that introduced employee shareholder status in the UK, setting out the legal framework and requirements for the scheme.
Retention	The ability to keep employees within a company, potentially enhanced through the incentive of shares in employee shareholder status.
Legal Challenges	Disputes or claims brought before a court, which employers may face if employee shareholder status is not implemented correctly.

 

 

Section L: Additional Resources

 

UK Government – Employee Shareholder Status Guidance
https://www.gov.uk/employee-shareholders
Official UK government guidance on the employee shareholder status scheme, including eligibility criteria and tax implications.

 

ACAS – Employee Shareholder Status
https://www.acas.org.uk/employee-shareholders
ACAS provides advice and resources on employee shareholder status, including the rights employees give up and the legal obligations of employers.

 

HMRC – Capital Gains Tax for Employee Shareholders
https://www.gov.uk/capital-gains-tax/employee-shareholder-shares
Detailed information from HMRC on the tax implications of employee shareholder status, including Capital Gains Tax exemptions.

 

Chartered Institute of Personnel and Development (CIPD) – Employee Shareholders
https://www.cipd.co.uk/knowledge/fundamentals/emp-law/employee-shareholder
CIPD offers insights and best practices for HR professionals on implementing employee shareholder schemes and managing the associated risks.

 

Equality and Human Rights Commission – Employment Rights
https://www.equalityhumanrights.com/en/advice-and-guidance/employment-rights
Guidance from the Equality and Human Rights Commission on protecting employee rights in the workplace, including considerations for employee shareholder agreements.

 

Law Society – Legal Advice on Employee Shareholder Status
https://www.lawsociety.org.uk/topics/employment-law/employee-shareholders
Resources and advice from the Law Society for employees and employers considering or implementing employee shareholder status.