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From 1 September 2013 small UK companies operating in highly competitive sectors can offer an additional incentive to attract and retain the best people by offering them a stake in the business as shareholders.

The take up and success of these new shareholder status employment contracts for British employees - forecast as being particularly effective for fast growing start-ups - could also provide food for thought for businesses abroad as to whether this kind of employee engagement could work outside the UK - and how HR professionals will manage the changes. 

Joan Pettingill Partner and employment lawyer at hlw Keeble Hawson which has offices in Sheffield, Leeds and Doncaster, outlines the new legislation which includes employees giving up certain employment rights and looks at some of the implications for HR professionals.

A Third Way in the Workplace

From the autumn in addition to ‘employee’ and ‘worker’ status, new equity–linked employment contracts give a third group of employees part ownership of the company they work for, through the receipt of shares worth a minimum of £2,000 and exempt from capital gains tax up to the value of £50,000

The shareholder ‘deal’ means the owner-employees will relinquish some employment rights relating to unfair dismissal, redundancy and the right to request flexible working and time off for training. They will, however still be protected in law from unfair dismissal procedures stemming from discrimination and whistleblowing.
It is not compulsory for employees to take up the new contracts and employers cannot lawfully compel them to do so or punish them if they have declined.

Weighing up the pros and cons

Offering new employees a stake in the company may help to attract and retain the calibre of people that may have previously been out of reach, or if recruited, may have rapidly sought to move on to the bigger competitors, taking their skills and talent with them. 

The scheme could also appeal to ambitious and high performing people who may actively choose to work for - and stay in - a smaller, high growth company they have ownership in. 

Alternatively, it may only be of real interest to senior executives, the very group regularly offered shares under existing share option schemes. Unless the value of the shares is significant, lower paid employees may not want to feel tied to a company or give up rights in today’s uncertain economic climate.

Employers may feel that as employees recruited after 6 April 2012 need to have worked at the organisation for two years before they can bring a claim of unfair dismissal, that the rights compromised by this scheme add little benefit but cause further untested red tape.

The HR Perspective

Those working in HR may rightly feel that they need more advice and guidance in order to manage the new arrangements covering multiple types of employment contract in the same workplace.

As an employer can choose to only offer shareholder status to new recruits the take up of a scheme that alters employee rights and benefits across a business may result in undesirable new divisions in an organisation - and could ultimately hamper productivity and growth.

Shares can fluctuate in value - and how employment law plays out in an organisation where some employees are shareholders and others are not also remains to be tested.

Effectively managing the changes presented by this new development will undoubtedly be a priority for HR professionals who should ensure they seek appropriate advice if embarking down this route.  

The new legislation also ensures that employees cannot be compelled to apply for or accept the new shareholder contracts without a full understanding of their risks and benefits. Employers are obliged to provide written information with full details about the shares. All individuals must then seek advice from an appropriate independent advisor - with the reasonable costs of that advice paid for by the employer - before entering into a shareholder contract. In practice there are a limited number of advisors qualified to provide the dual employment law and share advice required.

An employer will have to pay the costs of advice whether or not the employee goes ahead and some employers may be put off the scheme if they are picking up the tab for independent advice - and where what constitutes ‘reasonable costs’ have yet to be clarified.  

In a prolonged period of slow growth a scheme which gives employees a bigger stake in the company gives businesses more freedom to hire people whilst seeking to mitigate the risks and cost of tribunals, statutory redundancy pay or flexible working - could either spark much needed growth and innovation or cause disgruntled employee shareholders to bring their claims via other routes.

Ultimately, the new contracts could prove to have limited appeal and only be adopted by specific business sectors and among employees operating at senior levels.

No doubt some countries in Europe will be monitoring developments closely to see how this legislation pans out in practice in the UK before adopting it.

Joan Pettingill is a partner and employment lawyer at hlw Keeble Hawson, one of Yorkshire’s largest law firms with offices in Sheffield, Leeds and Doncaster.