What are employee shareholder contracts?

The Government has introduced controversial new employee shareholder contracts from last month which allow employees a share of any profits from their company in return for forfeiting some of their employment rights. Contact Law outlines what they will mean.

Employee shareholder contracts are a form of employment status that the Government has introduced via a Growth and Infrastructure bill amending the Employment Rights Act 1996.

The Government says the aim is to help businesses to increase workforce flexibility and provide incentives to staff – and maybe to attract a more motivated individual.

What are the benefits of these contracts?

The shareholder contract will give the employee shares in the employer's company (or parent company) worth at least £2,000. There is no maximum.

The sale of the shares by the employee (up to a limit of £50,000) will be free from capital gains tax.

The type of shares will be decided by the company, in respect of dividends, voting rights etc.

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Does the employee lose any rights by accepting this type of contract?

Yes. Agreeing to a shareholder contract means the employee:

– Will not have protection from unfair dismissal (except for “automatically unfair” reasons such as when discrimination is involved or they are dismissed for trying to exercise a statutory right)

– Will lose the right to statutory redundancy pay

– Would have to give 16 weeks’ notice of an early return date from maternity, or adoption leave rather than the statutory eight – or six for additional paternity leave

– Restricts their rights to make a statutory request for flexible working and for time off for training and study.

Could employees be forced to switch to an employee shareholder contract?

It is not possible to make existing employees become employee shareholders, but employers could make this mandatory for staff hired after the proposals come into force. So, if you are currently employed, you cannot be forced to change contracts.

Additionally, if shares are sold the original contract remains in force – with the reduced rights.

What happens to the shares when the employee leaves?

This is all down to the company's articles of association. There might be a buy-back scheme, but the value of the shares might be different. Alternatively, the employee could keep the shares. It all depends on the company's standard rules. If you are an employee considering this type of contract, you should ensure you understand what happens at this point.

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