Although the tax reliefs under employee shareholder status have been withdrawn in relation to shares acquired on or after 1 December 2016, historic arrangements remain in place. In a recent case, the Employment Appeal Tribunal considered how employee shareholder status can be validly terminated.
Reminder: employee shareholder status
Employee shareholder status allowed employees to be granted a minimum of £2,000 worth of shares free of income tax and national insurance contributions, in exchange for sacrificing certain statutory rights (including the right not to be unfairly dismissed and the right to a redundancy payment). Other formalities were involved in obtaining the status, including that the employee had to receive independent legal advice and sign a written statement of particulars.
Employment Appeal Tribunal case
The first case on employee shareholder status was heard in the Employment Appeal Tribunal (EAT) in August 2019.
In Barrasso v New Look Retailers Limited, the EAT considered whether an employee shareholder ceased to be an employee shareholder if they entered into a new service agreement, which reinstated rights that were formerly contracted out of and which did not explicitly refer to the employee shareholder status.
The facts of the case were that:
- The employee entered into an agreement to become an employee shareholder in 2015, with all the formalities met.
- As the employee was concerned about terminating certain statutory rights, the company also offered him a side letter reinstating his contractual right to bring an unfair dismissal claim and his right to a redundancy payment.
- In March 2017, he signed a new service agreement. This did not refer to his employee shareholder status, but contained an entire agreement clause (stating that the contract superseded all written and oral agreements previously made between the parties).
- In February 2018, he was summarily dismissed and brought a claim for unfair dismissal.
The EAT concluded that (on the facts) the claimant was not entitled to bring his unfair dismissal claim due to his status as employee shareholder.
The claimant had argued that his 2017 service agreement terminated his employee shareholder status.
The EAT disagreed, finding that this did not go far enough to extinguish his employee shareholder status. The EAT held that the service agreement and the shareholders' agreement had separate functions, and as the service agreement was silent on the employee shareholder status, it could not terminate this status.
Terminating employee shareholder status
The takeaway point for employers is that parties wishing to terminate employee shareholder status must explicitly rebut this in a separate contractual arrangement - simply issuing a new agreement does not go far enough to terminate the status.
If the status is to be brought to an end (so that the employee has their employment rights reinstated), advice should be obtained on the steps and documentation required to validly terminate the status.