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Employee Shareholders: Don't Let Your Words Come Back to Bite You!

Posted on August 27, 2013

The new Employee Shareholder model may be adopted by some truly entrepreneurial start-ups looking to manage workforce cost in the first years of a business.

Many nascent businesses will be attracted by the relaxation of the perceived burdens of unfair dismissal and other employment rights, thus giving them flexibility to make medium term workforce changes.

These start-ups will become aware that the employee shareholder structure requires advice from employment specialists to ensure correct set-up process is used on inception of the scheme for the Employee Shareholder status to be achieved successfully.

As the Employee Shareholder model is taken up, we may see growth in the use of employee ownership not from the large and established corporates well served with employee engagement and HR specialists experienced in employment law concepts but in entrepreneurial start-ups without the time or money for or sufficient experience in the management of the detail of incentives delivery for their workforce. As a result, they may incur liabilities and extra costs without realising.

Here are just some of the employment traps which businesses must look out for and guard against.

  • Beware grand promises used to encourage employee shareholders to join the business unless you are clear about what you will honour contractually.

The Courts recently enforced a multi-million Euro Bank general bonus pool promised by the CEO in a town hall announcement to all of the Bank’s staff as amounting to a change to the employment contracts of its staff permitted by its Staff Handbook and making the bonuses payable.  It was key that the promise of the bonus pool induced staff to stay with the Bank during very hard times at their employer.

  • Another risk is that joining promises are relied on as representations and court claims for them brought if the business does not pay out.

Since these claims can be brought up to six years after they arise, this may even be made by a departing Employee Shareholder concerned about leaving incentive value behind when they leave.

  • The new entrants to the employee owning model will also need to be very clear about rights arising by virtue of status alone.

Rights offered to all of a share owning class when the shares have little market can dilute value for the true business drivers later on.

Beware both of casual arrangements which give away shares or rights and of giving generous notice periods to those exiting which may mean that they are still holding valuable share rights when a business is sold. These rights holders may be forgotten in the excitement of the exit only to reappear as a claimant via a High Court claim and remind all of their rights after an exit is completed and all the proceeds already distributed to others!

GUIDANCE

Sense checking by an experienced Employment lawyer of Employee Shareholder scheme set ups and in the communication of incentives offered to the workforce is a wise precaution for those who need to avoid claims while they are driving a fast-growing and developing business.

For more information on any of the topics covered in this article, please contact Carolyn Brown, Partner, Head of Employment at HowardKennedyFSi LLP, Solicitors.

 
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