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Employee shareholders – is a new contract enough to make them an ordinary employee?

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Employee shareholders have always been rare beasts and may be rarer still if a contractual update meant they became ordinary employees again.

Summary

In Barrasso v. New Look Retailers Ltd the EAT had to consider whether a subsequent contract ended the employee shareholder status.  Employee shareholder contracts were introduced by the government in 2013. Under the contract, employee shareholders are given shares in the business in exchange for foregoing certain employment rights, including the right to claim unfair dismissal (unless the dismissal is automatically unfair or discriminatory) and the right to receive statutory redundancy pay. The EAT considered the crucial question of under what circumstances during the continuation of employment would employee shareholder status come to an end. In summary the key message from the case is that employee shareholder status was not terminated by a later service agreement.

Background

If readers are unfamiliar with the concept of employee shareholders or forgotten about that that is understandable.  After their introduction in 2013, the idea did not take off and employee shareholder contracts are not widely used. In this the case Barrasso (“B”) began employment with New Look Retailers Ltd (“NLR Ltd”) in November 2012 and by June 2014 had become UK Managing Director. In June 2015, when NLR Ltd was sold to another company, B was offered 7,000 ordinary shares in the parent company in exchange for becoming an employee shareholder under s.205A Employment Rights Act 1996 (“ERA”) and so giving up some employment protections.

B was concerned about losing these statutory rights. As a result, NLR Ltd agreed that B should have the contractual right to the equivalent of an unfair dismissal award and a statutory redundancy payment, subject to independent arbitration following dismissal. This agreement was executed as a deed between B and NLR Ltd in September 2015.

In March 2017 B and NLR Ltd entered into a new director’s service agreement which was also executed. This did not include any reference to B’s employee shareholder status and expressly provided that it superseded all written and oral agreements between B and NLR Ltd.

When B was later dismissed in circumstances that he regarded as unfair, he brought a claim for unfair dismissal. The employment tribunal had to consider whether B was prevented from making this claim as an employee shareholder. B relied on the later deed as having terminated his employee shareholder status. The employment tribunal decided that, as the later deed did not refer to employee shareholder status or to the subject matter of the s.205A agreement, these were not matters that could be seen as having been “superseded”. The employment tribunal therefore found B remained an employee shareholder and dismissed his claim.

B appealed to the Employment Appeal Tribunal (EAT), contending that the employment tribunal erred in its construction of s.205A ERA (in particular, in failing to hold that the requirements of this provision had to be met at the point of dismissal). The EAT rejected the appeal and held that the employment tribunal had made permissible findings as to the background that entirely supported its interpretation of the effect of s.205A ERA and the later deed.

Conclusion

This case is useful for those businesses which employ anyone as an employee shareholder.  It provides some clarity on what will bring the status to an end – something the legislation does not do.  However it should be noted that the EAT emphasised the decision depended upon the applicable factual matrix rather than a point of statutory construction.

The tax advantages of the employee shareholder status scheme were abolished from 1 December 2016, although existing holders of the scheme continue to benefit. It is therefore unlikely that there will be many more cases of this kind.