Shares for employee rights?

Proposals for employees to give up some employment rights in exchange for shares have been put forward by the Government - will ‘employee owners’ revolutionize the business world? Legislation is supposed to take effect from April 2013.

Key features:

•    Employees and employers may agree that the employee is to become an employee owner and receive shares, valued between £2,000 and £50,000. The value of the shares will be treated as a benefit of employment and taxed unless the employee pays for the shares. Any growth in value of the shares after issue would be exempt from capital gains tax.

•    In return an employee-owner will give up the following rights:

• to claim unfair dismissal;
• to statutory redundancy payment;
• to request flexible working (except on return from statutory parental leave) and to claim automatic unfair dismissal for making a request;
• to request time off to train and to claim automatic unfair dismissal for making a request where there is at least six months length of service;
• to give only eight weeks' notice of a firm date of return from maternity or adoption leave. Instead 16 weeks’ notice will need to be given.

Is this an opportunity for businesses to incentivise staff … or an underhand attempt to reduce employee rights? 

The apparent simplicity of the scheme could make it an attractive alternative to the existing Enterprise Management Incentive scheme (EMI).  As EMI shares are not exempt from CGT – the new scheme may win the day!  But the threshold of £2,000 could stop start-up companies from taking advantage of the proposals.  

There are a number of areas that need to be clarified before the model can work - this is likely to follow from the consultation which is ongoing.  The devil will, as always, be in the detail but those considering using this type of scheme should bear the following in mind:

1. The impact of promoting staff to becoming co-owners – the new shareholders will have expectations which will need to be managed and rights which need to be considered. 
2. Employment contacts will need to be reviewed to provide for the new rules.
3. The proposals suggest there will be flexibility in the type of shares that can be used: Should employees be able to vote? And what happens if the employee leaves?   Also, should the employee be able to transfer the shares to an outsider? 
4. Shares may go down in value!  For those who have paid for the shares or suffered a tax bill this may not be acceptable. 
5. And even if the shares go up in value – is there a market for them?
6. Advice from accountants or tax advisers is an absolute must before putting any share scheme in place
7. Employees who leave may be entitled to a reasonable price for their shares – but if they are being dismissed is it fair they should cash in an undeserved windfall?

The scheme may be attractive to small, emerging companies who want to incentivise staff by dangling the carrot of capital growth. 
But the key limitation on the attractiveness of employee share schemes remains – unless the owners of the business are planning to exit, employee share schemes tend not to offer staff a way of cashing in on capital growth.   For this reason the scheme is unlikely to revolutionize the world of company ownership.

For more information contact Karen Lord on 01737 854597 or at Karen.lord@morrlaw.com

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