Employee Ownership: Forging Ahead…

Our November newsletter discussed the Government’s consultation on implementing a new “employee owner” status, Employee Ownership: Consultation. As a reminder, the plans mean that employees would give up some of their employment rights in exchange for shares in their employer worth between £2,000 and £50,000, on the basis that any gains on those shares will be exempt from capital gains tax.

The Government has now published its response to this consultation and announced that it is going ahead with its plans. This is in spite of plenty of (unsurprising!) opposition to the proposals. In fact, the consultation responses included 92% negative or mixed views and only three out of 184 respondent organisations said that they would take up the new status.

However, the Government maintains that it has taken many criticisms from the consultation responses into account and that it is therefore right to give the plans the go-ahead.

Key changes:

The following key changes have emerged from the consultation:

• ‘Employee owners’ will be referred to as ’employee shareholders’;
• the Government plans to reorganise its guidance on employee, worker and employee owner status, to assist businesses to use these appropriately. There will be new guidance for individuals about the personal consequences of employee owner status, and guidance for businesses about its implementation, including guidance on valuation and forfeiture of shares;
• one of the key concerns about the employee shareholder status was that the employee shareholders would incur National Insurance contributions and income tax liabilities on acquisition of their employee shareholder shares. The Government has acknowledged these concerns and noted in the Chancellor’s 2012 Autumn Statement that it is considering introducing measures to reduce these tax liabilities; including potentially exempting the first £2,000 worth of shares from income tax and National Insurance contributions;
• the shares should be ‘fully paid up’ and issued free of charge;
• the Secretary of State can increase the minimum share value of £2,000;
• shares in excess of £50,000 can be issued but the CGT exemption will not apply over and above that amount;
• ‘Employee shareholders’ would have to give 16 weeks’ notice of the intention to return early from paternity leave (as well as maternity and adoption leave);
• the shares can be issued by both the employing company and the parent company; and
• non UK-registered companies can benefit from the status.

Comment:

Whilst the Government’s response has sought to address a number of the concerns raised in its consultation, there remain several problem areas.

Most importantly, considerable concern remains in respect of the legal complexities, cost and risk involved for small and medium sized private companies in entering into such a contract. Shareholders enjoy different rights to those of employees and have different remedies. For example, shareholders who consider they have suffered prejudice can bring claims requiring their shares to be bought out by the Company at a valuation rate determined by the Court and usually higher than that which the Company might consider appropriate. Dealing with these issues and other corporate law formalities might be off putting for organisations that may be well used to dealing with more usual employee disputes.

Further, valuing shares will no doubt leave plenty of room for dispute and litigation: in particular ensuring that those shares are worth a minimum of £2,000 and valuing them on an employee’s exit. The Government has acknowledged these valuation issues in its response to the consultation. However it has, as yet, not suggested any solutions other than non-binding guidance.

It is also unclear as to what happens to ’employee shareholders’ who cease to be shareholders. For example, employers may find their employee shareholders obtain employment rights in unforeseen circumstances such as personal insolvency. The Government has promised to produce clear guidance about the new status for companies and individuals, so we wait to see what this contains.

The Government response also does not deal with the problem for employers that, despite the employee giving up certain claims for shares, there will still be plenty of employment claims that such an employee could still bring. For example, even if employees agree to give up the right to claim unfair dismissal, this does not include the right to claim ‘automatic’ unfair dismissal where the dismissal is based on discrimination, a TUPE transfer, trade union activities, maternity leave and so on. Further, even if they surrender the right to request flexible working, working mothers (who are the group who make most of the flexible working requests) can almost always rely on sex discrimination legislation to still bring a claim if the employer refuses a reasonable flexible working request.

Also, from an employee’s point of view, the Government seems to have dismissed the concerns raised about them being coerced into the new status. This is on the basis that employees have free choice as to whether they sign up to the new status and that they can ‘take it or leave it’. There do not appear to be any measures in the draft legislation to avoid coercion, with the Government simply insisting that the new status will be voluntary. This attitude appears to ignore the very unequal bargaining position which exists in the vast majority of job offers, particularly in the current economic climate with high unemployment levels.

For now, we will have to wait and see how popular the employee shareholder status proves to be. However, certainly initially, the complexity of giving shareholder rights to employees may well be off putting for many employers, particularly small and medium enterprises.