Another month, another new idea for employment law reform from the Government! The reforms are certainly coming thick and fast at the moment – fortunately the team at Pure are here to read through the reams of information and consultation papers and distil down the important bits for you.
Earlier in October George Osborne announced plans to introduce a new idea whereby employees would be given shares in their employer in exchange for giving up certain employment rights. The plans took many of us by surprise, as they weren’t something that had been mentioned much, if at all, previously.
As you are probably aware, there are currently two main categories of people who have protection under UK employment law – ‘employees’ (obviously!) and ‘workers’. Osborne’s plans involve a third category being created, called ‘employee owners’. Some think that this is an attempt to copy the John Lewis model, where employees are partners in the business – but there are some key differences.
In order to qualify as employee owners, staff will need to have shares of between £2,000 and £50,000 in the company. Clearly businesses will have to be limited companies in order to have employee owners, so this will not be an option for partnerships, LLPs or sole traders.
The main ‘carrot’ offered with employee owner status is the fact that the shares will be exempt from capital gains tax (CGT). The idea is that fast-growing businesses can use this as a real incentive for staff. However, as with so many things in life, there is a catch!
In order to benefit from being an employee owner, the employee will have to agree to give up the following rights:
- The right to claim unfair dismissal (but note however that this does not apply to claims for automatically unfair dismissal such as for whistleblowing, pregnancy etc)
- The right to claim a statutory redundancy payment
- The right to request flexible working (other than on return from parental leave)
- The right to request time off for training
The employee would also have to give 16 weeks’ notice of early return from maternity or adoption leave (as opposed to the 8 weeks normally required)
George Osborne believes that the plans maximise flexibility and promote a competitive environment.
Valuations – One of the big difficulties with these plans is how shares will be valued, particularly in small and medium private companies. There is no agreed method for this and it is often a source of disputes between shareholders. A valuation will have to be undertaken to establish that the shares fall within the range necessary for employee owner status to apply.
Contracts – At the moment, the consultation is silent on how the new status would be documented. Would there be specific documentation to be signed to confirm ‘employee owner’ status, or would the issue of the shares be sufficient? Would the individual need to be told the implications of what he or she is agreeing to (as they do when they agree to a Compromise Agreement)? As we all know from investment advertisements, the value of shares can go down as well as up and employee owners may find they come away with less than they invested.
Optional – If it becomes law, there will be no obligation on employers to offer this new status either to new employees or existing employees. However, if an employer did decide to offer it to all new starters, then they may feel unable to say no – the job market at the moment means that employers hold even more of the bargaining power than they usually do.
Tax – Although the shares will be exempt from CGT, they will still potentially attract income tax and National Insurance contributions, and when they are sold there will be stamp duty to pay. It is also worth mentioning that the annual allowance for CGT is currently £10,600 so the employee owner’s gain would need to be more than this in order for them to get any real benefit from waiving their rights.
Types of shares – Not all shares are created equal – they can have different voting rights or rights to dividends, so determining that will be crucial. The consultation confirms that shares can have a condition attached dealing with what happens when the employee leaves – which will usually be that the employer has to buy the shares back at a reasonable price. That then brings in the issue of valuations again, and could actually give an incentive for employees to leave if they want to cash in their shares.
TUPE – The consultation doesn’t deal with what would happen to employee owners if there were a TUPE transfer. If they were to transfer to a new organisation in which they don’t hold any shares, would their waiver still be effective?
Is it worth it? – From an employer’s point of view, although some of the key claims are being waived, employee owner status does not remove the risk of many other types of claim such as discrimination or automatically unfair dismissal. Businesses will therefore need to weigh up whether it is worth their while to give the employee a shareholding and go through the necessary hoops just to avoid the employee being able to bring certain claims.
We will of course need to wait and see the outcome of the consultation – the Government has said that it would like to see this in force in April 2013. A consultation document has been issued, and the closing date for the consultation is 8 November, so this is something that is being dealt with very quickly by usual Government standards.
We would love to hear your thoughts on the proposals – why not email us at [email protected] or comment on Twitter or LinkedIn? We will be feeding back our thoughts as part of the consultation so please do contact us if you have any points you would like us to include.