Employment Rights for Shares - A fair swap?

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Employment Rights for Shares - A fair swap?

The last 2 years have seen a raft of proposals and consultations designed to reform employment law. The latest of these is the consultation on implementing employee shareholder status. Initially called ‘employee owner’ status, it was changed soon after the consultancy period closed. This was born out of the ‘Nuttall Review’ (designed to promote and facilitate employee ownership).

The key proposals are:

• A new status of ‘employee shareholder’ will be created;

• An individual joining a firm as an employee shareholder will be issued with fully paid up shares worth at least £2,000; and

• In return, the employee shareholder will forfeit certain statutory employment rights.

The offer will be available for new joiners and acceptance will be voluntary. Existing employees could also choose to accept an offer of a new contract.

Shares

It seems that the shares will be valued at their restricted market value. Employers will be free to put restrictions on the shares (eg restrictions on dividends or voting rights). Valuation methods could also impact on the taxability of the shares. Ultimately, employee shareholders could be getting less than they expect.

It is likely that employers will require employee shareholders to forfeit their shares on termination of employment. The buy-back mechanism for this is to be simplified (through changes to the Companies Act 2006) but there are still issues, not least that the forfeiture conditions are to be left to contractual agreement between the parties. How harsh can an employer make the forfeiture conditions without unreasonably restricting the value of the shares?

The good news is that any capital gain made by the employee shareholder will be exempt from CGT, although the value of the shares for CGT purposes will be capped at £50,000. However, the normal rules for Income Tax and NI Contributions will apply.

Employment rights

Employee shareholders will lose their entitlement to claim unfair dismissal, unless it is for one of the automatically unfair reasons, such as whistle-blowing or raising health and safety issues.

They will also lose rights to statutory redundancy pay; to request flexible working; and to request training.

Rather curiously, any employee shareholder returning early from maternity or paternity leave will have to give 16 weeks’ notice.

Comment

The proposals have met with a mixed reception, with many commentators remaining sceptical. Only a “very small number” of respondents to the consultation welcomed the new status and expect to utilise it. It is hoped that matters will become clearer as the legislation makes its way through Parliament, but grey areas remain:

• Will the complexity of the legal and tax rules be off-putting to the small and medium sized businesses at which the scheme is aimed? There will be no requirement for compulsory independent legal advice for individuals considering employee shareholder status.

• Acceptance of the contract, by a new joiner, is voluntary. However, they may have little choice if they want the job!

• Will the loss of unfair dismissal rights lead to an increase in employee shareholders’ remaining claims, such as discrimination and automatically unfair dismissal?

• Existing employees will be able to remain on their existing, traditional contracts if they choose. How will the creation of a mixed workforce impact on employee relations between those with and without full employment rights?

• How useful is the CGT exemption, given the current £10,600 annual allowance that already exists?

• The Government suggests that “in certain circumstances” an employer could buy back shares at less than market value (maybe where an employee was dismissed). Thus, an individual who considers himself to have been unfairly dismissed could not claim compensation nor receive the full value of the shares which were meant to compensate him for the loss of this right.

Further details are expected in the New Year, before the new changes are implemented as part of the Growth and Infrastructure Bill in April 2013. It remains to be seen how the concerns will be ironed out and how popular the new status will be once introduced.

Clare Chappell – clare.chappell@twmsolicitors.com

 

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