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Legal Insight: The potential impact of employee shareholder schemes

Posted on from HRzone

At the Conservative party conference last year, the Chancellor George Osborne unveiled plans to create a new employment status – the ‘employee-owner’.

Deregulation of the market

The government promoted these proposals as part of its drive for growth and to give business more flexibility to hire and fire staff.
 
Some commentators were quick to dismiss them as political rhetoric to satisfy those keen on seeing further deregulation of the labour market.
 
But at the end of last year, the government concluded its consultation and published its response. The proposals have now been incorporated into the Growth and Infrastructure Bill, which is currently making its way through Parliament.
 
Despite initial scepticism, it appears that the scheme is likely to become law at some point this side of the next general election. As to what it comprises, employee-owners would have a reduced set of employment rights in return for receiving shares in their employer’s company.

Changes under the proposals

An employee-owner would be given shares of between £2,000 and £50,000, which would be exempt from capital gains tax. In return, they would waive their right to claim unfair dismissal and statutory redundancy pay. 
 
In addition, they would not have the right to request flexible working unless they were returning from parental leave. New mothers who took part in the scheme would also be required to give 16 weeks' notice of a firm date of return from maternity leave instead of the usual eight weeks. 
 
Under the proposals, however, new hires would not be forced to accept the new employee-owner status, but employers would be able to offer it on a take-it-or-leave-it basis.
 
But the response to the consultation was broadly critical, with 92% of respondents viewing the plans in either a negative or mixed way.

Key points

The government received 209 completed replies from a range of interested parties including individuals, businesses, employer and employee representatives, special interest groups, accountants and charities. The following key points and concerns were raised:

  • The majority of respondents felt that the proposed scheme would have a low uptake. Around 80% believed that it would have little or no impact on recruitment. There was a common feeling that employment rights should not be changed at all
  • Employers already find it difficult to understand existing employment statuses and it was felt that the introduction of a new one would only cause further confusion. There was concern that it would lead to an additional administrative burden, particularly for small businesses, which may lack a dedicated HR function
  • There was widespread disquiet over how exactly shares would be valued among private companies that did not trade them in a regulated market. This situation would make it extremely difficult for small organisations and start-ups to use the proposed initiative. The costs associated with undertaking a valuation could act as a further deterrent
  • It was felt that the costs of the scheme could outweigh any benefits
  • Some respondents worried that an organisation with both employees and employee-owners could cause division and result in a two-tiered workforce, which could, in turn, have a negative impact on morale and productivity
  • The majority were concerned that the new status could increase the risk of discrimination claims being brought, due to the fact that individuals would not be able to lodge unfair dismissal claims
  • There were widespread fears that the proposed changes to the maternity leave notice period could have a negative impact on attracting and retaining female talent.

Flexibility for both parties

Despite the concerns raised, however, the government has confirmed that it intends to go ahead anyway. Although questions were raised about how the shares element of the initiative would operate, it has said that it does not intend to introduce legislation to deal with the matter.
 
Instead the government felt that existing rules in relation to employee share schemes would be sufficient and the introduction of additional regulation to deal specifically with employee-owners would reduce flexibility for both parties to negotiate arrangements. But it has decided to make some changes, including:

  • A name change from ‘employee-owner’ to ‘employee shareholder’
  • The Secretary of State would have the power to increase the minimum share value of £2,000
  • The upper threshold of £50,000 on the number of shares that can be offered will be removed, but exemption from capital gains tax will only apply up to £50,000
  • The notice period for return from additional paternity leave will also increase to 16 weeks to make it consistent with the proposals in relation to the maternity leave notice period.

Traditional employer/employee model

The big question is, however, whether the new employee shareholder status will mark a fundamental shift away from the traditional employer/employee model?
 
If the response to the consultation is anything to go by, it is highly unlikely to be the case. At best, the proposed employee shareholder status might be used by start-ups and small businesses that are interested in taking advantage of the exemption from capital gains tax.
 
However, these benefits could be offset by the problems caused by determining share values and the administrative burden in drawing up contractual arrangements to deal with a share buy-back in the event that an employee leaves. 
 
Nonetheless, there could be a nominal take up of the proposed initiative, although it does not cover the public sector, partnerships, charities and other bodies that are not companies, which automatically rules out a large swathe of employers.
 
It is conceivable that larger companies and multinationals listed on stock exchanges could offer it as an option to new hires on a take-it-or-leave-it basis, using any existing share incentive scheme.
 
However, in the current age of corporate social responsibility, any such decision would need to be balanced against any negative impact to corporate reputation – does the company want to be seen, whether fairly or not, as an employer that is keen to take on workers with a reduced set of employment rights?        
 
Given the initiative’s potential problems and what appears to be a widespread lack of enthusiasm among employers, why is the government continuing to push forward with these proposals?
 
Part of the answer lies in the Conservative Party’s ideological belief in the benefits of moving towards a more deregulated labour market and its view that the economy’s lack of economic growth is primarily a result of too much regulation rather than too little demand.
 
A number of questions remain around the operation of the proposed scheme and the government has stated that it will address any outstanding issues by issuing clear guidance.
 
Until the bill has been finalised and such guidance published, however, the jury will still be out on the true impact that the new status is likely to have on both employers and employees.

The original article can be found on HRzone.co.uk.

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