The Employee Shareholder "Hokey Cokey"

As mentioned in previous bulletins, during October 2012 the Government announced its intention to create a new type of employment status. This was originally reported as "Employee Owners", but following consultation is now to be called "Employee Shareholders", the central idea being that individuals will give up certain employment rights in return for capital gains tax exempt shares in their employer.

Currently there are three types of status a person can hold if they are engaged by a business, namely "employee", "worker" or "self-employed". Questions relating to an individual’s status are often the subject of litigation and some commentators have already questioned the wisdom of complicating this area further.

Under the Government’s original proposals, an Employee Shareholder contract will allow a company to offer new and existing employees capital gains tax exempt shares worth between £2,000 and £50,000 in its business in return for the employee waiving certain employment rights. These include the right to claim unfair dismissal, to a statutory redundancy payment, to request flexible working and to time off for training. In addition, women taking up the share option will be required to give 16 weeks’ (rather than 8) notice of their intention to return from maternity leave.

The Government received 209 responses to its recent consultation document. However, only a ‘very small’ number of respondents welcomed the proposals. Notwithstanding this, the Government is still pushing ahead with the new status, which is anticipated to come into force during September 2013.

A number of broad ranging concerns were raised in the consultation. Individuals were fearful that they may be coerced into accepting the new arrangements and had questions regarding the valuation of shares. These issues were echoed by businesses who considered the proposals costly and complex. More generally, there were worries that unscrupulous businesses could seek to manipulate the tax advantages offered by the system.

These concerns were obviously shared by the House of Lords, which was recently asked by Parliament to approve its Employee Shareholder plans. In fact, the House of Lords rejected these plans on two occasions before finally agreeing to the new status on the condition that the following caveats were introduced:

An individual will not be able to agree to become an Employee Shareholder unless they have first received independent advice (for example from a solicitor or union) on this option, much like the need to obtain such advice before signing up to a compromise agreement. Without advice, any agreement to become an Employee Shareholder will be invalid and the individual will be considered a normal employee for legal purposes. Also, the employer will have to pay for the cost of advice, irrespective of whether the individual ultimately agrees to become an Employee Shareholder or not.

Even if, after obtaining advice, an individual decides to become an Employee Shareholder, they will be given a 7 day "cooling off" period during which they can change their mind.

Employers will have to make written statements available which provide full details of the shares being offered and the relevant rights (e.g. voting, dividends, rights on sale of the employer etc) that they come with.

Any job seeker who refuses to accept the new status will not, as a result, forfeit their social security benefits.

Only the first £2,000 of shares awarded will not attract income tax. This means that any share awarded over the minimum level could lead to the individual facing an increased tax burden.

Existing employees will be protected from being subjected to any detriment as a result of refusing to switch to the new status.

Before the above caveats were introduced we were slightly pessimistic as to the take up of this new status and now we are even more of the view that we will not be seeing an overwhelming demand for advice on drafting Employee Shareholder contracts. Notwithstanding the administrative burden and complexity of getting suitable shares in place that can be offered to staff, our opinion is that only those individuals who are confident that they can either influence the success of the business they are being offered shares in or have a crystal ball for predicting the next big thing (for example, anyone who passed on Apple shares 20 years ago might be kicking themselves now!) will be remotely interested in giving up their employment rights. This is particularly because independent advisors will be duty bound to highlight all of the potential pitfalls and complications that go along with this new status.

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.