Signing away employment rights for company shares. Is it worth it? Neil Black, employment partner at Pinsent Masons explores government proposals for employee-ownership contracts.
Party conference season provides a platform for ministers to present eye-catching proposals that are alarmingly short on detail. George Osborne’s speech to the Tory faithful was no exception, as he outlined plans for UK employees to sign away a raft of employment rights for shares in their employer worth at least £2,000.
The Chancellor envisages employees giving up the right to claim unfair dismissal, the right to a redundancy payment, the right to request flexible working and the right to time off for training. maternity leavers will be required to provide 16 weeks notice of returning from maternity leave instead of the usual eight.
In return, Osborne offers employees shares in their employer, which are exempt from capital gains tax.
The key question is whether this has much appeal to either employees or employers. The plan certainly fits with Nick Clegg’s assertion in January that employee-owned firms perform better: “We need more individuals to have a real stake in their firms, more of a John Lewis economy if you like.”
Encouraging employee engagement is undoubtedly a positive step for both employer and employee. However, it is questionable whether this should be directly linked with reduced employee rights.
The employer’s perspective
The tension here is how this latest policy announcement fits with the Government’s intention to reduce red tape for business.
It anticipates that the proposals will be attractive to small and medium enterprises, yet if firms consider the proposals too complex they may prefer to risk possible unfair dismissal claims instead. John Cridland CBI General Director explains: “In some of Britain’s cutting edge entrepreneurial companies the option of share ownership may be attractive to workers, rather than some of their employment rights. But I think this is a niche idea and not relevant to all businesses”.
Many commentators view Osborne’s announcement as lacking in any real detail. With a consultation planned shortly, the real hurdle that the Government will have to overcome is to ensure simplicity, so that it is not a case of exchanging one red tape for another. Some of the operational issues the Government will have to resolve are:
- Will they produce standard wording for the contracts, articles of association, shareholders agreements etc. or are they an administrative cost and burden that employers will have to bear?
- What will happen following a sale of part of the business? Will a new employer be forced to offer a scheme to transferring employees to match that of their previous employer? Will this become an issue on future M&A deals?
- Given that employees have given up their unfair dismissal/redundancy rights, will it encourage employers to short-circuit redundancy processes so that opportunities for re-engagement and redeployment are missed?
- Who will buy the shares back from the employee owner? As Matthew Findley, partner in tax, litigation and compliance at Pinsent Masons advises, there is often no ready market in small and medium sized enterprises. Companies may therefore be expected to set up and fund employee benefit trusts to buy back shares.
- Will there be a mechanism for valuing the shares receipt on departure? For leavers, will this involve traditional good leaver/bad leaver provisions? For instance, will a company be allowed to place a lower value on the shares if the employee voluntarily resigns?
- What if there is a dispute on valuation? Will companies be expected to fund a reference to an independent third party valuer with the expense that will entail?
- What will be the tax treatment of the shares when they are given to the employee? Whilst the Government has said that employee owner shares will be exempt from capital gains tax, the income tax position is unclear. Whether or not income tax is payable, when will this materially affect the attractiveness (or otherwise) of the proposal from a tax perspective?
- How will the proposal to give up flexible working rights be squared with discrimination legislation? This is a discrimination issue as women are more likely to request flexible working than men. Discrimination claims will not be signed away under the new scheme, so employers could go to all the expense and effort of buying off the rights and still be left with a claim.
The plan affirms the Coalition’s commitment to business. But suggesting it is fear of unfair dismissal claims that prevents employers from recruiting is not reflected by a recent survey carried out by Pinsent Masons in response to the Government’s proposed tribunal reforms.
“In some of Britain’s cutting edge entrepreneurial companies the option of share ownership may be attractive to workers, rather than some of their employment rights. But I think this is a niche idea and not relevant to all businesses,”
John Cridland, General Director, CBI
It is worth asking whether these measures are even necessary. During 2011 there were 46,300 unfair dismissal claims before the tribunal, a fall from 57,400 in 2009–2010. This number is only likely to decrease further with the introduction of fees and the increase in the qualifying period to bring a claim to two years.
These and other issues need to be thought through carefully if the proposals are ever to see the light of day, or they will “sink without a trace” as Mark Serwotka, head of the PCS Union, predicts.
The employee’s perspective
New employees would understandably consider it a sizeable risk to sign away their rights with an unknown employer in exchange for £2,000 worth of shares. This is not an easy sell, given that:
- The median tribunal award for unfair dismissal in 2012 was £4,560 with the average award £9,133. However, employees can be attracted by headlines of high awards and drawn to the maximum compensatory award of £72,300. The Government has suggested that employment rights would be swapped for between £2,000 and £50,000 of shares. Are employees going to see that as a good deal?
- Employees will be expected to relinquish their right to a redundancy payment. Normally, one would expect redundancies to be made at a time when a business is struggling financially. The employee may have given up their right to a payment at the very time their shareholding value has decreased.
- The scheme has already received an angry response from unions, with Brendan Barber the TUC’s general secretary “deploring any attack on maternity provision or protection against unfair dismissal.”
Some commentators, such as the British Private Equity and Venture Capital Association, have welcomed the proposal: yet there are a number of hurdles that need to be overcome before the Chancellor’s ideal of an employee-owned business with an engaged workforce can become a reality.