Shares for rights

Employee ownership has recently been in the headlines. In what is said to be a first in the UK, law firm Fox & Partners announced that it has moved to an employee ownership model. In the same week George Osborne revealed a new type of “employee owner” contract to be introduced in April 2013.

Relative status

The proposal is for employee owners to receive shares in the company of between £2,000 and £50,000, which will be exempt from capital gains tax (CGT). These individuals will receive the same employment rights as an “employee” except in respect of “ordinary” unfair dismissal, certain rights to request flexible working and training, and statutory redundancy pay. They will also need to give 16 weeks’ notice to return from maternity or adoption leave (as opposed to the usual eight).

This new status will sit alongside those of “employee” and “worker”, and should be readily distinguishable. Operating distinct employee owner contracts should be relatively straightforward from a drafting perspective. The bigger issue will be the impact on workplace relations, specifically whether there is a risk of creating two-tier workforces, which could undermine business success. Consistency in offering employee owner contracts will also need to be managed. For example, opting only to make such offers to those with, or likely to have, families would be challenged on discrimination grounds.

The Government intends that all types of shares will be eligible for use; these may carry rights to dividends, voting rights, or rights to share in the company’s assets on winding up. Therefore, businesses seeking advice will be looking beyond employment law implications to, for example, corporate law issues which can arise from having a number of minority shareholders in a company, and the rights which should attach to different classes of share.

Beyond employment rights

The employee could be required to surrender the shares when they left, were dismissed or made redundant. The employer would have to buy them back at a reasonable value. But, for private companies in particular, there may be no market for their shares and so they could experience funding issues on being required to buy back for value.

Employment lawyers will need to keep an eye on developments in company law, given that the Government will be consulting separately on simplifying the process of buying back shares, as a result of the Nuttall review of employee ownership which reported in July 2012.

Some mugging up on tax implications will also not go amiss. Under existing law, if an employee receives shares from an employer for no consideration, the employee will, broadly, be liable to an income tax charge (or at a later date if restrictions apply), based on the market value of the shares acquired. This is a major barrier for the outright transfer of shares to employees and is why share options are popular alternatives. There could also be an employer and employee national insurance contributions liability, depending on the circumstances of the acquisition. When you consider also that individuals already have an annual CGT exemption – currently £10,600 – it is highly questionable just how much an employee gains in tax advantage from giving up valuable employment rights.

Effects in practice?

The consultation document reveals that the right to claim in relation to a discriminatory or an automatically unfair dismissal will be unaffected, with a couple of important exceptions. It will not be automatically unfair to dismiss an employee owner for having made certain requests for time to train where that employee has been employed for at least six months. It will also not be automatically unfair to dismiss one who requests flexible working, unless they are exercising the right to request flexible working when returning from parental leave.

Parental leave is underutilised at present, but if the proposals are implemented in their current form, we could see a rise as employee owners use parental leave prior to return from maternity leave in order to secure the consideration of a statutory flexible working request. The consultation document makes clear that employee owners will still be able to make informal requests to their employer, and that the proposed change only removes access to an employment tribunal claim for those who think their request has not been properly considered according to the statutory provisions. Discrimination claims may therefore abound.

Any hope that the Government would consult vigorously on the regime to ensure concerns are adequately addressed has been dashed by the deadline for consultation responses being 8 November, for a document only released on 18 October. Critics suggest that many of the Government’s recent pronouncements simply generate fear and insecurity at a time when certainty and confidence are required. These latest proposals are set to be criticised for the very same reasons.