The Government has responded to the consultation on Implementing Employee Owner Status. Despite a negative response (92% negative or mixed views) the government is going ahead with the new scheme.

A re-cap of the proposal

As George Osborne (Chancellor of the Exchequer) stated in October, under the proposal certain employment rights can be exchanged for shares worth between £2,000 and £50,000 and any growth in the value of the shares will be exempt from capital gains tax (‘CGT’). This was restated in the Chancellor’s Autumn Statement this week under the heading “Removing the Burdens of Unnecessary and Inefficient Regulation”.

Employee owners would not have the right to the following:

  • Unfair dismissal rights (except for reasons that are automatically unfair or that relate to discrimination).
  • The right to statutory redundancy pay.
  • Certain rights to request flexible working and time to train.

What’s new?

The following have emerged from the consultation:

‘Employee owners’ will be referred to as ‘employee shareholders’.

  • The shares should be fully paid up and issued free of charge.
  • The Secretary of State can increase the minimum share value of £2,000.
  • Shares in excess of £50,000 can be issued but the CGT exemption will not apply over and above that amount.
  • Employee shareholders would have to give 16 weeks’ notice of the intention to return early from paternity leave (previously this just referred to maternity and adoption leave).
  • The shares can be issued by both the employing company and the parent company.
  • Non UK-registered companies can benefit from the status.

The government has argued that employees have free choice as to whether they sign up to the new status and that they can ‘take it or leave it’. However it is likely that job applicants who refuse a job based on employee shareholder basis will then lose their rights to benefits for a period of time providing their refusal was unreasonable.

What is the likely impact?

Now we know what is proposed it is necessary to consider the potential impact this new status would have. The concept of employee ownership is not new and has been well established in the US since the mid-nineteenth century. The US concept was introduced to assist with retirement planning. Employment protection is very limited in the US and so shares are not traded for employment rights.

Even in the UK, companies such as John Lewis have for some time allowed employees to have a stake in the ownership of the business. The aim of the new legislation is to improve productivity and profitability whilst also providing some legal certainty for employers against employment litigation.

Previous experience has taught us that tribunals are keen to see access to justice. Any attempt by the government to narrow such access will be met with resistance from the tribunals. As such tribunals will be keen to ensure employees (including employee shareholders) are not unduly deprived of employment protection.

Employers will need to consider how they value the shares at the time an employee shareholder offer is made. The government seem reluctant to over-regulate how exactly the share element should work. Employers may want to consider putting a process in place to deal with the valuation of shares at the time an offer is made. Such process may include as a minimum:

  • Board meeting and minutes approving the valuation of the company and the shares.
  • Independent evaluation/audited accounts (depending on size of the business and shares being offered).
  • Appropriate paper trail detailing how the shares were valued.

This evidence should be kept on an employee’s personnel file to ensure it is available should it be needed in the future when an employee leaves the business.

Further consideration needs to be given to good leaver and bad leaver provisions and the potential impact this may have on the value of the shares when an employee departs. It is easy to envisage a situation where an employee has fallen out with their employer and is classed as a bad leaver. In this situation their shares may be worth very little and they will have no employment protection.

Employers need to be mindful that a minimum of £2,000 worth of fully paid up shares need to be given to an employee in order for the employee to be classed as an employee shareholder and thus trade their employment rights. If the employer overvalues the shares and the shares are in reality worth £1,999, it may be that the employee ends up with £1,999 worth of shares and full employment protection. Employers may consider airing on the side of caution to ensure the £2,000 threshold is met.

Employers who are spin offs from the public sector or other social enterprises might find this approach particularly useful. For them this could have a material effect on the finances of the employer, its gearing, and the way in which it can be funded and therefore on its sustainability. If it were to have a substantial employee ownership stake, then that would have the effect of increasing shareholders’ funds in the accounts and reducing the notional costs of meeting/paying for employment rights as they will have been surrendered by employees. The business should, therefore, be in a better state of solvency, more able to comply with bank covenants and so secure funding. That would be a good thing in relation to the business if that is what the owners of the business want and it causes the business to develop and thrive.

We note, however, that Community Interest Companies are not permitted to take advantage of this employee shareholder model.

The complexity of giving shareholder rights to employees may be initially off putting for some employers. Shareholders enjoy different rights to those of employees and have different remedies. For example, shareholders who consider they have suffered prejudice can bring claims requiring their shares to be bought out by the Company at a valuation rate determined by the Court and usually higher than that which the Company might consider appropriate. Dealing with these issues and other corporate law formalities might be off putting for organisations that may be well used to dealing with more usual employee disputes.

It is also unclear as to what happens to employee shareholders who cease to be shareholders. Unwary employers may find their employee shareholders obtain employment rights in unforeseen circumstances such as personal insolvency. The government has promised to produce clear guidance about the new status for companies and individuals. However, based on the current consultation response and announcement it seems the government are taking a non-interventionist approach.

In summary

For now we will have to wait and see how popular the employee shareholder status proves to be. Undoubtedly the model will suit some employers perfectly, once the various issues are ironed out we may see a surge of employers taking this route. It will be some time before we see any claims in the employment tribunals as there is unlikely to be any dispute until the point where the employee shareholder leaves the business. It may well be that employees who become employee shareholders find other ways to seek justice through discrimination or automatically unfair dismissal claims.

We will keep you informed...