The Chancellor announced this week a scheme that will, from April 2013, allow employees to be given shares in their employer worth between £2,000 and £50,000 and to pay no capital gains tax on any increase in value in those shares, all in return for waiving their rights to claim unfair dismissal, to a statutory redundancy payment, to request flexible working and also, rather strangely, if they agree to give 16 weeks rather than 8 weeks notice of their intention to return from maternity leave.

The public reaction has been interesting: the CEO of Sainsburys immediately rejected the idea as unattractive and implicitly unethical, as did the TUC. There was qualified if slightly dismissive approval from the CBI, whereas the British Venture Capital Association is enthusiastic.

There seems to general support for the concept of employee share ownership. Recent academic studies (for example, by the Cass Business School) claim that companies that encourage employee share ownership have been more resilient and profitable during the downturn. And levels of “employee engagement” are higher, apparently.

The Nuttall Review of Employee Ownership, which reported to the government during the summer, enthused about the advantages of employee ownership and even recommended that the government carry out consultation on introducing a right for employees to request it (the government is yet to act upon this). But there is something odd about having to give up basic employment rights in return – the bargain doesn’t quite seem balanced and therefore workforce reaction is likely to be polarised between those who are willing to invest and those who prefer the comfort of legal rights if things go wrong: economic risk versus legal risk.

Employees will suffer no direct loss if the shares lose value because they received them free. If they increase in value, individuals can already enjoy £10,600 per year free of CGT under the tax allowance system, so any gain will need to be significant for the additional tax concession to apply.

Of course, employees in very successful companies could make big financial gains. Employees in less successful companies could face a situation in which their shares have little or no value; they risk being made redundant without the security of a tax free statutory redundancy payment (maximum £12,900); and they risk being sacked for less than justifiable reasons without the ability to claim unfair dismissal (although according to Vince Cable’s announcement last month the maximum value of that claim will soon reduce from approximately £85,000 to approximately £38,000).

Whatever the ideology behind the proposal, the scheme will only take off at all if it can be easily administered by employers, particularly SMEs and, to achieve this, certain fundamental issues need to be addressed by the detailed proposals:

  • share valuation upon grant and upon sale;
  • the rights that shares in the scheme must have (e.g. dividend, voting rights);
  • mechanism for sale on termination of employment;
  • ability to use existing EBT or share schemes;
  • extent of rights that an employee gives up – some types of unfair dismissal claimderived from EU law may need to be excluded;
  • whether employees can be made to “pay” for the shares during their employment orwhen they sell them.

Many other questions arise, of course, and we will be advising on the detail of the scheme when it is published.