BIS has now published the promised consultation paper on the proposal for employees to give up certain statutory employment rights in exchange for shares. The paper gives further detail on the proposals and suggests a fundamental change to current employment laws, creating a new employment status, that of “employee owner”.

Employment Rights

The Government intends to amend the Employment Rights Act 1996 to create a third employment status, “employee owner”, alongside those of “worker” and “employee”. The employee owner status has two defining characteristics – an equity share and different employment rights. Under this new arrangement an employee owner will be “given” between £2,000 and £50,000 of shares. Any gain on those shares will be exempt from capital gains tax, however, the shares will still potentially be subject to upfront income tax and NICs to the extent the employee pays less than market value for those shares.

However, the employee owner would have reduced rights compared to an “employee”. These rights have now been clarified. Most significantly an employee owner would not have any ordinary unfair dismissal rights and would lose any rights to statutory redundancy pay.

Most automatically unfair dismissal rights would remain, although there would be two minor changes based on other reduced rights. The statutory right to request flexible working will be restricted and will only be exercisable for employee owners within 4 weeks of return from parental leave. The statutory right to request time to train where an employee works in a company of over 250 people (and the employee has been employed for at least 6 months) will be removed. Consequently it would not be automatically unfair for an employer to dismiss an employee owner who requests flexible working unless the employee is exercising the right to request flexible working when returning from parental leave. It would also not be automatically unfair to dismiss an employee owner for having made certain requests for time to train. The final difference in status is that employee owners would also have to give 16 weeks' notice of the intention to return early from maternity or adoption leave, compared with 8 weeks' notice for other employees.

Importantly, discrimination laws are unaffected and an employee owner would retain the right to bring discrimination claims in relation to dismissal.

Share rights

It is intended that companies of any size will be able to use this new status, but the consultation notes that it is principally intended for fast-growing companies that want to benefit from the flexibilities available through the new status:

The Government intends that all types of shares will be eligible for use under this arrangement. These shares may carry rights to dividends, voting rights or rights to a share in the company’s assets if it is wound up. The Government anticipates that this will take effect as part of a contractual arrangement between employer and employee owner. The employer would be allowed to include a clause in contracts requiring the employee owner to surrender the shares when the employee left, was dismissed or made redundant. If shares are surrendered the employer would have to buy back the employee’s shares at a reasonable value.

Comment

The consultation asks some fairly broad questions, ranging across employment, company and tax law, but, surprisingly, gives little further detail beyond the original press release.

Although the consultation has invited views on safeguards to minimise opportunities for tax abuse, there appears to be an overall failure to appreciate the reality that the majority of the UK workforce, other than the minority who are better paid, will not be in a position to either fund the upfront tax charge or have the available funds to pay market value for the relevant shares in order to avoid the tax charge.  Even in the case of an employer implementing the scheme using the minimum number of shares permitted, the employee would broadly have to pay £2,000 for those shares or pay a tax liability of at least £400 where the shares are received for no payment.  It is difficult to envisage an ordinary worker making an upfront payment to forfeit valuable employment rights in return for a speculative capital gains tax saving in the future.

As discussed in our previous Law Now (please click here to access) this novel proposal would mean significant cultural changes to the way employers and employee (owners) think. The ramifications across other aspects of law are also not to be underestimated.  So far the current proposals have been met with a degree of scepticism, but the measures are intended to be introduced through legislation to take effect from April 2013.

The consultation closes on 8th November and can be accessed here.