In the last head-to-head of the year we debate whether the much heralded, little used shares for rights scheme is a good or a bad thing.
Last week’s vote was an intriguing one: whilst 74% of you think shared parental leave is a good thing only 26% of you think that the paid period of shared parental leave should be increased to a year – that, it seems, is a step too far. For the full results see here. This is the last head-to-head of the year so may I wish you all the very best until battle re-commences next year.
Paul Mander, Head of Employment
YES to "Shares for Rights" because...
Employee shareholders agreements are becoming more common and, for the right employees, they can offer a good deal. The upside of tax free profits more than offsets the loss of the possible right to claim unfair dismissal, especially where the number of employees choosing to bring those claims is consistently falling.
Employee shareholder agreements are a three way deal:
- Companies give their employees shares worth between £2,000 and £50,000.
- The employee gives up certain employment protection rights such as the right to claim unfair dismissal and redundancy pay, as well as the right to request flexible working. Also new mothers will have to give 16 rather than 8 weeks’ notice of return from maternity leave
- The Government will then give up the right to tax the profit (if any) on the employees’ shares when they are sold. On balance, this is a good deal, when used properly, for the small and medium sized enterprises for which they were designed.
This scheme is voluntary and employees have to take legal advice before they can accept the shares. This has to be a good thing as employees are, in practice, being advised on far more than the rights they are giving up. This makes it easier for both parties to make sure that the employee shareholder agreement (including the rest of the terms of the contract) cover what the parties actually intend which, in turn, makes disputes less likely in the future.
Equally, where the shares offered are growth shares, there can be a very significant upside. Employees can access a tax free profit which, in turn, incentivises them to participate within the business. As the economy needs more growth, any schemes that encourage growth have to be a good thing.
Although concerns have been raised about the downside of employee shareholder agreements and the erosion of employee rights, this impact can be mitigated. Many employees are insisting on additional contractual protections being included into their contracts (whether by way of longer notice periods, liquidated damages clauses, or arbitration when the right to claim unfair dismissal has been lost). Such contractual protection can more than offset the removal of the statutory protections required by the law.
NO to "Shares for Rights" because...
The "Shares for Rights" scheme introduced by George Osborne in September 2013 that heralded the creation of a new "employee shareholder sector" has now been with us for over a year. Has it been a good thing?
The scheme was not met with much enthusiasm by employment commentators at the time with even its mildest critics calling it "hare brained". It was packaged to encourage significant numbers of start-ups and/or SMEs to embrace the scheme in the hope that they would be energised by a new breed of employee stakeholder motivated by at least £2,000 worth of shares.
But the scheme also removed a number of unfair dismissal and redundancy rights from employees - disregarding the fact that these rights are perhaps less attainable anyway because of the introduction of tribunal fees. In short, employers would be encouraged to hire without too much concern about the fire.
Have we seen start-ups and SMEs skipping to Mr Osborne's tune? No. Have we seen the schemes at all? Yes but in quite a different environment to that originally packaged and sold.
For venture capitalists and the like, the schemes are a useful way of rewarding and incentivising an existing management team who will be interested in the significant tax breaks which far and away exceed any potential loss of statutory compensation. Canny advisers can also introduce a substitute for statutory compensation in contractual terms. At the same time, external investors have flexibility and certainty over the suitability of the management team and a useful tool for those "it hasn't worked out" conversations.
So, are they a good thing? Something is generally considered good if it does what it is designed to do. But, in this case, the scheme has singularly failed to produce a happy crowd of start-up employees. Well-advised companies and investors may have another mechanism to produce tax efficiencies but the “product” is far too complicated and unwieldy for its target audience where the value of shares is also so difficult to determine.
So, the Shares for Rights scheme is definitely not a good thing but it’s another question as to whether it is bad or simply not much use.