On 8 October 2012, George Osborne announced plans for a new employee-owner employment contract. The proposals are stated to better engage employees, who would be more closely linked with the success of the company they work for. The consultation closed on 8 November 2012 and the new contract is expected to be available for employers to use from April 2013.
The proposals
Employers will be able to offer employees the chance to own shares in the company where they work at a value of between £2,000 and £50,000. When sold, any sum made on these shares would be exempt from capital gains tax. In return, employees who opted to purchase shares would give up significant employment rights, including:
- unfair dismissal protection
- statutory redundancy payments
- the right to request flexible working and time off for training and
- mothers being required to provide 16 weeks’ notice if they wish to return early to work from maternity leave, instead of the usual 8 weeks’ notice.
The shares may be of any type and may carry a range of rights including, a right to vote and a right to a dividend. Employers will be allowed to include a clause in the contract requiring employees to sell their shares back to the company on leaving employment. The value of shares and rights on leaving employment will be fixed to ensure that employees are not forced to dispose of their shares at less than their original value.
Who do the proposals apply to?
The new contract will be available to all new and existing companies, regardless of size.
However, the proposals are aimed at smaller companies and those anticipating fast growth.
The new contract would be optional for existing employees, who could choose whether or not to enter into this contract. However, employers would be free to require new employees to enter employee-owner contracts.
A good idea?
The proposals have received a mixed reception. Although some have encouraged the proposals asserting that “employee engagement is an extremely powerful motivator and employee ownership can be behind this” (Chief Executive of CMI, Ann Francke), many problems have been highlighted, including whether:
- there is sufficient protection in place to prevent employers mis-selling the potential benefits of an employee-owner contract to an employee. For example, even a modest amount of shares would not qualify for the capital gains tax threshold so only employees who purchase a significant number of shares would take advantage of this new tax exemption
- the proposals will be attractive to employees who may be worried about job security. The proposals provide employers with the ability to hire and fire at will on the basis that shareholdings in the company will cost less than any tribunal or redundancy payments
- businesses will want to become involved in the complex tax rules in relation to employment related securities
- businesses will want to incur the further costs involved with valuing shares. There will be difficulties for unquoted companies that are not subject to stringent valuation requirements and an additional valuation of the shares may also be required on the buy-back of the shares.
Potential impact
It is questionable whether the proposals will have a significant take up by UK businesses. The Director-General of CBI, John Cridland, asserts that “this is a niche idea and not relevant to all businesses” and the Trades Union Congress leader, Brendan Barber, agrees that “few businesses will want to tie themselves up in the tangle of red tape necessary to trigger these exemptions”. However, for fast growing start-up businesses, this option may be worth exploring further.
If you would like clarification on these issues or advice from a member of Greenwoods’ Employment and Employee Benefits Team, please contact either of us by email or telephone on 01733 887703.
The information contained in this article is intended to be a synopsis only. Before acting on it you should take professional advice.
Written by Lisa Jinks, Associate and Siobhan Thomson, Solicitor
Employment and Employee Benefits Department
Greenwoods Solicitors LLP
Monkstone House
City Road
Peterborough PE1 1 JE
For more information click here