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Robert Davies

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Legal insight: shares-for-rights legislation and what it means for employers

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This article was written by Robert Davies, Partner at law firm Dundas & Wilson.

The Chancellor’s proposals on the establishment of a new category of employees, namely employee-shareholders, were first outlined in his 2012 Party Conference speech and have been the subject of considerable discussion as to their appropriateness and utility in practice, leading to some vigorous debate in the House of Lords and certain concessions being granted by the government in order to secure agreement for the legislation to enact the scheme.

It was presented as an exercise in workplace choice and as a "voluntary three-way deal" which would benefit small businesses in particular.

In summary, the employer grants shares of a value between £2,000 – £50,000 to an employee who in return agrees to forfeit certain core employment rights such as the right: not to be unfairly dismissed, to receive a statutory redundancy payment or to make applications for flexible working arrangements or to undertake study or training by virtue of the new employee-shareholder status. The incentive for employees to move forward with this scheme is supplied by the government implementing tax legislation that applies a zero rate to the capital gains from those shares.

Extra safeguards built into the bill and agreed by the Government relate to the process that will be necessary in order for a valid employee share-ownership agreement to be entered into and are designed to ensure that an employee approaches such an offer from a suitably well-informed position. This is achieved by the following:

  • A company wishing to utilise the scheme must give a potential recruit a written statement of the particulars of the status of employee shareholder and in doing so specify the employment rights being forfeited and, equally significantly, the rights, restrictions and any other conditions attaching to the shares – such as dividend rights, voting or non-voting status, and buy-back and redemption provisions.
  • The individual must receive independent legal advice (from the same category of personnel able to advise on a statutory compromise agreement) as to the terms of and the effect of entering into the employee shareholder agreement.
  • There is a seven day "cooling off" period during which the agreement can have no legal effect.
  • Even if the employee decides after the receipt of such advice not to take up the offer of the new status the company is still obliged to meet the "reasonable costs" of the advice – which will not be treated as a taxable benefit.

It should be noted that if an employee refuses an offer of employment which is confined to employment under the new status there is no alternative to insist upon recruitment as an employee or worker – as far as the prospective relationship with the offering company it is "take it or leave it". However, the government has accepted that jobseekers will not be compelled to look for an employee-shareholder role and, importantly, existing employees will be protected from any detriment or dismissal based upon a refusal to convert to the new status.

That said, there are a number of issues that will arise under this new regime both at macro and micro-levels, such as:

  • Will it prove principally to be another option in the creation of tax-efficient remuneration arrangements for senior personnel as opposed to a route that encourages greater recruitment by SMEs which are perceived by BIS as otherwise dis-incentivised by the prospect of too much employment law risk and a lack of flexibility to recruit more employees?
  • How will the shares be valued for capital gains tax (CGT) purposes, and at whose cost, and how will the initial grant be taxed?
  • What happens if there is a business sale – will a transferee be obliged to create its own employee shareholder regime or should there be a default to a non-employee –shareholder employment status?
  • Precisely how much detail will be required when advising on issues such as: "drag-along" rights compelling sale if a majority shareholder elects to sell their interest; and good and bad leaver categories in which alternative bases of valuation may be specified by a company depending on the circumstances of an employee’s departure?

It will remain to be seen whether the additional administrative costs and complexity that appear to be part and parcel of the employee-shareholder status will outweigh the limited forfeiture of certain employment rights, particularly as the rights to bring discrimination and whistleblowing claims are unaffected. BIS emphasised in the Parliamentary debates that the Treasury, HMRC and BIS will monitor closely the potential for abuse of the system for what were described as "excessive and unacceptable" tax purposes.

The actual rate of take-up for the new status when available will be an interesting indicator of the utility of the scheme, as would statistics on whether recruitment for a particular role would have gone ahead even if the employee shareholder route was unavailable should BIS decide to monitor the latter.

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