Author: Mike Tremeer
In October 2012 George Osborne announced plans to introduce a new type of employment status: the “employee shareholder”. The proposal is set to be introduced in April 2013 and will enable companies to offer, and in some cases require, employees to enter into a specific contract of employment in which they waive a number of employment rights. In exchange, the employee will receive shares in the employer company worth between £2,000 and £50,000, with any growth in value of the shares being exempt from Capital Gains Tax.
The proposal has attracted criticism from practitioners and commentators from the outset. Shortly after the announcement, the Guardian suggested that the proposal “simply doesn’t add up” and the Telegraph expressed the view that it “helps no one”. The Government’s own response to a condensed consultation process revealed that 92% of the submissions received viewed the proposals in a negative or mixed way.
Chief among the concerns raised is the potential for employees to be influenced into sacrificing important rights and protections without taking adequate advice and without fully appreciating the longer term consequences. For example, one of the rights to be waived is the employee shareholder’s ability to request flexible working under the statutory regime. A naive graduate who accepts an employee shareholder job offer when keen to embark on their career may only realise the impact of this later in life when they wish to start a family.
Employers have also raised a number of queries regarding the scheme and will need to consider the potential cost and difficulty of assessing the value of their companies and the shares to be issued to employee shareholders. Companies will also be anxious to hear what rights they will have to repurchase shares in cases of dismissal and resignation. The Government suggests that repurchase arrangements will be left to the relevant parties to agree, but it seems inevitable that the parties will have very different ideas about the terms and price that should apply in any repurchase provisions, and who is to be responsible for the associated costs.
Given the apparent lack of support for the proposal, and the legitimate concerns raised by both sides, it is valid to question whether there is any benefit to it for either employees or employers.
Waiver of rights
Employee shareholders will be required to give up their rights to:
Objectively, it appears that the proposal could therefore be attractive to a number of categories of employee.
Firstly, those employees with genuine “trust and confidence” in their employer and who do not fear unwarranted dismissal or some other arbitrary abuse of any rights that will be waived. It is unusual to come across an employer that wishes to dismiss employees or treat its workforce badly without any justification whatsoever. Therefore, those employees who have faith and trust in their employer could feel comfortable in becoming an employee shareholder. Of course, should their employer subsequently be acquired by less sympathetic owners, these employees may find their previous faith misplaced.
Key employees and those who provide a significant contribution to their employer may also feel little risk in waiving the required rights. Most employers are reluctant to take any action that may damage the commercial interests of the organisation. Those employees who are confident that it would not be in the employer’s interest to dismiss them may be willing to waive their rights in exchange for the chance to benefit financially from a growth in value of the company.
Two of the employment rights to be waived relate to giving a longer notice period when returning from maternity, adoption or additional paternity leave and to request flexible working. This may be significant for female employees but, on a current reading of statistics, it is likely to be less relevant to many male employees.
Finally, recent years have seen a considerable reduction in the employment protection that exists for employees. Those recruited after April 2012 now need two years’ continuous service to pursue a claim of unfair dismissal, meaning that an employer is largely free to dismiss with impunity in this period (provided that there are no allegations of discrimination, whistleblowing or similar grounds). From the summer of 2013 it will be necessary to pay a fee of up to £1,200 in order to take any Employment Tribunal claim to a final hearing. Both of these significant changes were introduced without any corresponding benefit to employees. With the Government’s review and abolition of employment rights set to continue, and provided that adequate protection regarding the employer’s ability to repurchase shares is put in place, securing any form of severance package (i.e. the value of the shares initially granted) could be seen as a positive position for new employees.
Artist David Choe is a prime, though admittedly extreme, example of how an employee shareholder arrangement could be of great financial benefit to employees. Mr Choe was hired by Facebook in 2005 to paint a mural in their offices. He was offered a payment of $60,000 or shares in the company. Mr Choe chose the shares which, at the time of Facebook’s flotation in 2012, were said to be worth in the region of $200m.
Clearly the opportunity to save Capital Gains Tax of up to 28% on such a dramatic increase in value would be a significant benefit to an employee.
The feedback received regarding the arrangement suggests that there is little appetite for it from employees or employers, and so it remains to be seen how often it will be used in practice.
However, employees should not dismiss the possibility of accepting an employee shareholder offer out of hand. In particular, employees joining small, start-up companies that are expected to increase in size and value in the coming years should remain alert to the tax breaks that the scheme could offer.
Equally, small but growing companies, who may not be able to offer the generous salaries and benefit packages of their larger competitors, should consider using the scheme as a tool to attract top talent to their organisation. The possibility for the employee to benefit financially from the company’s growth could be a very attractive proposition, and may also result in employee motivation and retention benefits.
Mike Tremeer, Solicitor, Fladgate LLP (email@example.com)