Author: Jamie Hamilton
Employee Shareholder Status (ESS) divided opinion between the main political parties in the run-up to May’s General Election. Both Labour and the Liberal Democrats had pledged to scrap this Conservative-backed tax relief scheme – which offers tax exemptions to qualifying employees on the acquisition and disposal of shares in their employer, in return for sacrificing certain statutory employment rights – and companies were understandably wary of committing resources to implementing ESS given the tight polling data in the run-up to the election.
However, under the new Conservative government, companies can be more confident that ESS is here to stay, at least in the medium term. We have advised on the implementation of several ESS transactions in recent months and this is an opportune time to use this practical experience to re-examine the potential benefits of the regime and some hurdles to overcome in implementing it.
Background and controversy
ESS was implemented by the Growth and Infrastructure Act 2013, with the aim of encouraging more companies to offer shares to employees. The motivational effect of share ownership in the workforce is widely acknowledged, with John Lewis being the best known example. To illustrate this, the Employee Ownership Index (EOI) (an index of companies quoted on the London Stock Exchange’s Main and AIM Markets which have at least 3% of shares in the hands of employees other than main board directors) has outperformed the FTSE All Share index in nine of the 12 years since its inception, often by large margins. Funds are now being set up specifically to track the EOI.
The critics of ESS, however, point out that ESS shares have predominantly been taken up by senior management-level employees, who would have acquired shares in their employers anyway and are simply using the regime to pay less tax on those shares. They also argue that these individuals are less likely to be affected by losing statutory employment rights than the lower-level employees for whose benefit the scheme should be designed to operate.
Lost employment rights
ESS is a distinct employment status. Employee shareholders are subject to contracts which are largely the same as normal employment contracts, but the law does not afford them the following rights:
In addition, employee shareholders on parental leave must give their employers an increased period of 16 weeks’ notice of their intention to return to work.
There is nothing to stop employers from agreeing to reinstate some or all of the lost statutory employment rights into the employee shareholders’ employment contracts, typically by means of a side agreement. If employers are prepared to do this, it removes the biggest disincentive to ESS.
Implementation: headline criteria
There are few restrictions on the types of companies that can use ESS. In particular, there are no restrictions on the size of the company or the type of trade it can undertake. This makes ESS attractive to companies that cannot qualify for other government approved tax incentives such as EMI.
The headline qualifying criteria set out in the legislation are:
Implementation: issues in practice
Implementing the above criteria raises a large number of corporate, tax and employment-related issues. Some of the main issues on which we have recently advised are as follows:
To remove these factors from the key negotiating period, the deal can either be agreed subject to completion of them or the parties can agree to deal with them after completion – depending on how important ESS is to the protagonists.
Implementing an ESS scheme and ensuring it complies with the range of applicable corporate, tax and employment legislation is not straightforward. As companies and advisers become more accustomed to the issues, however, the implementation process is becoming increasingly smooth and more companies are likely to adopt ESS as a means of promoting employee share ownership.
Jamie Hamilton, Senior Associate, Fladgate LLP (firstname.lastname@example.org)