Member Article

Employee shareholders rejection, again

James Hall, associate at Charles Russell LLP, looks at the Employee Shareholder status idea as it gets a second rejection in the House of Lords.

The House of Lords has rejected for the second time the Government proposal to introduce a new “employee shareholder” employment status through the Growth and Infrastructure Bill. This new form of employment status would see employees giving up key employment rights (including standard unfair dismissal rights, redundancy rights, as well as some parental rights, such as the right to request flexible working) in return for at least £2,000 of company shares. These shares would be free from Capital Gains Tax up to £50,000.

In a clear demonstration that they are determined to push this new status through, the Commons have already responded to the latest Lords rebuff with a new list of concessions. These provide for a seven day cooling off period before an offer can be accepted, a written statement setting out the rights to be given up and a written statement setting out the type of shares and rights associated with them. These are in addition to the concessions after the first Lords rejection that stated that no one would lose unemployment benefits for failing to accept an employee shareholder job offer, as well as granting income tax relief on the vesting of the first £2,000 of shares.

The fact that the new concessions followed the Lords rejection so rapidly could be seen as an indication that the Commons are well aware of the weaknesses of this proposal. Whilst the savvy employee in a fast-growing business may well draw great benefit from joining as a shareholder, it is only too easy to see the potential pitfalls for the less-well-informed.

The only other way to give up employment rights to this extent is through a compromise agreement, which needs to be signed off by a lawyer who has advised the individual. Whilst the latest concessions of providing written statements about the rights lost and the type of shares gained do at least provide some information, it is significant that there is no requirement that the employer makes these understandable. In addition, for new employees, they may be made a job offer on the condition they are an employee shareholder. As a result, it is likely that many employees will simply accept the deal without fully understanding their position. Not only may this cause difficulties for employers down the line, but might also lead to a rise in discrimination claims.

Valuation of the shares is also an area which is notoriously uncertain. Even though ‘market value’ should be calculated in accordance with the Taxation of Chargeable Gains Act, the reality is that many of these shares will not have a true market. In addition, it does not appear that the Government has considered putting safeguards in place to ensure fair treatment when an employee leaves the business.

It is interesting to view the determination of the Government to push this new status into being within the wider context of the current trend of watering down employee’s rights. Given the fact that there is seemingly little interest from employers or employees in this new status, a cynic might say that this recent move is simply the latest step in removing the traditional employment contract altogether.

This was posted in Bdaily's Members' News section by Charles Russell LLP .