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Law for Business

Knowhow - guidance - precedents

10 OCT 2012

George Osborne's brave new world for employees - rights for shares

Nick Smith, Head of the Employment Team, Guildhall Chambers

Under radical plans announced at the Tory party conference, the Chancellor George Osborne informed the party faithful that he intended to introduce legislation from April 2013 that would enable employees to trade their statutory rights to claims unfair dismissal, redundancy payments, the time off for training and the right to request flexible working for shares in their employer's business. In addition it is intended that the scheme would require women on maternity leave to provide their employers with 16 weeks notice as opposed to the 8 weeks currently required, in return for shares.

The plan is a variation of that proposed by Adrian Beecroft, the capitalist and Tory party donor whose earlier proposals included controversially ‘no fault' dismissals. These were  met with considerable opposition from Business Secretary, Vince Cable. It was thought that Mr Beecroft's radical plans had been largely thwarted. It is understood that the Liberal Democrats had given their support for the plans on the basis that they were voluntary.

There is little detail available, but the basic proposals are as follows:

  • Companies would be able to give employees shares in their business if they give up employment rights.
  • No capital gains tax would apply to any increase in the share value.
  • Employees would be given between £2,000 and £50,000 worth of shares.
  • New business could make the contracts compulsory for all new staff, but existing businesses could not compel existing staff to sign.
  • Employees who gave up their rights would not be able to reverse their decision without the consent of their employer.

The proposals were not greeted warmly by the unions; Paul Kenny form the GMB was quoted as saying "slashing peoples employment rights under the guise of ownership schemes won't create jobs and it won't create growth". TUC General Secretary Brendan Barber said that few firms would choose to "tie themselves up in the tangle of red tape necessary to trigger these exemptions".

The British Chambers of Commerce said Osborne's policy announcement was "imaginative" stating: "The Chancellor's announcement of a new form of business ownership, with individuals swapping greater employment flexibility for an equity stake in the company, could be a useful option for some new and fast-growing businesses. It is an innovative and imaginative proposal that deserves to be tried out".

At first blush the intention that this should be good news for SMEs and start-up businesses seems to ignore the fact that founders of new business are best placed to determine with whom they should share risk and potential profit. It seems unlikely that such business will wish to give away a percentage of hard won business without significant investment. Can it really be said that the forfeit of the right not to be unfairly dismissed and/or a statutory redundancy payment will represent such a major incentive to the business when significant compensation still looms under the Equality Act?

On the other side of the equation, will many staff members wish to give up their rights for the uncertainty of a share price that may go down or prove worthless if the company fails? A workforce might feel deep resentment if it considers that the majority shareholders on the board are doing a bad job in running the business. It is not clear what will happen in the event of the insolvency of the business. Will they lose out on the right to claim notice pay and a statutory redundancy payment from the Government if they have forfeited these rights in return for worthless shares?

There are also potential major issues as to how the shares are valued. Employees are effectively being asked to invest in the business, but what information will be made available to them? What happens to those who have signed away their statutory rights on a false prospectus?

Another issue will be the nature of the shares that would be offered to employees, will they have voting rights?

Of course, things may work out very well for employees. Famously, those who were given shares in Facebook in return for their labour have been transformed into millionaires upon its recent flotation. Of course, for every Facebook, there are thousands of failed companies or small businesses with ambitions that extend no further than paying the bills each month.

Many might feel this is too much of a gamble. Those new enterprises who in due course can compel staff to ‘buy in' may find that this is a disincentive for new workers.

Other questions concern the issue of the consent needed to return to a non share-holding status. On what basis can an employer reasonably refuse to buy an employee's shares back? Will the employee, a minority shareholder have an unfair prejudice claim under the Companies Act? Will time spent working as an employee-shareholder count as service for the purposes of unfair dismissal rights?

On balance the feeling is that most employers would rather not get involved. The proposals will inevitably generate an additional and significant layer of administrative cost. This will have the opposite effect to that intended which is the removal of ‘red tape' and greater de-regulation of the labour market. Many employers will prefer not to over complicate things and will prefer to keep with the ‘devil they know'.

There is a risk that the sort of disputes that can be envisaged may damage goodwill and will create greater opportunities for conflict than currently exist. Arguably litigation is best avoided by the employer deploying good industrial practice and procedure and remunerating its staff well. Share option/stakeholder schemes work in many companies, the bargain is that staff are incentivised to give their best, in return for this additional element of their pay package. This is designed to engender greater loyalty and job security. By way of contrast, the bargain here seems to be that staff will trade in their most fundamental job security - the right not to be unfairly dismissed - in return for shares.  

On the other hand those who are high-earners may benefit most from these reforms. The provision of shareholdings creates an opportunity to structure remuneration in highly tax efficient ways. Bankers and other highly paid executives are the obvious candidates to benefit from these changes which provide for a Capital Gains Tax break in respect of shares owned under the scheme. High earners rarely engage in litigating unfair dismissal claims as the statutory cap, (currently £72,300) for a compensatory award, rarely provides an incentive for them to bring proceedings for unfair dismissal particularly when the stigma of being seen as litigious can have a marked detrimental effect on future employability and there is a relatively low chance of recovering costs in the employment tribunal. It may well be that those in such a position will happily exchange unfair dismissal rights in return for switching shares already owned, into ownership under the scheme.

On the other side of the coin those with very little bargaining power, who may struggle to find work, may well be compelled to sign away their rights if a start-up business introduces a compulsory scheme as a condition of employment.

There are interesting times ahead.

Would you give up your rights to gain shares in your employer's business?


Let us know your thoughts and join in our discussion on Jordans Law for Business LinkedIn Group.


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