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Neil Andrews Partner Coles Miller

Employee ownership7th Dec 2012

by on 7th Dec 2012


Neil AndrewsOn 3 December the Government responded to its consultation on employee ownership which allows employees to give up some employment rights in return for shares in their employer.

Whilst a whopping 92% of those who responded to the consultation thought that the idea was either misconceived or that it had not been properly and fully thought through, the Government has made it clear it intends to implement the policy.

The Response still leaves open a number of unanswered questions but we now know a little more about the proposed developments. Primarily, these are:

  1. Employee shareholders who dispute they have been given shares worth at least £2,000 by their employer will be able to challenge their employment status in Employment Tribunal.
  2. The Secretary of State (at BIS) will be able to increase the minimum share value offered to employees to "opt out" of their employment status (currently this is £2,000).
  3. Employers will be able to grant employee shareholders more than the previously proposed upper limit of £50,000 of shares, although still only £50,000 profit will be exempt from capital gains tax.
  4. Employee shareholders may receive shares in a parent company of their employer (although not a subsidiary).
  5. The employer will have the power to require employee shareholders forfeit their shares in accordance with any agreed shareholders agreement (e.g. gross misconduct), subject to the employee's rights to maintain a minimum of £2,000 worth of shares.
  6. The Government has also said it is looking into ways of reducing the income tax and NI contributions that arise when employees receive their shares.

The Government proposes to implement the scheme in April 2013. No doubt there will be further clarification of the proposals as they make their way through the various readings by Parliament. Our position remains largely unchanged:-

Whilst the proposed scheme may provide a great opportunity for a small minority of UK employees at fast growing companies to get their hands on company shares and enjoy the £50,000 capital gains tax exemption when they sell them on for a handsome profit and may well be a good idea in the "start up" space, we suspect many employees won't be interested primarily because of the uncertainties, costs and problems surrounding share valuation and the relatively illiquid asset of shares in a private company, whilst many employer shareholders will decide this "horse-trading" of employment rights for shares isn't good for employee engagement or, alternatively, that having their shareholding diluted, risking shareholder disputes or the costs of setting up and administering the scheme just isn't worth it.

We are also concerned that employees with weak negotiating positions will have little option but to accept the proposal from their employer and it's because of this risk some commentators are calling the proposal "Beecroft by the backdoor."

All in all, we think the unintended and problematic consequences for employers and employees who buy into this (if this becomes law) could create a much more difficult and complex landscape for employers at a very time they need as few distractions away from their core business as possible. Either this, or the scheme may end up much like the stakeholder pension: largely ignored.

This document is not intended to constitute and should not be used as a substitute for legal advice on any specific matter. No liability for the accuracy of the content of this document, or the consequences of relying on it, is assumed by the author. If you seek further information, please contact Managing Partner Neil Andrews at Coles Miller Solicitors LLP.