10 October 2012

Swap your rights for shares?

George Osborne has announced plans for a new type of employment status: ‘employee owners'. Employees will give up their rights to protection against unfair dismissal, statutory redundancy payments, and the right to request flexible working hours and time off for training, in exchange for between £2,000 and £50,000 of shares in the company for which they work. These shares will be free from capital gains tax when they are eventually sold.The scheme is expected to come into force from the beginning of April and will be optional for existing employees but may be compulsory for new staff. It is all well and good that the shares on offer may be free of CGT but the tax most people are concerned about when shares are being distributed is income tax.  Giving up employment rights for £2,000 less tax sounds particularly unattractive! The prospect of having a stake in the business for which you work may be attractive to some employees. However, giving up key employment rights for only £2,000 of shares will seem like a bad bargain to most.  Women will perhaps be most adversely affected by giving up the right to request flexible working hours, which is a right most frequently used by mothers returning from maternity leave. They will also have to provide sixteen weeks' notice of return from maternity leave rather than the usual eight. The proposal aims to minimise the risks for a company taking on new staff. However, it does not avoid the risk of employees bringing discrimination claims against their employer and arguably increases this risk given that, once dismissed, angry employees tend to assert whatever claims are available. Furthermore, the situation in relation to unfair dismissal will not change dramatically under this new proposal as this protection is not triggered until a new employee has completed two years' service in any event. This new scheme is mainly aimed at small, fast growing companies to allow them to give their staff a stake in the business. However, the shares offered by small companies may not result in much financial benefit to the employee. Very few private unlisted companies are floated on the stock exchange so most employees are not likely to see much of a return on their shares. Employers could do a number of things to keep the value of shares low, including ensuring any profits are paid to the real owners by way of increased salaries. If the company is allowed to buy back the shares and set the price for doing so, that will put the employee in a weak bargaining position. It may even be the case that an employer could establish two companies: one to employ the staff and another, with the real value, to conduct the business.  If permissible under the legislation, this would mean that staff could be given shares in a worthless business and the owners of the true business would not need to dilute their own ownership.  Of course, no employee in a good bargaining position would accept this but, in times of low employment, workers may accept whatever job they are offered (and it will be open to companies to offer this new type of contract only). I doubt these schemes will catch on with large companies, because these generally seek good employee relations and will not want to foster mistrust by recruiting people on the basis that they can be treated unfairly.  Whether smaller companies will find them more interesting remains to be seen.

Category: Blog