In its Autumn Statement, the Government revealed that it is pressing ahead with its proposal for an “employee-shareholder” scheme, despite widespread criticism. From 6 April 2013 employers will be able to offer their employees fully paid up shares that will be exempt from capital gains tax, in return for employees giving up certain employment rights.
The draft legislation is available here (at section 27). The proposals are mainly aimed at SMEs wanting to create a flexible workforce and reduce the risks and costs associated with employment rights. However, the plans have been criticised by lawyers and tax experts, who have pointed out that employees are already entitled to an annual capital gains tax exemption (currently at £10,600 and set to increase to £11,100 in 2015). So would employee-shareholder status be an attractive offer to employees or is waiving employment rights too high a price to pay for shares in a company?
The proposal
Under the plans, employees will receive shares worth a minimum of £2,000 and up to a maximum of £50,000, which can be sold at a later date without any liability for capital gains tax. In exchange for the shares employee-shareholders will give up their rights to claim unfair dismissal (except in the case of dismissals that are automatically unfair, such as discrimination or whistleblowing) and rights to redundancy pay. They will also get limited rights to request flexible working time or time off for training and female employee-shareholders will be required to give 16 weeks’ notice of return from maternity leave, rather than 8 weeks.
Practical concerns
Whilst the new proposals may well encourage businesses to take on staff and promote loyalty to a company there are some practical issues the Government will need to consider before the legislation comes into force.
Valuation
The employer will be able to buy back the employee-shareholder shares at reasonable value. The Government recognises that valuing company shares will present difficulties, particularly in the case of unquoted companies. If the company performs badly, then the shares could ultimately be of little value and of no benefit to an employee, especially if the employee is faced with the situation where he or she feels they are being forced to sell their shares in a situation where they could have had a claim for unfair dismissal (for which the current maximum award given by a tribunal is £85,200).
Further, it is not clear how the reasonable value of shares will be determined. Employees will depart in different circumstances; so should the same method of valuing shares be used for redundancy as in the case of an employee dismissed for gross misconduct? If disputes arise over the valuation of shares, this is more likely to be a matter for the High Court or county court rather than the faster and less expensive employment tribunals.
Tax
Despite the capital gains tax exemption, it is clear from the consultation document that the allocation of shares to employees will also attract income tax and national insurance contributions under the normal rules of shares acquired through employment. The Government also anticipates that such shares will not qualify for the Enterprise Investment Scheme or any other tax-advantage employee share scheme (such as Enterprise Management Incentive Schemes) and thus employees will not be able to defer payment of income tax.
In addition, the exemption from capital gains will be irrelevant for many smaller businesses given the existing current annual exemption of £10,600 and will only benefit certain employees who are high earners and sell their shares at a high value.
Employment
Existing employees will not be required to change over to employee-shareholder status. However, new employees may have no option but to accept an employee-shareholder job offer with reduced employment rights. This may create a two-tier workforce and lead to potential conflict amongst employees. The Government’s consultation paper did suggest that employers will be able to provide more rights to staff but many employee-shareholders may not have an opportunity to negotiate their contracts. It remains to be seen whether potential or existing employees are required to take legal advice before signing up to employee-shareholder contract as is the current situation for employees waiving employment claims under a compromise agreement.
It is also unclear how the employee-shareholder status will be affected if the business or the company is sold and the employment transfers to the purchaser under the Transfer of Undertaking (Protection of Employment) Regulations 2006 (TUPE). The purchaser may not want to offer shares in its new company or business if its other staff are not on employee-shareholder contracts and changes to terms and conditions of employment following a TUPE transfer are void. Offering shares to employees under the new proposals might therefore be commercially unattractive for small businesses hoping to find a suitable buyer.
What next?
The proposals are only in skeleton form and, as highlighted above, there are a variety of practical issues that will need to be addressed before the final bill is approved and employees and employers warm to the concept. We will provide a further update on this when the legislation is implemented in April 2013. It will be interesting to see how these proposals change the dynamics in the workplace.