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Employee ownership and employee shareholder status – reasons to be cheerful?

Today's over-subscribed FFW Annual HR Planner provided a timely opportunity to review the proposed employee shareholder status and to test enthusiasm for the proposal from a large group of HR Today's over-subscribed FFW Annual HR Planner provided a timely opportunity to review the proposed employee shareholder status and to test enthusiasm for the proposal from a large group of HR professionals and in-house lawyers representing many different types of employer across a number of different sectors.  The employment law changes to create this new employment status are in clause 27 of the Growth and Infrastructure Bill which is reaching the end of its passage through Parliament.  It is about to be considered line by line by Committee in the House of Lords.

The Chancellor of the Exchequer announced this headline grabbing idea for a new employment status on 8 October 2012 at the Conservative Party Conference.  A consultation paper, the Government response and the Parliamentary website provide more information.  More detail is also now available on the all important capital gains tax ("CGT") exemption.

Under clause 27 an employee shareholder agrees to have fewer employment rights than an employee in return for fully paid up shares of a minimum value of £2,000 (but could receive shares worth more).

The gains on the first £50,000 of shares acquired will be CGT exempt provided the shareholder or a connected person does not have a material interest in the company (or has not had within one year up to acquisition).  A material interest is 25% or more of the voting rights.

The Government may legislate to deem, for income tax purposes, that employee shareholders have paid £2,000 for their employee shareholder shares, reducing the taxable value on acquisition to nil for those acquiring the minimum £2,000 of shares.

This measure is not a Nuttall Review recommendation.  It is part of the Government's ongoing Employment Law Review.

This measure can be reduced to two propositions, depending on your viewpoint:

  1. will you accept fewer statutory employment rights than an employee to get £2,000 worth of shares, a potential CGT exemption and, if you are a new recruit, a job; and

  2. will you accept an individual as a shareholder in the company with £2,000 worth of shares, in return for fewer potential statutory employment law claims and, if a new recruit, filling the job vacancy?


 

The answers to these questions will determine what share rights and other arrangements are needed to implement and administer an employee shareholder agreement.  Will the share rights be just the minimum necessary to comply with clause 27 or will, for example, an employee benefit trust (or the OTS's proposed new employee shareholding vehicle) be needed to ensure the employee can at some stage realise value from these shares?

The employee shareholder status is controversial.  Lord Adonis said in the House of Lords:

"There is nothing well considered about this shares-for-rights plan. The consultation demonstrated almost universal criticism and lack of support."

It is criticised as an employment law measure. The Employment Lawyers Association has said:

"The proposal seems unlikely to improve significantly and/or alter labour market flexibility. Maternity provisions, in particular, may harm rather than improve flexibility".

The measure is also criticised from a tax point of view.  The Institute for Fiscal Studies describes Clause 27 as a "billion-pound lollipop" for tax avoiders, which looks as if it will foster a whole new avoidance industry.

The Employee Ownership Association has said clearly "There is no need to dilute the rights of workers in order to grow employee ownership".

But this arrangement has its supporters.  And there are scenarios in which it could work, and work well.

Sufficient consensus will emerge on the impact and value of the statutory rights given up.  An executive in a fast growing company, who would be offered an equity incentive anyway, could find this attractive.  He or she might agree to trade rights for a CGT exemption, particularly if other contractual terms are enhanced as part of the arrangement.

Also, interestingly, this measure has or may have some incidental benefits for employee ownership:

1. This measure has helped raise awareness of the Nuttall Review's vision of employee ownership

The employee shareholder status controversy has helped attract much needed attention towards employee ownership, and so raise awareness of employee ownership. For example, in the House of Lords, Lord Adonis and Baroness Brinton readily stated their support for wider share ownership among employees and the proposals in the Nuttall Review.

2. BIS now has evidence that employment law changes are unlikely to promote employee ownership

In theory, many employee owned companies will naturally follow best practice without needing the law to enforce this.  One of the Nuttall Review recommendations, accepted by the Government, is to assess whether a review of the impact of regulation and, in particular employment law, upon employee owned companies is warranted.  The responses to the Government's consultation on the new employee shareholder status show how important employment law is, to underpin employee rights, even in companies with employee ownership.

3. This new CGT exemption, together with increased tax breaks for enterprise management incentives are encouraging signs that the Government might yet introduce tax changes to encourage employee ownership

Following the Autumn Statement, HM Treasury continues to review employee ownership and has stated "The Government will consider further incentives to support the sector, reporting back at Budget 2013".

4. This measure helps confirm that employee ownership toolkits should concentrate on share capital companies and not, for example, limited liability partnerships ("LLPs")

The Employee and Mutual Ownership team at FFW has occasionally looked at using LLPs as an employee ownership model.  The fundamental problem is asking individuals to give up employment rights and become self-employed partners.  The possible national insurance contributions ("NICs") savings and even a promise to reproduce employment rights through contractual terms in the partnership agreement have never been sufficient to overcome this fundamental problem.  The Nuttall Review's recommended "off the shelf templates" should therefore, as planned, be based around conventional share capital companies and not LLPs, so that this issue does not arise.

In conclusion, no-one attending today's seminar rushed to say they would take advantage of this new measure, whether as an employee or an employer, but interest was expressed.  This measure does cause some confusion, with the aim of promoting employee ownership, although the name change from "employee owner status" has obviously helped.

The challenge is to add this new measure to the range of those available to employers and employees, in a way that is consistent with the promotion of employee ownership.

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