A bird in the hand worth two in the bush? A look at the Chancellor’s employee share ownership proposals

Many of you will have seen George Osborne’s announcement yesterday in relation to the introduction of a new “employee-owner” contract.  Under the proposals, which are due to come into force in April 2013, employees may be given between £2,000 and £50,000 worth of shares in their employer company – free from capital gains tax – in return for waiving key employment rights.

The scheme is primarily designed for fast-growing, small and medium-sized companies, although it will be open to limited companies of all sizes.  Interestingly, it would appear that companies will be able to compel new starts to sign up to such contracts from April next year, whereas existing employees will have to opt in to such an arrangement. 

Whilst details of the proposals remain sketchy at present, Simon Allison (Partner, Employment team) and Kirk Dailly (Associate, Corporate & Commercial team) take a brief look at some of the potential issues:

Employment Law

The affected rights would be the right to claim unfair dismissal, redundancy, time off for training and flexible working.  Additionally, women on maternity leave would require to give their employers 16 weeks’ notice of a return to work, as opposed to the current 8 weeks’ notice.  At the moment, the proposal does not seek to affect a worker’s protection against discrimination in the work place. 

In my view, this is a niche concept which will only be attractive to a limited spectrum of employers.  It seems likely that smaller, more newly formed employers might seek to benefit from the protection of unfair dismissal and redundancy type claims.  By comparison, this proposal is likely to be more attractive to employees.  The Equality Act protects employees from discrimination.  Any treatment which is because of age, sex, race, religion or belief, sexual orientation, gender-reassignment or disability can be unlawful.  Given that most tribunal claims now contain at least a flavour of discrimination, even if employees do agree to discharge these “employee-owner” rights, they will still be entitled to pursue a claim against their employer for any alleged discrimination. 

Company Law

From an employer’s perspective, there will be expense involved in setting-up such a scheme – it is certainly not going to be a matter of issuing shares and that’s that.  Owners are going to have to think carefully about how many shares they are prepared to give away and what rights are to attach to those shares, tailoring their constitutional documents accordingly. 

In my opinion, there will also be a number of company law considerations for employees to weigh up.  Those participating are likely to become minority shareholders, who will typically lack the power to influence a company’s management and decision-making.  A company’s directors will still have responsibility for the day-to-day running of the company, while the relevant employees may lack the necessary voting rights to block key shareholder resolutions.

Separately, I believe that the preservation of an employee’s stake in the business is another potential issue that your average employee may not be alive to.  If a company issues further shares in the future, an employee is likely to have to invest further sums of money into the company just to maintain his or her proportionate shareholding.  Otherwise, he or she will face being diluted.

I have seen it mentioned that this scheme may be attractive to young technology companies, and there are of course a number of those in the Dundee area.  However, it is important to remember that many of these companies require significant investment in their early years in order to develop and exploit their products and services.  This investment will sometimes come from business angels and institutional investors, who will typically demand preferential rights in relation to matters such as dividend payments and decision-making.  As such, it is not difficult to imagine how an employee who has given up his or her employment rights in return for shares in a start-up technology business could find that the landscape has changed considerably following an investment round.

Summary

As ever, the devil will be in the detail and we will keep a close eye on developments here.  In the meantime, our view is that we are unlikely to see widespread adoption of the scheme.  It throws up a number of potential issues for both employers and employees, and those participating will certainly be advised to take expert legal advice at an early stage.

Simon Allison
Partner
Business – Employment Law

Kirk Dailly
Associate
Business – Corporate & Commercial Law

Price Tag for Employees? (It’s all about the money, money, money)

Why are employers unhappy?

A common complaint by employers is that they are frequently held over a barrel when it comes to employment tribunal claims.  At the moment, it is relatively easy for an employee to lodge a claim against an ex-employer.  The claim form can be submitted online and there is no requirement for the employee to pay a fee.  By comparison, employers are compelled to resist such claims, regardless of the merits of the claim.  Additionally, since very few claims are struck out before proceeding to an evidential hearing, employers occasionally find that it is cheaper to pay an economic settlement sum to an ex-employee, rather than run a hearing and obtain a successful judgment.

What is the Government doing about this?

The Government is currently consulting on a number of employment law reforms.  One of these reforms is a review of the employment tribunal rules.  The current proposal includes a set of tribunal rules which are easier to understand, particularly for non-lawyers, and includes a framework which potentially allows more employee claims being struck out by an Employment Judge before reaching the tribunal hearing stage.

What is included in the proposal? 

These proposals include:

  1. The payment of a fee by the employee who is lodging the claim.

At the moment, an employee can lodge a claim form without having to pay a fee.  This is potentially going to change.  The level of fee for an employee lodging a claim is likely to be between £150 and £250.  Until this fee is paid, the tribunal will not accept the claim form.  By comparison, the employer is not being required to pay a fee, unless the employer is making a counter-claim against the employee.

  1. An initial sift by an Employment Judge.

At the moment, a case will ordinarily proceed to an evidential hearing unless either side requests that the other side’s claim is struck out.  This is also potentially going to change.  The Employment Judge is potentially going to be permitted to consider whether any aspects of a claim lacking a reasonable prospect of success should be struck out.

  1. Early ACAS involvement.

It is proposed that, when a claim is lodged, certain prescribed information will need to be submitted to ACAS to allow for pre-claim conciliation.  Only when it becomes clear that no settlement can be reached will the ACAS officer issue a certificate allowing the claim to proceed.

When are these changes likely to take effect?

The consultation period will conclude on 23 November 2012. This means that any proposed changes will not likely take effect until 2013 at the earliest.

Will these changes improve matters for the employer?

Only time will tell whether or not these changes will improve the tribunal experience for employers.  However employers should keep themselves informed of these developments over the next few months and ensure that, if they are unlucky enough to receive a claim form through the post, they take legal advice as soon as possible.

Simon Allison
Partner
Business – Employment Law