Will the new employee-owner contracts really appeal?
15th October 2012
Don’t you love conference season? This year, with electoral engagement close to all-time lows and the economic situation challenging (to put it mildly), our three major political parties were determined to stand out from one another, and to show they have the best ideas to get the economy back on track. Bold economic policy announcements and pot-shots at the competition were required. (Labour pointed out that the Chancellor did not mention ‘growth’ once in his speech, whilst the Conservatives pointed out that Ed Miliband did not mention the word ‘deficit’).
The most exciting employment law news of the season was George Osborne’s announcement concerning the introduction from April 2013 of employee-owner contracts. In return for giving up certain employment rights, including unfair dismissal and redundancy rights, employee-owners will be given between £2,000 and £50,000 of shares that will be free of capital gains tax (CGT) on disposal. The new employee-owner status will be optional for existing employees, but employers will be able to make it a condition of employment for new hires. All companies will be free to use the new scheme, but it is mainly designed for small and medium sized companies with rapid growth potential.
Employment lawyers need the ability to see the issues from both sides of the table. Many of us act on both sides to one degree or another, and those who do not still need to see both sides’ perspective, and to imagine they wear two hats – let’s call them the employer top hat and the employee baseball cap.
Employer ‘top hat’ view
Most employers support the notion that there is too much employment ‘red tape’. They would like more flexibility to hire and fire, more cheaply and easily, with less risk of tribunal claims.
It appears that on hiring an employee-owner, rather than an ordinary employee, there will inevitably be more complexity in the contractual documents. Or, to put it another way, more red tape, not less. After all, the documents are going to have to cover the shareholder position, and not only the pure employment issues.
We believe that in the vast majority of cases the surrendered rights would be of marginal significance from the employer’s perspective during and at the end of the employment relationship – particularly when you consider the panoply of other employment rights which will be unaffected. It is true that if in due course you wanted to make the relevant employee redundant - after they had been with the Company for long enough to qualify for unfair dismissal protection and the right to a statutory redundancy payment (now two years in each case) - then it would be easier with an employee-owner than an ordinary employee. However, there would still be important employment law rights to take into account, for example equality and anti-discrimination provisions.
The idea that the scheme could motivate and incentivise employees (who incidentally would enjoy slightly less employment rights) is still potentially attractive for companies. But they will need to consider carefully various questions – for example, is it a commercially sound idea to give away meaningful equity stakes? If you are not giving all your employees this benefit then could your employee relations suffer with the emergence of a two tier workforce? And are you going to attract the best talent via what will appear a trade-off between some free shares and basic employment rights? It was interesting to see that Justin King, CEO of Sainsbury's, immediately expressed concerns about the scheme. Noting current widespread popular distrust in business, he asked ‘what do you think the population will think of businesses that want to trade employment rights for money?’
We have to agree with the CBI’s view that for employers the scheme is a ‘niche idea’. There are some sectors where this scheme could seriously appeal, for example new media and emerging technologies, but in time it will be interesting to see if it even has widespread take-up in areas like Silicon Roundabout.
Employee ‘baseball cap’ view
The reaction from the union side was, unsurprisingly, hostile. Equally, real doubts about this scheme have been raised across a broad spectrum of opinion, and it is clear that Justin King was right to anticipate widespread mistrust of the scheme amongst employees. Further, why would the average employee be interested in the CGT exemption when they already enjoy (and probably do not have any need to use) an annual £10,600 capital gains tax exemption?
Nevertheless whether the scheme is suitable for an employee will depend on the circumstances: notably, the value and growth potential of the shares they are offered, and their appetite for risk. In fact, the scheme could well be attractive for senior executives. Many senior executives already have little interest in unfair dismissal and redundancy rights as the law currently stands, choosing instead to protect themselves by negotiating favourable contractual terms, such as long notice periods, bonus rights, ‘golden parachutes’ and so on. They are used to receiving compensation under share schemes and the complete CGT exemption of the shares under this scheme will be of major interest.
The devil, as usual, is in the detail, about which the Government will shortly commence consultation. In the meantime, our view is that take up of the scheme will be limited, with the scheme appealing mainly to entrepreneurial SME companies in sectors with high growth potential… and in particular to the senior executives of such companies. If not, we shall eat our hats (or one of them).
(This blog was co-authored by Andreas White and Roberta Draper).