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New employee shareholder scheme struggles to get off the ground

Meredith Hurst Friday, April 26, 2013

The government believes that businesses that are owned in part by their employees have higher productivity and growth rates, lower levels of absenteeism, greater employee wellbeing, and smaller pay gaps between top-level management and other workers.

Graeme Nuttall was asked by the government to conduct an informal consultation on employee ownership. He delivered his report to the government in July 2012 (the Nuttall review), setting out a number of recommendations to improve take up of employee ownership structures:

  • Consult on introducing a new statutory right for employees to request consideration of an employee ownership proposal.
  • Develop simple employee ownership toolkits covering the key legal and tax considerations involved in creating an employee ownership arrangement. These toolkits should include off-the shelf templates for articles of association for an employee owned company and related ancillary documents.
  • Consult on measures to improve the operation of internal share markets, including the possibility of holding private company shares in treasury and facilitating share buybacks.

The government have since carried out a number of consultations to develop policy in this area. They aim to raise awareness of employee ownership, and simplify the rules governing it.

Under the government's proposed scheme, which creates a third type of employment status, employers can award employees at least £2,000 in shares in exchange for the employee giving up a bundle of employment rights (including 'ordinary' unfair dismissal and the right to a statutory redundancy payment).

Plans also included allowing private companies to finance buy-backs out of capital and pay for the buy-back in instalments, but only where the buy-back is for the purposes of, or pursuant to, an employee share scheme

In the March 2013 budget, the government stated that it will provide £40 - 50 million annually from tax year 2014-15 to encourage uptake of employee ownership structures for businesses. 

However, since defining its ambitions for employee share ownership, all has not gone well for the government. On 22 April 2013, the House of Lords voted for the second time to reject the proposed Employee Shareholder status.

The government however has been determined to pursue the scheme and published a further list of concessions which it hoped would mean the Lords accepting the proposed legislation. The concessions included:-

  • a provision that the employee cannot accept the offer within seven days of it being made (an employer remains free to refuse to offer the job to a prospective employee who doesn't want to take up employee shareholder status
  • there will be a seven day 'cooling off' period, during which any acceptance of employee shareholder status will not be binding
  • a written statement setting out the rights that the employee is giving up
  • a written statement setting out the details of the shares being offered (including whether they are voting or non-voting shares, whether they carry a dividend, and whether they carry a right to a share in the company's assets if it is wound-up, whether pre-emption rights are excluded, and details of drag-along and tag-along rights).

These concessions already come on top of concessions made by the government to the original proposals including:-

  • a jobseeker who refuses a job on an employee shareholder basis will not automatically forfeit their unemployment benefits
  • the first £2,000 of shares given to the employee will not attract income tax

The problems for the government arose because of the concern that the scheme is becoming ever more complicated to the extent that employees will not understand it. Indeed, there was no obligation on the employer to provide any sort of independent legal advice, which means that any employee who did not understand the scheme would have to give up major employment rights on the basis of the employer's word.

On 24 April 2013, the government sent the scheme back to the Lords for approval. It was finally passed but not before the Lords had extracted a further concession from the government

  • The further concession is that an agreement that someone shall become an employee shareholder is invalid unless, prior to entering into the contract, the individual has received advice from a relevant independent advisor (ie a lawyer, CAB, law centre, union etc). Further, the employer has to pay the reasonable costs of that advice - whether or not the employee then accepts the role - if they would otherwise have been payable by the employee.

    If the employee does not receive independent advice before agreeing to become an employee shareholder, then s/he will be an ordinary employee.