Osborne’s shares-for-rights proposal: the details

Legal, News

We’ve been following the Government announcements around employment law changes all year and they just don’t stop! At the end of Summer we summarised all the proposed changes and progress. In October the Chancellor George Osborne announced that a new type of employment contract, called “owner-employee”, will allow companies to offer employees shares in the business – worth between £2,000 and £50,000 – in return for the employee giving up a number of their employment rights.

Any gains made on these shares would be exempt from capital gains tax. The Government believes this scheme will boost business growth and employee retention and commitment.

Companies of any size will be able to use the new form of contract, but the government is aiming the new contract at fast growing small and medium sized companies (SMEs).  The contract would be optional for all.

The employment rights that would need to be given up by employees in exchange for shares are:

And, in addition employees on maternity leave would be required to provide 16 weeks notice of their date of return from maternity leave, up from the current eight weeks notice that is needed.

Companies would be able to offer more generous terms and conditions if they wished. As expected there has been a huge amount of criticism and concern over the proposals.  Criticisms are mostly around:

  • The fact that employees would give up significant legal protection in return for a relatively small tax break, and may not benefit much from the shares
  • The need for clarity on how workers will be protected from companies using measures such as transferring staff to a new business in order to force them on to the new-style contracts, or putting pressure on staff to sign them
  • The ability to persuade an employee that the shares are going to be worth more than the potential claims he / she is surrendering (especially in the current climate where shares are not performing well, and where there is no ‘open’ market value for shares in many companies)
  • The validity of the information employees would be given about the ‘health’ and prospects of the company
  • What type of shares would be offered? Employers may not want to give away voting rights
  • The need for clarity of what would happen if an employee left the Company. For example, how would the Company manage the disposal of the shares if an employee left? Would you need ‘good’ and ‘bad’ leaver rules, depending on how an employees employment ended (e.g. dismissal or resignation)?
  • The increase in red-tape, administration and expenses this would bring, especially for small employers
  • Small employers, especially family-owned/managed business may be reluctant to give shares away
  • The name ‘owner-employee status’. It does not appear that the employees status would change at all; the employee would still be an employee but given a financial benefit.
  • HMRC already authorises a share incentive plan where employees do not have to pay capital gains tax on their shares if they keep them in the share plan until they sell them. So why do you need to change the existing employment relationship?
  • Some believe that the focus on flexible working and maternity return rights could lead to claims for indirect sex discrimination

Supporters of the new contract are:

  • Adrian Beecroft – author of a controversial review of employment law which recommended no-fault dismissals – see our Guide to this here – as “a real shot in the arm for Britain’s entrepreneurs”
  • Simon Walker, Director General of the Institute of Directors, said it had “the potential to reduce the employment law burden on companies and make employees better off at the same time”
  • CBI Director General John Cridland, who said: “In some of Britain’s cutting-edge entrepreneurial companies, the option of share ownership may be attractive to workers, rather than some of their employment rights. But I think this is a niche idea and not relevant to all businesses.”

The Treasury aims to fast-track the scheme through Parliament for introduction in April 2013, and expects hundreds of thousands of employees to sign up within the next few years. Many commentators believe that the April 2013 date will not be met though as there will need to be changes made to existing legislation to bring about these changes.

The government will consult on details of the contract later this month and the HMRC are reviewing the proposal.

Have any questions on how the shares for rights scheme could impact you? Ask us here!

If you are an Employer and need ongoing professional help with any of these issues then talk to us at The HR Kiosk (click here)- a Human Resources Consultancy for small businesses – you can retain us for as much time as you need.

Please note that the advice given on this website and by our Advisors is guidance only and cannot be taken as an authoritative or current interpretation of the law. It can also not be seen as specific advice for individual cases. Please also note that there are differences in legislation in Northern Ireland.