Employee shareholder ping pong in Parliament

The government’s proposal to introduce a new employee shareholder status has sparked an ongoing battle between the two Houses of Parliament. The House of Lords originally rejected the clause in the Growth and Infrastructure Bill that would introduce the employee shareholder status on 20 March 2013. That was, somewhat embarrassingly, on the same day as George Osborne announced that the provision would come into force on 1st September 2013. 

George Osborne was able to drum up enough support when the Bill returned to the House of Commons on 16th April to reinstate the clause. However, the House of Lords has now rejected the clause for a second time, in a vote on 22nd April. The Bill will now enter the “ping pong” legislative procedure between the two Houses, where amendments are passed back and forth until either the changes are agreed, or the Bill will fail. At the time of writing this article, the fate of the employee shareholder clause was still undecided.

What you need to know

The government first announced plans for a new “employee shareholder” status in October 2012. The basic premise is that, in exchange for forfeiting certain employment law rights, employees will be given tax-efficient shares in the business for which they work. 

This has sparked plenty of debate; Labour MPs and peers are critical of a concept which (in their view) encourages employees to trade their rights as if they were commodities, frustrating their purpose as essential protections for employees who tend to lack effective bargaining power. 

Michael Fallon, the Business and Enterprise Minister, has defended the proposals, noting that British companies are competing globally to increase their competitiveness and that this status could afford companies, particularly young companies, a competitive edge and the flexibility to attract high-calibre individuals who have a positive impact on performance. 

Under the current proposals, an employee shareholder would not have certain key employment rights, most notably the right not to be unfairly dismissed (unless that is for a reason which is considered to be automatically unfair) and the right to a statutory redundancy payment. The status will be entirely optional for existing employees, and the government has also confirmed that jobseekers cannot be forced to apply for an employee shareholder position. 

In exchange for their forfeiting certain rights, employee shareholders will receive a minimum of £2,000 worth of shares, fully paid-up and issued free of charge. The first £2,000 of shares will be free from income tax and national insurance contributions. In addition, the first £50,000 in value of shares (as calculated at the time of acquisition) will be exempt from any capital gains tax on their disposal.

In the latest House of Commons debate on 23rd April 2013, the government has offered further concessions in a bid to persuade the House of Lords to accept the new status. These include a requirement for prospective employee shareholders to be given a statement by their employer explaining the rights that they are giving up, and to be given a seven day cooling-off period once they have entered into the agreement.

A Treasury paper has suggested that 20,000 to 40,000 individuals may eventually benefit from the tax exemptions every year. However, there is the potential that employee shareholder status could be used predominantly to deliver significant tax-free growth to a small number of key employees, rather than achieving the government’s main aim of increasing flexibility and reducing the regulatory burden on business. 

In addition, as was pointed out in the Commons debate, the attitude of businesses to the proposals can at its most generous be described as “divided” and there has been discontent expressed in some quarters with the connection drawn between employee ownership and the forfeiture of employment protections. It is also possible that perceived pressures on individual employees to adopt this status could damage good workplace relations. 

In practical terms, there is also likely to be difficulty surrounding the valuation of employee shareholder shares, particularly where shares are offered in small, unquoted companies. In such circumstances, the proposals may lead to disputes about whether the employee shareholder status has in fact been validly created. 

Despite the strong base of reservations expressed against the status, the government has indicated that it will push ahead with the proposal. Although the government may ultimately persuade the Lords to accept the new status, care needs to be taken, as Lady Wheatcroft has highlighted, to ensure that it does not give the concept of employee ownership a “bad name”.

Jonathan Fenn is a partner and Clare Fletcher is a professional support lawyer with international law firm Slaughter and May.

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