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Legal advice: Considering the Employee Shareholder Scheme

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When the government released its response to the consultation on its proposed Employee Shareholder Scheme last week, debate was raging about the outcome of the Leveson report, and it mostly slipped by unnoticed.

Initial responses to the consultation have expressed some doubts over the workability of the proposals in their current form, although it is hoped that these kinks are currently being worked through by the government ahead of the scheme’s journey into the statue books by April 2013.

To recap, the scheme suggests that the new arrangement would see employees give up some of their employment rights in exchange for shares in their employer worth between £2,000 and £50,000. Any growth in value of the shares would be exempt from capital gains tax, and the employer will be able to buy back the shares from the employee if that employee is dismissed from the organisation. 

The plans are part of the government’s drive to cut red tape for small businesses so they are not put off from hiring new staff and growing their business by the fear that they will be clobbered by a costly employment claim from employees with an axe to grind.

This looks like good news for businesses especially SMEs – but there are some key considerations to be taken into account before businesses plump for this option with any new hires. 

Here are a few issues to consider when exploring Employee Shareholder arrangements for your organisation:

1. The tax question

The government has yet to provide clarification on the tax implications, especially surrounding the initial share valuation and share forfeiture.

2. Fight for your rights

Employee shareholders would lose their rights surrounding unfair dismissal, redundancy and the right to request flexible working. The erosion of these rights could have an unforeseen effect on the workplace, leading to a two-tier workforce if a redundancy exercise needs to be carried out then that would be problematic.

Would employers automatically choose the employee shareholders for redundancy, as they wouldn?t hold any redundancy rights and wouldn?t be able to bring a claim against them” Is that fair” What about the merit and skill of those employees when compared to their colleagues who aren?t employee shareholders but who hold employment rights” Time will tell how effectively employees with different status and rights will interact in the workplace, and whether it will be very different to when employers engage consultants alongside employees.

3. The bottom line

Like any new scheme, there will be costs associated with executing employee-shareholder arrangements and ensuring they run smoothly. For SMEs with a relatively small back-office staff, implementing this complex scheme could turn into both an HR and administrative headache. 

The term “John Lewis economy” is being buzzed around by many politicians at the moment, and while employee share schemes can create a more responsible business and loyal workforce, the idea that basic employee rights have to be exchanged for this is a difficult pill to swallow for many. 

For startups, the Employee Shareholder Scheme could offer an appealing way out of potentially costly employee disputes and if all staff are signed-up to the scheme, the two tier element may be eliminated. 

SMEs should keep a watchful eye on developments and further government guidance in this area, if they are looking to adopt the new status. With government plans to introduce it in April 2013, further guidance is likely to be on the horizon very shortly. 

Sofia Syed is an employment solicitor at Mundays LLP and Julian Harvey is a corporate partner specialising in share options at Mundays LLP.



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