Would you sacrifice your rights for a share handout?

The coalition government’s new ‘employee shareholder’ regime came into effect on the 1st September to quite a lot of confusion. We’ve spent the weeks since looking into the details, and we’re still struggling to get too excited about the new scheme.

 

The premise is simple enough. Employers give employees shares worth at least £2,000 and up to a maximum of £50,000. The first £2,000 worth of shares are exempt from income tax and national insurance, with tax payable on any excess over £2,000. Sales of shares up to the maximum of £50,000 are also exempt from capital gains tax when sold.
 

In return, employees sacrifice various employment rights – things like the right to claim for unfair dismissal, the right to request time off for training or study, the right to make a redundancy claim and the right to ask for flexible working hours.

 

So far, so straightforward: more shares equals fewer rights. The coalition sold it as a win-win, with employers benefitting as they can issue shares at little cost and employees benefitting as they can own a part of the company and reap the benefits when business is good.

 

The reality, however, is rather more complicated. There’s an awful lot of small print attached to the employee shareholder’s scheme. So much so, in fact, that you can make a compelling case for it actually being more of a lose-lose policy – and the general lack of support coming from both employer groups and trade unions would seem to back that up.

 

Employers or employees: does anyone benefit?

Let’s start by looking at the employer’s position. The shares given to employees have to be worth at least £2,000. If they are worth less than that then the employee shareholder arrangement doesn’t apply, but if they are worth more than that then national insurance and income tax become payable.

 

Companies that are issuing the minimum amount, in other words, need to make sure that they really are offering exactly £2,000 worth of shares. But this isn’t always straightforward.

 

If, for instance, employees are restricted in their ability to sell the shares or their voting rights are limited, the valuation of those shares might reduce. Suddenly the need for companies to take independent share valuation advice looms large, because failing to do so leaves a huge tax uncertainty. Taking the advice, however, incurs another cost.

 

In addition, employers who decide to offer ‘shares for rights’ need to pay for employees to receive independent legal advice before they sign a contract. This condition was added during the policy’s rough ride through the House of Lords, and is designed to ensure that employee shareholders understand exactly what they’re signing up to.

 

It means, however, that even if an employee or potential employee takes the advice and decides not to sign up to the scheme, there’s still another cost to add to the list. And then we come to the employees. Even with the share benefits, it is difficult to imagine too many people leaping at the chance to throw away their working rights. Most long-term employees would be reluctant to sign up to less favourable terms, and while new staff could be pushed into employer shareholder contracts, that doesn’t really generate the sense of ownership and participation that thescheme was intended to create.

 

Of course there’s no doubt that the scheme will have attractions in certain circumstances. The exemption for capital gains tax is a real benefit on larger share issues, for example. But in general, it still seems to us that a standard EMI option has far more benefits – and remains a lot more attractive – than a scheme which ultimately risks leaving both employers and employees feeling short-changed.