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Media Coverage

Full steam ahead for controversial employee shareholder proposal

3 January 2013
HR Zone

At the Conservative party conference in October this year, the Chancellor unveiled plans for the creation of a new employment status – the ‘employee owner’. The Government promoted these proposals as part of its drive for growth and to give business more flexibility to hire and fire staff. Some commentators were quick to dismiss the proposals as political rhetoric to satisfy those keen on seeing further deregulation of the labour market. Two months on, the Government has concluded its consultation and published its response. The proposals have been incorporated within the Growth and Infrastructure Bill, which is currently making its way through Parliament. Despite the initial scepticism, it appears that the scheme is likely to become law at some point this side of the next general election.

Response to the consultation

The Government consulted on the introduction of a new employment status in which employee owners would have a reduced set of employment rights in return for them receiving shares in the employer’s company. It had proposed that an employee owner would be given shares of between £2,000 and £50,000, which would be exempt from capital gains tax. In return, employee owners would not have the right to claim unfair dismissal and statutory redundancy pay. In addition, employee owners would not have the right to request flexible working unless they were returning from parental leave. Also, new mothers who take part in the employee owner scheme would be required to give 16 weeks' notice of a firm date of return from maternity leave instead of the usual eight weeks. Under the proposals, new hires would not be forced to accept the new employee owner status, however, employers would be able to offer it on a take it or leave it basis.

The response to the consultation was broadly critical of the proposals. The Government received 209 completed responses from a range of interested parties including individuals, businesses, employer and employee representatives, special interest groups, accountants finance professionals and charities. Bodies such as the CIPD and Engineering Employers Federation (EEF) have been critical of the proposals. 92 per cent of respondents viewed the plans to introduce a new category of employment status in a negative or mixed way.

In response to the consultation, the following key points and concerns were raised: 

  • The majority of the respondents felt that there would be a low uptake of the proposed scheme. Around 80% believed that it would have little or no impact on recruitment. There was a common feeling that employment rights should not be changed at all.
  • Employers already find it difficult to understand the existing employment statuses and it was felt that the introduction of a new employment status would cause further confusion. There was a concern that there would be an additional administrative burden and this would be a particular problem for small businesses which may lack a dedicated HR function.
  • There was widespread concern about how exactly the shares would be valued for private companies who did not trade shares on a regulated market. As a result, this would make it extremely difficult for small companies and start ups to use the proposed employee owner scheme. In addition, the costs associated with undertaking a valuation might act as a deterrent for such companies.
  • There was a concern that the costs of the scheme would outweigh any benefits.
  • Some respondents felt that a workforce with both employees and employee owners could cause division and result in a two tiered workforce, which could in turn impact morale and productivity.
  • The majority of respondents felt that the implementation of the employee owner status could increase the risk of discrimination claims being brought, due to the fact that the individual would not be able to bring an unfair dismissal claim.
  • Most respondents expressed concerns that the proposed changes to the maternity leave notice period could have a negative impact on attracting and retaining female talent.

Despite the concerns raised, the Government has confirmed that it intends to implement the proposed scheme. Although questions were raised about how the shares element of the employee owner status would operate, the Government will not introduce legislation to deal with this aspect of the scheme. It felt that the existing rules in relation to employee share schemes would be sufficient and the introduction of additional rules to deal specifically with employee owners would reduce the flexibility for both parties to negotiate arrangements. The Government has, however, decided to make some changes to the proposed scheme, including:

  • A name change from ‘employee owner’ to ‘employee shareholder’.
  • The Secretary of State would have the power to increase the minimum share value of £2,000.
  • The upper threshold of £50,000 on the number of shares that can be offered will be removed, however, the exemption from capital gains tax will only apply up to £50,000.
  • The notice period for return from additional paternity leave will also increase to 16 weeks to make it consistent with the proposals in relation to maternity leave notice period.

Potential impact

Will the new employee shareholder status mark a fundamental shift away from the traditional employer/employee model?

If the response to the consultation is anything to go by, it is highly unlikely that this will be the case. At best, the proposed employee shareholder status might be used by start-ups and small businesses that look to take advantage of the exemption from capital gains tax. However, these benefits could be offset by the problems caused by determining the value of the shares and the administrative burden in drawing up contractual arrangements to deal with buy back of shares in the event an employee leaves.

There could be a nominal take up of the proposed scheme. The scheme would not cover the public sector, partnerships, charities and other bodies that are not companies. This automatically rules out a large swathe of employers. It is conceivable that larger companies and multinationals listed on stock exchanges could offer this to new hires on a take it or leave it basis, using any existing share incentive schemes. However, in the current age of corporate social responsibility, any such decision would need to be balanced against how this could negatively impact its corporate reputation – does it want to be seen, whether fairly or not, as an employer that is keen to take on workers with a reduced set of employment rights?

Given the potential problems of the scheme and what appears to be a widespread lack of enthusiasm amongst employers, why is the Government pushing forward with these proposals? Part of the answer lies in the Conservative party’s ideological belief in moving towards a more deregulated labour market and a commonly held view that the lack of growth is primarily a result of too much regulation rather than too little demand. A number of questions remain around the operation of the proposed employee shareholder scheme and the Government has stated that it will address any outstanding issues by issuing clear guidance on the new scheme. Until the bill has been finalised and guidance published, the jury will still be out on the true impact that the new status will have on both employers and employees.

Media Contact

  • Surinder Sian
    PR Executive
    T +44 20 3130 8120

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