23 October 2012

All in it together

Britain's Chancellor is keen for employees to swap rights for shares in the businesses where they work. Simon Kerr-Davis explains why both workers and employers are cool on the idea

By Simon Kerr-Davis

Fancy a small slice of the profits, mate?

Motivating, incentivising and engaging staff through share ownership has long been considered a positive idea by governments of all shades in many jurisdictions. The idea of sharing in the growth of the business you are helping to build can certainly be an inspiring thought.
The latest expression of this idea in the UK was announced by Chancellor of the Exchequer George Osborne at the recent Conservative party conference. He proposes to create a category of employee entitled to holding between £2,000 and £50,000 of shares and to tax free capital gains on the shareholding, but lacking certain statutory rights. To some extent this builds on the idea of the ‘compensated no-fault dismissal’, suggested and discarded by the British government earlier this year.
However, the proposal removes the idea of a standard compensation for dismissal and effectively creates an uncompensated dismissal, but gives an employee the possibility of gaining from the shareholding despite losing his job.

Frosty reception

The proposal has been frostily received by a surprisingly diverse collection of interest groups and has made unlikely bed-fellows.
Employees are objecting to the idea of a loss of some basic employment rights, including: protection from unfair dismissal, the right to a redundancy payment, the right to request flexible working, time off for training and a different regime for early return from maternity leave. The idea that £2,000 worth of shares is enough of an incentive to release all of these rights seems unlikely. The unfair dismissal award alone outstrips the financial value of the share award itself.
It is true that the share value may grow, but it may of course fall and may lapse entirely, as the employer will be permitted to include conditions and ‘bad leaver’ reasons for the employment terminating.
Trade union reaction has focussed on the removal of rights and has largely ignored any potential gain from shareholding.
Employers seem also to be unenthusiastic, commenting that a significant employee shareholding could make clear management decisions much more difficult to make. For many entrepreneurs, growth in the business is their primary reward. Sharing that growth and any level of corporate control with staff is therefore unappealing. Hopes of a simple dismissal system were raised by the British government’s recent ‘red tape challenge’, but the suggestion that the price should be giving up part of the benefit of ownership was never mentioned as part of the deal.

Niche idea

The Confederation of British Industry, which represents employers, has referred to the proposal somewhat dismissively as a ‘niche idea’ and even the more enthusiastic Institute of Directors commented that ‘the key to the success of the idea will be encouraging employers and workers to use it’.
 Poll results to date suggest that they will not. Some 90 per cent of respondents to a survey conducted by The Guardian newspaper said that they would shun the scheme, and 63 per cent of respondents to a YouGov survey considered it a ‘bad idea’.
Legal advisers are sceptical that the employment rights can all be waived. While unfair dismissal is a UK domestic remedy, and therefore can be removed by the British parliament, the rights in relation to maternity and flexible working have their origin in anti-discrimination legislation, much of which is European driven. To attempt to remove such established rights from any group of employees will certainly be challenging to embed in UK legislation, especially as UK legislation must be compatible with European Directives, including equality laws.
The British government’s equality assessment notes that approximately equivalent numbers of male and female employees work flexibly full time, which suggests that gender equality will not be an issue in removing the right to request flexible working. However, the equality assessment does not provide comparisons between numbers of men and women requesting flexible work arrangements, or working part-time, and it is likely that these figures would display a disparity, with significantly more women availing themselves of the ‘right to request’ than men.

Bundle of rights

It is questionable whether removing this particular bundle of rights will really assist the start-up companies it is targeting to create a more flexible workforce in the early years of a business. Both unfair dismissal and redundancy awards already have a built-in requirement of two years’ service and the amount of a redundancy award is linked to ongoing service. The logic of removing of the right to request flexible working to promote flexibility has also been questioned. In addition, the proposal leaves intact the most highly compensated employment rights, such as discrimination and whistle-blowing and all categories of ‘automatic’ unfair dismissal, which are not subject to any service qualification or a statutory cap on compensation.
Tax advisers have pointed out that the shares to be awarded would, on the basis of the current law, be taxable on the award date, creating an additional tax charge for the employee at the start of the employment. Furthermore, it would seem that the difficulty in valuing the shares on issue creates a loophole for entrepreneurs themselves, rather than for their workforces, allowing them to benefit from the tax free nature of the capital gains they could make on the issue of shares with a face value of up to £50,000 on issue.

Employment at will

Across the world, some jurisdictions routinely exclude the most senior directors from employment rights. While the idea that controlling directors should not benefit from employee rights is not uncommon in Europe, the concept of excluding rights for employee shareholders is something new, and suggests a move to the ‘employment at will’ more traditionally associated with US labour law than European employment law. The English model has traditionally steered a steady course between the complexity of employee protection seen in continental Europe and the relative lack of protection available in the US.
Mr Osborne’s proposal marks a departure towards a less protective environment for employees and any conflict with EU directives raises the spectre of challenges at a European level. In the meantime, the proposal -- designed to bring together the interests of employers and employees in a focussed drive for business growth and engagement with an entrepreneurial culture -- seems rather to have reinforced the traditional conflicts between the owners and the workers and does not meet the expectations of either.

Simon Kerr-Davis is an associate in the London headquarters office of global law firm Linklaters

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