by Katie Clark and Richard Cook
On October 8, 2012, George Osborne announced that the UK Government was proposing a new type of employment contract, dubbed the “employee-shareholder” contract.
The proposals were designed to allow employers to offer their employees shares in the business, at a minimum value of £2,000. In exchange, the employee would forgo certain statutory rights including, most pertinently, unfair dismissal and the right to a redundancy payment. The employees would receive favourable tax treatment on the disposal of the shares, up to a value of £50,000.
During the consultation process, the Government received little positive feedback on the approach, but confirmed in its consultation response that it intended to implement the proposals in any event.
On 24 April 2013, having twice rejected the Government’s proposals, the UK House of Lords accepted concessions made by the Government and voted to accept employee-shareholder status. The proposals are expected to become law in the autumn of 2013.
Details of The New Regime
Employers will now effectively be able to buy certain of their employees’ statutory rights for as little as £2,000.
For the rights to be effectively waived, however, a number of criteria must be met:
- Each individual must be given a written statement of the particulars of their employee-shareholder status. This must specify the employment rights that he/she will forgo and detail the rights, restrictions and other conditions attached to the shares.
- The individual must be given independent legal advice as to the terms and effect of entering into the scheme. Unless independent advice is received, and the individual has been given seven days to consider the advice, the employee’s employment rights will not have been waived.
- The employer will need to meet the reasonable cost of the legal advice, even if the offer is not taken up.
The right to claim discrimination and claims of automatically unfair dismissal, including whistleblowing, are excluded from the waiver.
What Does This Mean for Employers?
In theory, employee-shareholder status will provide more flexibility for employers in recruitment, and the potential to mitigate legal risk, by offering an up-front payment, in the form of shares, of as little as £2,000.
In practice, however, the intricacies of the offer-acceptance process are likely to mean that employees will be very well informed, making them less likely to “sell” their valuable employment rights for as little as £2,000. There is also scope for technical errors to be made in the new, more complex, process that may result in the employee receiving £2,000 but still retaining his or her statutory rights.
Nonetheless, if implemented properly, employee-shareholder contracts could be a valuable tool for employers who are looking to build flexibility into their workforce. The question is whether employees, given the inherent value of the rights they are being asked to give up, and the risk of a fall in the value of their shares, will find the proposition an attractive one.
For further information, or for assistance in setting up an employee-shareholder arrangement, please contact Katie Clark or your regular McDermott lawyer.