by Katie Clark and James Noble

Following recent discussions on this topic, lawmakers in the European Parliament have now adopted legislation intended to cap the value of bonuses paid to certain bank staff.

Background

The measure forms part of the Capital Requirements Directive IV package of reforms implementing the Basel III regulatory framework, which aims to improve stability in the financial sector. The proposed reforms will apply to a range of credit institutions and investment firms.

The final text will be subject to a detailed review of the legal drafting and translation into the official EU languages, before being presented to the Council of Ministers for formal adoption later this year.

What Does This Mean for Employers?

If formally adopted, the new rules will limit the potential bonus entitlement of certain staff at credit institutions and investment firms, whether they work within the European Union (regardless of their employer’s country of origin), or abroad (if working for a European bank covered by the rules).

The rules will apply to employees whose professional activities have a material impact on their risk profile — such as senior managers, risk takers and staff performing control functions — and to other employees who receive equivalent remuneration. The European Banking Authority will develop criteria to help employers identify staff covered by the rules.

The proposals envisage that the default position for all staff covered by the rules will be a cap on annual bonus payments of 1 x salary. An institution could increase the cap to 2 x salary with shareholder approval. This would require the votes of at least 66 per cent of shareholders owning half the shares represented, or 75 per cent of votes if there is no quorum. An element of long-term deferral will also be necessary for any bonus payment exceeding 1 x salary. The European Banking Authority will, again, prepare guidelines in this regard.

It is envisaged that, once adopted, the new measures will affect bonuses paid in 2015 in relation to performance in 2014. This will clearly have a considerable impact on remuneration practice in the financial services sector, particularly given the potential effect on any bonus years that fall wholly or partly after the rules come into effect.

Employers in the United Kingdom will also eagerly await details of how, if adopted, the legislation will be implemented domestically, given the shift in emphasis from deferral to fixed remuneration that the new rules will have in practice.

What Happens Next?

The final text of the legislation will be prepared and presented to the Council of Ministers for formal adoption later this year. If approved and published before 1 July 2013, which appears likely, the rules should then be implemented into the laws of each Member State by 1 January 2014.

We will keep the situation under review and will issue a further update as it develops. Please contact your usual McDermott lawyer or Katie Clark if you would like to discuss in more detail.

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 [...]

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