Living up to expectations

Writing earlier this year, (Solicitors Journal, 8 January 2013) I expressed hope that the government's proposals to introduce a new 'employee shareholder' (originally 'employee owner') status may be dropped before the enactment of the Growth and Infrastructure Bill.

Despite near-unanimous consensus that the introduction of such a status was unnecessary to encourage the growth of employee ownership, and may even be harmful to the interests of businesses and their workers, it has now come into law via section 31 of the Growth and Infrastructure Act 2013.

A newly inserted section 205A of the Employment Rights Act 1996 sets out the features of 'employee shareholder status'. Individuals who agree to become employee shareholders are to receive shares in their employing company (or its parent undertaking) with a value of no less than 2,000. In return for the issue of these (capital gains tax-exempt) shares,employees no longer have recourse to the following employment rights:

the right not to be unfairly dismissed (This is referred to as 'ordinary' unfair dismissal, as employees remain protected against automatically unfair dismissals, and termination in contravention of the Equality Act 2010.);

the right to statutory redundancy pay;

the right to request flexible working; and

the right to request to undertake study or training.

Employee shareholders are furthermore subject to longer notice periods before returning from maternity, paternity or adoption leave (up from six or eight weeks' notice to sixteen weeks)

These substantive reforms are accompanied by a series of procedural safeguards, introduced as a result of several rounds of parliamentary ping-pong in the spring of 2013. Section 205A decrees that prospective employee shareholders need to be issued with a detailed statement of particulars, including the terms at which shares will be issued, as well as a list of rights denied. Following receipt of this statement, the worker is entitled to independent advice (at the employer's expense); the offer can only validly be accepted following such advice and after a seven-day cooling-off period.
Provisions have furthermore been made to protect existing employees from suffering detriment in employment or unfair dismissal as a result of a refusal to become an employee shareholder. Finally, the government has given an undertaking that jobseekers could not be forced to accept employment as employee-shareholders at pains of losing their entitlement to receive jobseekers' allowance.

Implementation

As the Law Society has noted, the new status is likely to lead to "costly satellite litigation on a range of complex issues which are likely to arise at the outset and upon termination of an employee's contract". It is, for example, highly likely that the inability to sue for 'ordinary' unfair dismissal will lead to an increase in alternative claims, such as unlawful discrimination or automatically unfair dismissals.

In addition to some of the previously identified problems (notably as regards the identity of the relevant employer in complex corporate arrangements), the interaction of the new status with existing common law and statutory regulation in various areas of employment law remains unclear. This is particularly true in the area of wrongful dismissal (to what extent is the line of cases building on Johnson v Unisys [2001] UKHL 13 applicable to the new status?), and in TUPE scenarios where the transferee entity does not employ any employee shareholders.

Particular difficulties are furthermore to be expected as regards the valuation and terms at which employee shareholders' shares are issued. The former question is supposedly addressed by a direct reference in the new provisions to 'market value' under sections 272 and 273 of the Taxation of Chargeable Gains Act 1992. The operation of these provisions in companies with unquoted shares (as is the case for the vast majority of UK employers) is however notoriously difficult, and thus expensive for employers. Provisions regulating the buy-back of shares upon termination of the employment relationship are left to parties' contractual freedom, subject only to a residual power to regulate such terms under section 205A (12).

In the course of the official consultation last autumn, only three of nearly 200 respondents indicated an interest in adopting the new employment status. Given the complexity and potential cost of the scheme, it remains to be seen how extensively it will be used in practice.
The only significant interest so far comes from private equity investors, who may use the CGT-exemption in aggressive tax planning for senior portfolio company employees - at a cost to the Treasury in excess of 1bn according to figures prepared by the Office for Budget Responsibility. It is difficult therefore to see how the new status will ever be able to live up to the government's purported aims of "maximising flexibility" and creating he competitive environment required for enterprise to thrive".