Print this Post

Growth and Infrastructure Act 2013: Rights for shares

Jonathan Exten-Wright, a Partner in our London office, comments: 

The Parliamentary term ended on 25 April 2013 with a narrow win for the Government in a stand-off over the “shares for rights” scheme. This controversial employment measure, contained in the Growth and Infrastructure Act, will allow employers to offer employees a new form of employment contract under which they give up certain employment rights in return for shares in the business.

Before receiving Royal Assent, the Growth and Infrastructure Act 2013 went back and forth between the House of Commons and the House of Lords a number of times. The House of Lords voted in March to remove the provisions creating ’employee-shareholder’ status from the then Bill. The House of Commons voted to reinstate employee shareholder status but the Government was only able to gain approval for the then Bill from the House of Lords after making significant concessions.

The basic principle of employee shareholder status is that an employee shareholder will receive shares in their employer worth at least £2,000, in exchange for giving up a bundle of employment rights including ‘ordinary’ (i.e. not automatic) unfair dismissal, the right to a statutory redundancy payment and the right to request flexible working. The first £2,000 of shares will be free from income tax and NICs, and on sale the first £50,000 of shares will be free from capital gains tax.

One of the most controversial aspects of the original proposal was that it allowed employers to ‘buy out’ employment rights at the outset of employment, rather than at the end under a compromise agreement and whereas the compromise agreement regime requires employees to be fully informed and take legal advice about the impact of giving up their employment rights, the same protection did not apply to employee shareholder status. There was concern that this could lead to exploitation, with employee shareholders giving up valuable employment rights in exchange for shares of limited value which may not be easily traded.

The Government has been forced to make concessions on this aspect of the proposal which mean that employees will now have to take independent advice, paid for by the company, and then wait seven days before agreeing to give away some of their employment rights in exchange shares.

The House of Lords’ opposition to the scheme also led to the Government making concessions over the voluntary nature of employee shareholder status. Concerns were raised over whether employee shareholder status could really be described as voluntary, as it was not clear whether unemployed people claiming Jobseekers’ Allowance (JSA) would be penalised for not taking a job which was offered only on an employee shareholder basis. The Government has now confirmed that it will amend the guidance for DWP jobcentre advisers to state explicitly that a jobseeker cannot be compelled to apply for an employee shareholder job, nor can their jobseeker’s allowance be reduced or cut if they turn down an offer of an employee shareholder job or refuse to apply for an employee shareholder job.

The Government intends to bring employee shareholder status into force in September, although it remains to be seen whether there will be much take-up of the scheme. The proposed reform has not been met with much approval from the business community. In the Government’s own consultation, only five businesses out of the 200 responses received showed any interest in taking up the scheme. Employee shareholder status may be attractive to some companies purely as a tax efficient method of giving shares to key employees. However, for many businesses the complexity and cost of carrying out the necessary share valuation could well act as a barrier.

+44 207 153 7706

Permanent link to this article: https://www.dlapiperbeaware.co.uk/rightsforshares/