Knowledge Hub | Articles

02 January 2013

The pros and cons of employee-owner contracts

This April will see the launch of the Government’s controversial new “employee-owners contract”, a scheme aimed principally at fast growing, smaller to medium sized companies who want to create a flexible workforce. This is in spite of the fact that 92% of respondents in the consultation process viewed the proposals in a negative or mixed way. 

In basic terms, companies will be able to create a new kind of contract by giving employees  £2,000 plus worth of shares in exchange for them giving up their UK employment rights on unfair dismissal, redundancy, the right to request flexible working and time off for training.  Employees returning from maternity and paternity leave would also be required to provide 16 weeks’ notice of a firm date of return instead of the usual eight weeks.

For employees, the benefit is that any gains made from the eventual sale of the shares (up to £50,000) would be exempt from capital gains tax.

Last autumn, the Department for Business Innovation and Skills (BIS) produced a consultation document about the scheme and, as employment lawyer Jo Davis explains, reaction has been mixed. Here she looks at the pros and cons for employers and employees alike.

“The Government sees this scheme as a way of improving the effectiveness and flexibility of the labour market. By removing what it says are ‘perceived barriers around the fear of being taken to an employment tribunal’ it hopes to encourage businesses to recruit more staff,” said Patricia.

“There seems to be little actual research to show this to be the case and there are also concerns among employers about how complex and expensive these new legal and tax rules will be, as well as how many staff will really want to take up the option.”

Of particular concern is the valuation of the shares, especially for unquoted companies, which are likely to make up the majority of the smaller, entrepreneurial businesses that the Government hopes will be at the heart of the scheme.

Employers are likely to apply restrictions on the shares they issue and that will include surrender of the shares at such time as employee-owners leave the company. The Government has already stated that the employer would have to buy back the shares at a “reasonable value” and Patricia says far more detail is required to explain how a company should obtain a valuation and the likely administration and cost burden.

She also believes potential employee-owners will need educating to ensure they understand exactly what they may be giving up.

“On the plus side, employees have the chance to gain a tax-free reward, but in reality these shares may have a highly uncertain valuation. Anyone thinking of participating will need to ask themselves how much negotiation power their shares will really give them, particularly for those at the lower end of the spectrum, in return for a dilution of their employment rights,” she concluded.

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