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Employee-owner contracts – a view from our Employee Benefits Group

Yesterday Carla blogged on the new proposals that will see employees relinquish employment rights in exchange for shares which would be exempt from capital gains tax. Should the proposals be viewed as a business friendly initiative or as a blunt instrument for reforming employment law? Below is my immediate reaction.

The motive of helping small businesses cut through the perceived red tape of ever burgeoning EU employment legislation seems laudable enough. There has been a lingering feeling for many years now that the employer-employee relationship has shifted too much in favour of the employee and that in difficult economic times a more flexible approach to hiring and firing was required. Equally, there is much evidence that companies in which employees hold a genuine stake in their employer are more productive and profitable. Encouraging greater employee ownership is therefore a very good thing. But is it wise to try and combine both initiatives within the same proposal?

My worry about the proposal is that it is a hybrid and like all hybrids there is a concern that you are compromising on the best bits, in favour of something where the whole is much less than the sum of its parts.

From an employee engagement perspective, it is difficult to see how the proposals will benefit a workforce if you have, in effect, a two-tier labour market with existing employees on full employment rights and new hires on reduced rights. Would employers want to be perceived as being that divisive?

From an employment law perspective much of the current legislation derives from EU law and therefore will require primary legislation to make George Osborne’s proposals work and even then may be ineffective. For example, in theory female employees will still be able to raise claims for indirect sex discrimination if their requests for flexible working are refused when returning from maternity leave. And this is all before you consider the practical implications of doling out tax free shares.

Will the receipt of (say) £2000 of shares be taxed to income and employer and employee NICs upfront? Looking at the proposed tax break, then the current annual tax-free capital gains tax limit is £10,600 meaning that the value of the minimum share amount handed over would have to increase substantially for the proposed tax break to mean anything. Then there are all the issues surrounding minority employee shareholdings in a private company. It is hard for privately owned companies to operate with lots of small employee shareholders – how do you trade and value the shares to the satisfaction of your employee shareholder base?

Separately, the motives behind the proposal have much to commend them. Together, I worry that the proposal will become excessively complex and burdensome.

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