Osborne's employment 'rights for shares' scheme is short-sighted and flawed

The principle of boosting employee participation and commitment in line with the success of a business is a good idea, but there are numerous reasons why this version of that concept is unlikely to find favour.

by Tom Flanagan
Last Updated: 02 Nov 2012

From an employee perspective, the economic climate means shares are not performing well anyway. The Office for Budget Responsibility recently expressed the view that austerity measures may be necessary until 2018. The percentage of a business allocated to employees through share schemes is traditionally low and so the gain is unlikely to be significant for many. It is likely that employees would look at current trends and see little potential benefit in return for giving up rights. 

The announcement refers to ‘owner-employee status’. In fact the status does not change at all; the employees will still be employees and this concept is essentially a repackaging of existing employee share ownership schemes - not a new idea. 

Put simply, this is a good idea for good times – but these are not good times. Small businesses may be reluctant to give shares away, particularly if they are family or owner-managed businesses. Also, there is no effective open market value for shares in ‘closed’ companies. 

And on that note, what types of shares would be on offer? Businesses will not necessarily want to give voting rights to staff over company strategy or policy. Will there be good leaver/bad leaver provisions on disposal of shares when employees leave?

If this creates a combination of complicated shareholder arrangements and tax provisions, smaller businesses – the prime targets for this initiative – are unlikely to want to become involved because, ironically, it could results in yet more red tape and cost.  

Evidence during the government’s recent consultation into dismissal suggested that the UK already has some of the most flexible employment laws in Europe, and that dismissing staff is not as difficult as it is sometimes made out to be. For that reason you could argue that a scheme like this, which is at least partly designed to make dismissal a more palatable political idea, isn’t really needed.

And one final fundamental: under existing UK law, an employee can not contract out of some of the rights which it is intended to relinquish, without a compromise agreement (to be renamed a "settlement agreement") which needs to be linked to an existing employment dispute and involve advice from an independent advisor.

In short, it will take primary legislation to bring about the necessary changes that a ‘rights for shares’ scheme would need.

 

Tom Flanagan is head of employment law at law firm Irwin Mitchell

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