Rights for shares: Responding to the Consultation

Well so far the Chancellor’s new wheeze of letting employees sign away key employment rights in return for some shares in their employer’s business shows no sign of going away. A consultation has been published by BIS and Clause 23 of the new Growth and Infrastructure Bill sets out the new right – albeit in rather sketchy terms.

The Consultation document follows the pattern of recent Government consultations in that it doesn’t ask open ended questions about whether the proposal is a good idea or not. Rather, it asks very specific questions about how the new law should be implemented. Am I the only one who thinks it a bit odd to be looking at a first consultation on a brand new employment law proposal when the legislation has already been drafted and it due to be debated before Parliament (second reading – 30 October)?

So I think I’ll pass on responding to the consultation. In any event, Governments don’t really pay attention to the responses to consultations, they only hear what they want to hear (Michael Reed’s post on this is pretty compelling). So instead of answering the Government’s rather loaded questions, I’d like to ask a few of my own

1. How voluntary is this going to be?

We were told that although employers would be able to offer only ‘owner-employee’ status to new recruits, this would be an entirely voluntary matter for existing employees. Clause 23 of the Bill says that the employer and employee need only ‘agree’ that the employee should be an employee-owner and that shares should be allotted in consideration of that agreement.

There seems to be no provision to protect an employee who is offered employee-ownership but does not want to accept it. For the agreement to be truly voluntary the employee needs to have a right to refuse the employer’s offer, with protection against unfair dismissal and detriment equivalent to the protection given to an employee refusing to sign an opt-out from the 48 hour week. Are these provisions to be introduced at a later stage in the Bill’s progress? Why is this issue not mentioned in the consultation?

If this protection is not provided then the ‘voluntary’ tag will be meaningless. an employer would be able to insist on employee-ownership as a condition of the employee accepting a pay-rise, or a promotion – or may even be able to enforce the status through dismissal and re-engagement,as though this were just any old change in terms and conditions.

2. How will the shares be valued?

The Bill currently does not mention the right for the employer to buy back the shares, nor does it give any mechanism for valuing them. However it is clear that the £2,000 to £50,000 brackets are entirely nominal. What will the real value of the shares be?

In the consultation the Government asks whether the buy-back should be at full market value ‘or some other level (e.g. a fraction of market value)’. Really? The Government is  prepared to contemplate a right to buy back shares at a fraction of their market value? The Government also asks ‘What would the administrative and cost impact be for a company if an independent valuation was required?’ If? Is the Government seriously considering allowing an employer to conduct its own assessment?

The suspicion is that the ownership of shares will be a much less valuable benefit than it looks on paper and that this could mislead employees about what they will receive in return for giving up their rights. This issue goes to the absolute heart of the proposal, and as yet there is no hint as to how it will work. Surely this is the sort of thing you work out before deciding that the proposal is a good idea?

3. What if the employee is a ‘bad leaver’?

Company share schemes often provide differently for employees who are dismissed for misconduct or who resign without notice. Will the new scheme allow this? Surely an employee who is dismissed for misconduct but who has given up any right to claim unfair dismissal could not be treated as a bad leaver with the result that he or she loses out in the valuation of the shares? That would make a mockery of the whole scheme. So far the draft is silent on this and the consultation document does not refer to the issue.

4. What happens if the employer does not pay the right price to buy back the shares?

So imagine an employee being sacked and told that because he or she is an employee-owner there is no right to claim unfair dismissal. The employer is entitled to buy back the shares but either chooses not to, or offers a mere pittance below the level dictated by the statutory scheme. What does the employee do? Does the claim lie in the civil courts to enforce the sale of the shares at the right price? That is a complicated and difficult thing to expect an employee to do. The better approach would be to say that the status of an employee in those circumstances reverts to that of an ordinary employee who can claim unfair dismissal. But if that happens then the Tribunal may as a preliminary point be asked to determine whether the correct price was paid for the shares – which doesn’t seem ideal.

Disputes about the value of shares and how that impacts on employment rights could be a real problem. Nothing in the Bill or the consultation document indicates that the Government has addressed its mind to the issue.

5. What about TUPE?

If an employee-owner is TUPE’d across to a new employer, will he or she be entitled to shares in the new employer, or will he or she merely become an ordinary employee? Someone needs to work this out, and I’m glad it won’t be me. On a technical point, since an automatically unfair dismissal under TUPE is not created under an ‘Act’ it won’t be a right that employee-owners have (see Clause 23 – New S.205A(4) Employment Rights act 1996). Unless there is an amendment, an employer would be free to dismiss an employee-owner prior to a TUPE transfer – unless of course the courts decide that that would be in breach of the Directive. I look forward to seeing how this issue plays out in the Court of Appeal, Supreme Court and European Court of Justice in the coming years.

6. What happened to simplifying employment law?

Any Government which chooses to introduce a brand new employment status based on share ownership loses all right to complain that employment law is becoming too complicated and legalistic. Even if most employers end up ignoring employee-ownership because it is just too tricky or costly, it will still mean an extra chapter in every employment law textbook. Add to this the extra complications introduced by the Enterprise and Regulatory Reform Bill and any claim the Government makes about simplifying employment law simply becomes laughable.

7. When will this actually happen?

I still say that there is no way this can be in place in time for April 2013. The Growth and Infrastructure Bill is just starting its Parliamentary progress and the provisions on owner-employees will – surely! – need to be fleshed out and amended before Royal Assent Employers and employees will also need guidance on the new status and how and when it applies. April next year is far too early.

My Response to the Consultation

On second thoughts I think I will respond to the Government consultation – though I won’t be answering their specific questions. My response is this:

Don’t do it, its a bad idea

Do you think they’ll listen?

About Darren Newman

Employment law consultant, trainer, writer and anorak
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5 Responses to Rights for shares: Responding to the Consultation

  1. John Read says:

    Regarding protection for employees – as you note, a particularly important issue – I posed a question on this for Jo Swinson in her recent Q&A session. It wasn’t picked/answered.
    It is strange indeed that the consultation paper does not address it, particularly so given that it expressly invites responses on anti-avoidance measures/safeguards in relation to tax (para 59 and question 19 in consultation document – “The Government welcomes views on particular safeguards that would need to be applied, in order to minimise opportunities for abuse”). At least I’m assuming that’s in relation to tax, given that it appears under the “Tax” heading.

  2. teagoemplaw says:

    Another great post there Darren. I have responded to the consultation, this is the first time I have felt sufficiently moved to spend my own time giving the Government the benefit of my time on a consultation of this nature (although I shan’t be invoicing them – not this time anyway!). Yes, the questions are loaded and yes, it does look suspiciously (or indeed obviously) like the result is a foregone conclusion. But in the same way that the questions appear to have been worded to give the Government the answers that it wants to hear, I simply used the questions as a starting point to give the answers I wanted to give. Darren, this post contains some really valuable points and I hope you may reconsider and respond officially to the BIS consultation.

  3. binnielaura says:

    Excellent overview and shows the many problems/hurdles in this whole proposal… hope you will find yourself at that Survey Monkey page, if only to copy and paste some of the above.

  4. Pingback: An exchange with the Minister for BIS | teagoemplaw

  5. Marilyn says:

    Hello Darren

    I’m sorry that you feel that government doesn’t listen to consultation responses – I can hopefully reassure you that we do. I have passed your blog to the employee owner consultation team so that it can inform their analysis.

    Marilyn
    BIS Digital Engagement

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