In May 2010, the Government committed to review employment laws for “employers and employees, to ensure they maximise flexibility for both parties while protecting fairness and providing the competitive environment required for enterprise to thrive”.
The proposal for a new type of contract, the “employee-owner” contract, which in turn creates a new status of individual, is designed to build on measures already implemented – such as the increase to the unfair dismissal qualifying service to 2 years – and those already being considered such as settlement agreements.
Under this proposal, employers will be able to offer individuals contracts under this new status, whereby employee owners will receive shares in the company between £2000 and £50,000 which will be exempt from capital gains tax. However, shares will still be subject to income tax and national insurance contributions. These individuals will receive the same employment rights as a regular ‘employee’ except for unfair dismissal, certain rights to request flexible working and training, and statutory redundancy pay. They will also need to give longer notice to return from maternity or adoption leave.
Dismissals for an automatically unfair reason will not be covered under the new status. This means that an employee owner would still be able to make a claim for unfair dismissal if they asserted the dismissal was because, for example, they had made a protected disclosure, or because they had made a flexible working request, or because they had become entitled to a higher level of minimum wage.
An employee owner would also still be able to claim that they had been unfairly dismissed because of a discriminatory reason. Anti-discrimination legislation is not affected by employee owner status.
The Government intends that all types of shares will be eligible for use under this arrangement. These shares may carry dividends, voting rights, or rights to share in the company’s assets if it is wound-up.
Companies of any size will be able to use these contracts but it is principally intended for fast-growing companies that want to benefit from the flexibilities available through the new status by reducing the risk of being taken to a tribunal over employment rights. It may not be appropriate for all businesses but will add to the options in determining employment relationships. Importantly, employee owners will own part of the company they work for.
The Government anticipates that employers would choose to apply restrictions on the shares they issue. The employer would be allowed to include a clause in contracts requiring the employee to surrender shares when the employee left, was dismissed or made redundant. Where shares are surrendered, the employer would be required to buy back the employee’s shares at a reasonable value.
Shares will be valued according to their unrestricted market value at the time they are awarded. The Government is keen to ensure that valuation requirements beyond those that already exist are not imposed. Depending on the design of the forfeiture and buy back requirements, and any tax requirements, a further valuation of the shares may be needed.
The Government intends to provide advice and guidance to individuals and businesses so that all parties are fully aware of the implications of taking on employee owner status.
For any further clarification, please call our 24 Hour Advice Service on 0844 892 2772.