Monday, 15 October 2012

Osborne proposes employee share schemes

The season for political party conferences is upon us once again and the Conservative party took to the stage in Birmingham to showcase its policies for the coming political year.

During his speech on the economy the chancellor, George Osborne, outlined proposals for employees to be given between tax-free shares in exchange for giving up some of their employment rights.

The idea is that the employee will give up his right to claim unfair dismissal, a redundancy payment and a request for flexible working in return for between £2,000 and £50,000 of shares in his employer company. Furthermore, female employees may have their maternity rights reduced. Mr Osborne proposed that companies could make such a scheme mandatory for new employees.

Employee share schemes are not a new concept. Successive governments have always sought ways to encourage companies to grant options and shares to their employees, particularly through favourable tax treatment.

In the late 1980s employee benefit trusts (EBTs) were popular as they minimised corporation tax, National Insurance contributions and income tax, and could provide benefits to employees and, in some situations, former employees and employees' dependants.

However, EBTs are now seen as being too tax advantageous and the government currently favours enterprise management incentive (EMI) schemes. EMI schemes are often used by small, higher-risk trading companies. Under an EMI scheme, a company grants options to employees who can then purchase shares at a set price within a specified timeframe.

Both the company and the employees who benefit from the scheme must meet certain criteria, for example, the company's gross assets must not exceed £30 million, and an employee holding options must spend at least 25 hours a week or 75% of his working time on the business of the company.

As a trainee undertaking my first seat in the corporate and commercial practice group here at B P Collins LLP, I recently worked on a matter involving an EMI scheme. In this particular matter two employees were exercising EMI options to become shareholders, and then further options were being granted to them and several other employees.

I drafted exercise certificates, new option certificates and board minutes (yes, the LPC did come in handy here!) and filed information about the new shares at Companies House. The employees who exercised their options became shareholders and I helped amend a shareholders' agreement for them to enter into with the existing shareholders.

While working on this matter, the advantages for both the company and its employees became clear to me. The shareholding employees receive equity in the company, motivating them in their work because if the company succeeds they will get a better return from their shares. The company gets a more motivated and dedicated workforce which it benefits from. And both parties may get some tax relief.

I have keenly watched the press take hold of Mr Osborne's recent proposal; it has faced a myriad of responses, many of them critical, and despite the advantages of option schemes it is easy to see why. Although an employee will receive equity in his employer company, he is unlikely to have any controlling influence in the company; in fact he may not even get voting rights with the shares he is given.

Furthermore, the value of his equity is, of course, dependent on the success of the company which is less than certain in this current economic climate. And, given this climate, giving away employment rights on dismissal may not be advisable, when dismissals are more likely to occur!

Companies already use employee share schemes as an incentive in recruiting, retaining and motivating employees. Such schemes also help to bring the interests of a company's shareholders into line with those of its employees.

But are employer companies now likely to give away shares if they do not already do so? Small businesses, especially those which are family-run may understandably be reluctant. The potentially necessary complex and costly shareholder arrangements and tax provisions will be off-putting to many, but for some companies, the cost of using an employee share scheme will now be offset by the ability to get rid of employees more easily.

While the debate about the economic consequences of George Osborne's proposal and the morality of taking away employment rights from employees continues, it is worth bearing in mind that an employer may want to use an employee share scheme even if Mr Osborne's proposals don't get much further than his speech at the Tory party conference.

If you are thinking of setting up an employee share scheme or need some advice in relation to your or your employees rights, B P Collins LLP will be happy to assist you so do get in touch.

Posted by Harriet Betteridge, trainee in the corporate and commercial practice.

Harriet started her training contract in September 2012 having previously worked in the Litigation team as a paralegal. Her previous experience includes working at a group of law centres in south London and in the Legal, Compliance and Risk team at the Charities Aid Foundation.