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Would you trade your rights for shares? A 5-minute guide to owner-employee contracts

Posted by BIMA knowledge-sharing Legal & Finance November 12, 2012
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Asking employees to waive some of their rights in return for shares could soon become common practice – how would this affect you?

Next year, employees could have the option to swap some of their employment rights, including redundancy pay and flexible working, for shares in the company at which they work. These plans were unveiled by Chancellor George Osborne recently as part of a new contract scheme, likely to be in circulation from April 2013.

Any company will be able to use this new contract, but the scheme is mainly aimed at fast-growing small- and medium-sized businesses – many of which are in the technology sector.

So what should you know about owner-employees and how could this new contract affect your business?

What does it offer?
Under the scheme, employees can be offered shares worth between £2,000 and £50,000 in the company at which they work. The shares will not attract capital gains tax when they are later sold (although they will be subject to income tax and national insurance contributions on grant).

In exchange, employees have to sacrifice some of the employment rights that protect them in the workplace.

What rights will employees waive?
The rights that the employees will waive under the contract include:
•    The right not to be unfairly dismissed
•    The right to a redundancy payment
•    The right to request flexible working
•    The right to time off for training

With options like these available, these contracts could be attractive to start-up businesses that are looking to limit their liabilities and have greater workforce flexibility in their first few years of operating.

Are there any drawbacks?
Yes – several. It might be commercially unattractive for the owners of the company to be handing out shares to its employees for free.

Also, the logistics of the scheme are still unknown. It will be interesting to see what procedures employers are required to go through when employees choose this status. And we don’t know what information employers will be required to give staff before they can sign up. To date, it has been notoriously difficult for employees to waive their rights – and illegal for employers to coerce their employees into doing so.

When the employee leaves, the company would have to buy back the shares at a ‘reasonable’ price. But it’s unclear whether this legislation will include a variation mechanism or parties will be left to agree a value – the employee and the company could be trapped in limbo until a price can be decided.

It is also worth noting that the employee will retain the right to claim unfair dismissal in circumstances where the dismissal was discriminatory or done in connection with the transfer of a business under the Transfer of Undertakings (Protection of Employment) Regulations 2006. This makes the advantages of the contract somewhat limited.

So, is it worth it?
As it stands, we need more details before we can draw any conclusions. It’s likely that legislation will be put together later this year, so it remains to be seen whether the Government will identify the potential pitfalls in time and cover them off.

Would you waive your rights for shares? Or if you’re an employer, would you give staff this option?

About the author

Elizabeth Kirk is an Associate at Kemp Little LLP, a leading technology and digital media law firm. Elizabeth can be contacted on elizabeth.kirk@kemplittle.com.

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