Trade-off of employment rights for employee shares: UK

Analysis

Trade-off of employment rights for employee shares: UK

Employees in the United Kingdom can now receive company shares in exchange for giving up some of their employment rights and entitlements. What are the pros and cons of this change, and could it happen here?

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Employees in the United Kingdom can now receive company shares in exchange for giving up some of their employment rights and entitlements. What are the pros and cons of this change, and could it happen here?

UK legislation was amended on 1 September 2013 to provide for the introduction of employee-shareholder contracts. Employees can choose to be issued with shares valued at between 2000 and 50,000 pounds, and will gain a tax advantage if they do, but in exchange they must forfeit various other rights under the legislation.

Eligibility

For an employee to enter into an employee-shareholder contract, the following conditions must be met:
    • The employee must voluntarily agree to the contract, it cannot be imposed as a condition of employment for existing employees, but could be for new ones — see ‘No compulsion allowed’ below.
    • The shares must be worth at least 2000 pounds as at date of issue.
    • The employer must issue the employee with a written statement providing information about both the shares (eg voting rights, entitlement to dividends, transferrability, whether redeemable, any other restrictions) and the other employment rights/entitlements that the employee has given up.
    • The employee must have an opportunity to receive independent financial advice (paid for by the employer regardless of outcome) before agreeing to the contract. After receiving the advice, there is a seven-day cooling off period before the contract can commence.
Tax benefits

Employees will gain exemptions from income tax and national insurance contributions for the first 2000 pounds worth of their shares. Some capital gains tax exemptions also apply if the shares are later sold for a profit.

What entitlements are forfeited?

Employees must agree to give up the following rights/entitlements:
    • The right to make claims of unfair dismissal, in most cases. However, employees will still be able to lodge a claim if dismissed for a reason that is either unlawful discrimination or ‘automatically unfair’ (eg if related to workplace health and safety rights, family leave, trade union membership/activities, or for asserting a statutory right under the legislation).
    • Entitlement to statutory redundancy pay.
    • The statutory right to make a request for flexible work arrangements, or other arrangements to cover study or training obligations.
Employees will also be required to give longer notice periods when intending to resume work after a period of family-related leave, such as parental leave.
 
Employees who hold employee shares but are not covered by an employee-shareholder contract still retain their full statutory entitlements.

What entitlements remain available?
 
The following rights and entitlements cannot be traded for shares:
    • the right not to be discriminated against because of a protected attribute (eg race, sex or disability)
    • minimum periods of holiday leave under the working time provisions
    • notice period rights
    • statutory payments such as sick pay and maternity pay (provided the employee is eligible for them in the first place)
    • payment of the national minimum wage
No compulsion allowed
 
Employers cannot compel employees to transfer to employee-shareholder contracts. Any dismissal for refusing to agree to such a contract will be an ‘automatic unfair dismissal’ and the two-year-service qualifying period for lodging a claim will be waived. Nor can employees be subjected to a detriment (eg by being disciplined or having their pay reduced).

However, employers can require newly-hired employees to enter into employee-shareholder contracts.

Could it happen here?
 
Not without significant amendments to the Fair Work Act 2009. The provisions would be in breach of some of the National Employment Standards, and possibly the better off overall test (BOOT). The provisions for unfair dismissal claims would also require some amendments. 

At the recent 2013 Labour Law Conference, held by the Workplace Research Centre (WRC) and Sydney Law School, Anthony Forsyth, Associate Professor of the Royal Melbourne Institute of Technology (RMIT) offered the following reasons why the UK provisions were unlikely to be seriously considered in Australia, regardless of the Election result:
    • There is no economic case for a workplace relations ‘austerity model’ in Australia.
    • The role of government in workplace relations is unlikely to significantly change further.
    • Reaction to the WorkChoices legislation last decade suggested that Australians strongly support institutions that safeguard minimum standards for employees.
    • The Federal Opposition’s workplace relations policy contains only minor changes to the current system, at least in its first term of office.
    • Share options as a trade-off were available when Australian Workplace Agreements were a feature of Australian legislation, but little interest was shown in them at the time.
Forsyth also outlined other changes the UK Government has made or is about to make to its workplace relations legislation, which were summarised in a report on the conference published previously.

Initial reactions from UK employers also appear to have been apathetic. One newspaper report claimed that no employer enquiries about the new contracts were received on the day the changes commenced.

There has been plenty of criticism of the UK provisions. One critic claimed that a ‘double whammy’ could hit employees if the employer went out of business — they would have no entitlement to redundancy pay and their shares would also be worthless.
 
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