The UK Government has given the go-ahead for a controversial new proposal - the "employee-shareholder". This new form of employment status may be available for employers to offer to new hires from as soon as 6 April 2013.

The concept is simple: employees will give up certain employment protection rights in return for part ownership in their employer's business in the form of shares, provided they are worth a minimum of GBP 2,000. Although the Government will consult separately on tax it is understood that the shares up to a value of GBP 50,000, will be exempt from capital gains tax on a disposal of the shares, but subject to income tax and national insurance contributions when the shares are acquired.

The employee-owner will have to give up the right to unfair dismissal (except where the dismissal would be automatically unfair, such as for whistleblowing or in connection with a TUPE transfer).

The employee-owner would also have only limited rights to request flexible working and, if an employee of a larger company, would lose the right to request training.

There would be no right to statutory redundancy pay on dismissal.

The employee-owner would be required to give 16 weeks notice to return early from maternity, adoption or additional paternity leave, rather than the usual eight.

A key issue for both parties will be the arrangements on dismissal or resignation. The Government's consultation paper proposed that the employer may choose to include a forfeiture clause requiring the employee to surrender shares at a reasonable value when their employment ends. The Government has said that the arrangements in relation to the shares will be a contractual matter between the employer and the employee - there will be no restriction on the type of shares which can be issued or the rights which apply to them, although this could affect their value of course. This also means that there will be no restrictions on the provisions regarding share valuation or buy back of shares, although the Government still appears to be considering its options on this point.

What these proposals mean in practice

The response to the Government's consultation, published on 3 December, reveals that 92% of respondents to the consultation viewed the plans in a negative or mixed way. Also, that unemployed people may lose their benefits if they reject an offer of work on an employee-shareholder basis, unless they have a good reason for doing so.

The new status will be optional for existing employees, but both established companies and new start-ups can choose to offer this type of contract for new hires on a take-it or leave-it basis. Some large companies have already indicated that this new type of arrangement will not work for them and many employers will be deterred by the cost of running such a scheme.

A further deterrent for employers will be the cost of share valuations and any requirement to buy back shares - these details will be for the parties to agree but such provisions could deter an employer from dismissing unsuitable or unwanted employees, even though they have sacrificed unfair dismissal rights.

It is possible that some start up and growth companies in certain industry sectors may find the new arrangements attractive, particularly where the company already uses employee share schemes. Although there may be start-up costs, once a share scheme is properly running, an employer may start to experience the benefit of the waiver of rights, particularly when it needs to carry out redundancies. Whether an employee will wish to accept a particular job with limited rights will depend on the value they attribute to unfair dismissal or redundancy protection. Skilled employees may consider it is worth sacrificing some employment protection in return for shares.

An employee who signs away his employment protection rights on termination of employment under a compromise agreement must receive advice from an independent advisor on its terms and effect. No such similar arrangement is proposed here, but many will argue that potential employee-owners should be protected in the same way. However, the Government has now promised that it will issue guidance on the employment law and tax implications of the scheme, so this guidance will be available to individuals considering taking up a job offer on this basis.

We now await further details on the tax proposals and on any further proposals in relation to forfeiture and valuation. Once these proposals are made clear, Clyde & Co will be in a better position to offer advice and training on how the new proposals will work and whether they would be suitable for your organisation.

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