Employee or shareholder

The Coalition Government has taken to the idea of making us a nation that holds shares in our employers.  How likely is it that a major change will happen?

George Osborne announced a scheme to the Conservative Party Conference by which staff will agree to give up some of their employment rights in return for being granted a shareholding in their employing company.  Before that, the Nuttall Review, published in July 2012, made a series of recommendations of how to reduce barriers to employee ownership.  The Review illustrated a number of benefits for companies where all employees own a substantial stake in their employer, including faster job creation, greater staff commitment and lower staff turnover.  It also set out the broad categories of obstacles to employee ownership: lack of awareness of the concept; lack of resources to support employee ownership; and actual (or perceived) legal, tax and regulatory complexity.

We are all for doing our part in raising awareness!  As Nuttall said, some businesses, such as John Lewis Partnership, are well known for their employee ownership model.  But employee ownership does not have instant recognition in contrast to, say, franchising or operating as a charity.

Birkett Long’s Commercial and Corporate Finance team has lots of experience of putting in place different types of employee ownership. 

One of the most useful ways of giving employees a stake in their business, which we encourage clients to consider, is a share option scheme.  There are several possible ways of setting these up but the clumsily named Enterprise Management Incentive scheme (the Government might help by giving it a snappier title) is a particularly straightforward scheme.  Employees are given a right to buy shares at a future date, at a price set in advance.  If the company does well and the shares are worth more than the purchase price, the employee gets the benefit.  The scheme has beneficial tax treatment – for example, there is no income tax payable at any point.  We can provide all the legal documents needed to establish such a scheme. 

Another means of giving staff a substantial stake in their employer is by shares being held collectively on their behalf, usually by an employee benefit trust (one of our local Essex employers, Wilkin & Sons, has adopted this route and was mentioned in the press release at the Nuttall Review launch).  We can advise on the legal requirements for such a structure, which are not particularly complex.  The simplest means of employee ownership is for the employee directly to own shares from the outset.  There are a number of legal issues to consider, including how the shares are to be dealt with if an employee leaves and lack of resources to fund a purchase.

As a result of the Nuttall Review, the Government issued a “call for evidence” on the idea of giving all employees a statutory right to request employee ownership.  As the employer would only have to give “reasonable consideration” to the request and there would be a broad range of grounds for refusing, we think it is difficult to see what a statutory right will achieve, except more red tape for businesses to cope with.  At the time of going to press, we have not seen details of George Osborne’s “shares for employment rights” idea. It is difficult to judge whether it will be popular. Buying shares is a risky business in any event, because a company could fail and the shares lose all their value.  Adding to that the risk of losing unfair dismissal and redundancy rights does not appear particularly attractive.

It will be interesting to see whether the proposals to raise awareness of employee ownership and to simplify the structures for putting it in place will lead to an increase of the model; we suspect that there is less appetite among owners to share their ownership, and among employees to become shareholders, than has been suggested.

If you are interested in exploring it for your business, please come and talk to us.