Nigel Watson: Shares for rights – A diamond in disguise

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New law

As of 1 September 2013, a new employment status, that of “employee shareholder”, became law. This new status allows employees to surrender certain statutory employment rights in exchange for tax efficient shares of between £2,000 and £50,000 in the employer – hence “Shares for Rights”.

Shares for Rights is not to be confused with another government initiative currently being promoted, that of encouraging companies to become employee owned along the lines of the so-called “John Lewis” model. The detail around that particular initiative is still being consulted on.

A difficult birth

From the moment the Chancellor of the Exchequer, George Osborne, announced Shares for Rights, the concept has roundly been condemned as unworkable – the overwhelming perception being that it would have limited appeal. Shares for Rights even had a difficult passage through Parliament with Lord O’Donnell claiming that “in the old days the price of slavery was 20 or 30 pieces of silver – is it now £2,000?”  The idea of surrendering valuable worker rights in exchange for shares is not seen as a realistic or sensible trade-off between worker protection and employee benefit. Various commentators, trade unions and employee representatives claim that Shares for Rights will simply not be attractive to lower paid employees.

An AESOP fable

There is a saying that a diamond is just a lump of coal that stuck at it and I certainly recall this being the case for something called the All-Employee Share Ownership Plan (AESOP). Don’t recognise the name?  AESOP was the original name for the now very successful all-employee share plan called the Share Incentive Plan or SIP. When it launched back in 2000 everyone complained that it was too complicated and would never catch on – indeed there was almost outright hostility towards it (sound familiar?). Today the SIP has never been more popular amongst companies who want their employees to be eligible for tax efficient shares in their employer. It sits nicely in the armoury of any company wanting to improve employee engagement and commitment.

My point is this. Once something is on the statute books, behaviours change to accommodate the new law. In turn, the law changes to reflect the changed environment. In short, both society and the law are continually adapting. In an employment context many employers believe that the pendulum has swung too much in favour of the employee and that the balance needs to be redressed. One senses a new paradigm around employee/employer relations. Employees recruited since April 2012 now need two years’ continuous service to pursue a claim for unfair dismissal – before it was only one year.

A growing opportunity

For many companies, offering Shares for Rights will not be appropriate – rarely is any equity policy a panacea. For others though, especially small, profitable, fast-growing enterprises with dynamic management teams, it is a fantastic opportunity to increase employee commitment and dedication, improve recruitment and retention and fundamentally enhance the overall reward package through a powerful bit of new tax planning.

One of the early adopters of Shares for Rights is Whitworths. The managers there have been offered tax efficient shares in the century-old supplier of dried fruit and nuts and other companies will surely follow – and let us not forget it has only been one month since Shares for Rights became law.

I predict that Shares for Rights will become more widespread than its critics would have you think. To quote Humphrey Bogart in Casablanca: “maybe not today, maybe not tomorrow but soon….

By Nigel Watson, Partner and Head of Employee Benefits at Brodies LLP, assisted by Tara Buchan, Trainee Solicitor.

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