Never Knowingly Undersold: Employee share ownership

“We need more individuals to have a real stake in their firms more of a John Lewis economy if you like…employee ownership is a highly under used tool for unlocking growth”. – Nick Clegg.

According to the Deputy Prime Minister earlier this week, wider share ownership will encourage greater motivation and loyalty, improving employee retention, as well as presumably discouraging dissent and employment disputes.

This may be a little optimistic.   Spare a thought this week for the partners of Clarkson Wright and Jakes currently facing the prolonged and presumably extremely expensive age discrimination claim of their former senior equity partner and joint owner, Antony Seddon.

Irrespective of these considerations, in general terms the introduction of a so called employee right to request shares in the employer must clearly be welcomed.  The introduction of such schemes will clearly raise a number of legal issues and, as always, the devil will be in the detail of such agreements and the legislation.

Whilst we await the detail however, there are clearly a number of specific issues which will need to be considered at an early stage. Prior to introducing any right to request shares, employers will need to have a formal written agreement in place to adequately deal with the allocation and disposal of shares.  In the case of an unlisted company then any scheme would need to include the creation of an internal market to enable shares to be sold. 

This is not straightforward. The costs associated with both the creation and administration of such a scheme with the likely proliferation of relatively small individual share holdings could be considerable. At the same time anyone with any experience of dealing with share holder disputes will appreciate the difficulties associated with share valuations in this context. Some care will be required to manage employee expectations not least because of the unpleasant truth that shares can go up as well as down – a point that many current employee share holders have found to their costs over recent years.

Employers will also need to define who is entitled to qualify for share ownership. The treatment of certain categories of staff will also need to be defined. For example, the position of women on maternity leave and indeed men who take the proposed additional paternity leave,  staff taking career breaks and those absent on long term sickness.  Consideration will also need to be given to the often vexed question of who should be treated as a good and bad leaver.  In a world where mergers and takeovers, outsourcing and redundancies are commonplace then these too are difficult questions.

Other legal implications are unclear at this stage.  It is not clear whether employers will be permitted to require their employees to accept a lower salary in return for receiving shares.  This may be rather less motivational to hard pressed employees than hard cash.  Such changes will also require not only consultation but changes to terms and conditions of employment.

Smaller employers and indeed current share holders and investors may fear the dilution of share ownership and what they perceive to be the resultant loss of control over key business decisions.  Even employment claims relating to dismissal may become more complex as this additional benefit will need to be added to the list of potential heads of loss when calculating damages.

And finally, historically certain share schemes attract considerable tax advantages for employers if they are approved by HMRC.  It is not yet clear the extent to which these tax benefits will apply to the new style schemes.  In the current time of austerity it seems that any further drop in tax revenues is not likely to be welcomed elsewhere in Government irrespective of the much trumpeted but largely incalculable longer term economic and social benefits of wider employee share ownership.

Certainly a business owned and run by the people who work within it will be a very different beast to the current model but isn’t that what they call the cooperative movement?!

Catherine Wilson, employment partner, Thomas Eggar LLP