Shares for Rights finally agreed

Last year the Government proposed that existing employment legislation be changed so that companies could arrange for employees to give up unfair dismissal, redundancy and certain other rights in return for free shares in their employer. This would be voluntary for existing employees but new employees could be required to take up a job on these terms. Click here for a previous Law-Now on this proposal.

Over the last few weeks, this proposal has achieved greater prominence as the House of Lords and House of Commons were unable to come to any agreement on it. The House of Lords repeatedly rejected the proposal while the House of Commons repeatedly reproposed it, and this difference threatened to derail a substantial body of other Government legislation.

A compromise has now been agreed in which the proposal will be enacted but with some additional employee safeguards. These include a requirement for the employer to provide in writing a significant amount of information to affected employees about the share rights that they would receive and to find and pay for independent advice before the waiver of rights is enforceable, in much the same way as independent advice is required before compromise agreements can be enforced against employees. Additionally, there must be a seven-day cooling-off period before any employment contract involving the waiver of relevant employment rights can take effect.

Separately, draft tax legislation has recently been published under which the first £2,000 of shares given to employees in exchange for relevant employment rights will be income tax and NIC free when they are awarded (they would otherwise be taxed as an up-front signing on bonus). The Government has confirmed that employers can pay for independent advice without a benefit-in-kind charge arising. In addition, it is still the position that capital gains on the shares the employee receives will be tax free, though this will only apply to the first £50,000 of shares an employee is awarded.

While the tax part of the overall proposal is appealing, our view is that this proposal is now even less likely to be used than when it was first introduced. There is now a requirement on employers to draw up a relatively complicated list of information for employees (with all the risks of misrepresentation if anything is factually wrong), the need for employers to pay for independent advice before the new contract becomes binding (regardless of whether the employee chooses to accept the arrangement or not) and a seven-day cooling-off period. Even for £2,000 of tax free shares, many employers may feel that the practicalities and costs of awarding shares may exceed the cost of employment claims likely to be avoided. Whether any adviser will want to advise on these points when the likely fee is so low is also another consideration.

While there will clearly be some who want to use these arrangements - perhaps motivated either by political zeal or by being an employee who can take advantage of the tax breaks on offer in a way that is not intended by the proposal - we therefore do not anticipate that these arrangements will have any noticeable take-up. That said, they do provide an important precedent. They will represent the first occasion in the UK where it is now a requirement for employees to obtain external legal advice before an employment contract can become binding.

Click here to see the latest version of the relevant legislation.