Employee share ownership – an incentive or a risk?

The Government recently announced plans to introduce new ‘owner-employee’ contracts enabling employees to obtain shares in their employer in exchange for waiving their employment rights such as unfair dismissal, flexible working and redundancy.  Under the new contracts, employees would be given between £2,000 and £50,000 worth of shares of which would be exempt from capital gains tax. The proposal is aimed principally at small and medium sized companies, both start-ups and those already established, and can be used for new and existing employees.

Owner-employee contracts for existing employees can only be introduced with the agreement of the employee to give up their statutory rights and vary the terms and conditions of their employment.  For new employees, companies will be able to insist on this type of employment contract however the contract can be amended to include more generous employment provisions as additional incentives to employees.

Whilst the initiative is aimed at small and medium companies, it may be that some small companies will not want to give away shares, particularly not those with voting rights. It is also possible that employees may not consider these shares a sufficient incentive to forgo important employment rights such as the right to claim unfair dismissal, particularly because of the risk that the shares will fall in value. The announcement has already faced some criticism and many want to see the details of how this will actually work in the forthcoming consultation. The consultation is due to be published at the end of October 2012 with legislation scheduled to be published by the end of the year and the arrangement coming into force in April 2013.

Currently scepticism about the level of uptake is the most common reaction from commentators so far.

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