25 March 2015

Letter to America: Last chance for UK “Employment At Will” hires?

As the UK general election draws nearer and the political parties thrash out their manifesto commitments, employment law change is back on the agenda. Please see our article Letter to America:  all change for UK employment law (or more of the same?) for a summary of the key themes and proposals from the main political parties so far in the run up to the general election.

Since it took power in 2011, the coalition government has introduced significant change to the employment law landscape with the express intention of reducing the burden for employers. Key changes included increasing the qualification period for unfair dismissal protection to two years, reducing the cap on compensation and making it more expensive for employees to sue their employers. Whatever your view of the politics, at the moment the risks associated with UK dismissals are lower than they have been for a generation. Whether these changes would survive a change in government is a more debatable topic.

Camouflaged among these more mainstream employment law issues is the prospective repeal of “employee shareholder” status by any new government. This status was introduced in 2013 and, essentially, allows employers to buy out certain employment law rights in return for a relatively small award of fully paid shares in the employer or its parent undertaking (valued at no less than GBP 2000) on the date of issue. Crucially, employee shareholders waive the right not to be unfairly dismissed so are essentially employed at will (albeit subject to a small amount of statutory minimum notice). Other than waiving certain employment rights and agreeing to become an employee shareholder, employees do not give any consideration for the shares and no tax is due. The real trade-off for the employee is that the capital growth in the shares will be free from tax provided they were worth no more than GBP 50,000 on acquisition. 

Certain procedural requirements apply to the process of granting the shares and the employee must receive independent legal advice paid for by the employer. In addition, existing employees cannot be forced to give up their rights in return for shares but there is nothing to stop new roles from being offered solely as employee shareholder positions or varying current roles to that of employee shareholder status by agreement (which is common). Moreover, there is no requirement that the shares are retained indefinitely, so they can be made subject to “bad leaver” restrictions without the status being prejudiced.

Despite the obvious advantages of the system, take up of the scheme has been relatively low, although our impression is that it has been gaining some momentum recently. This may be because of the front-loading of complexity in complying with the procedural requirements and perhaps a sense that it is somehow too good to be true. Some employers may also have been deterred by the prospect of the scheme being withdrawn if the Conservative party is not elected to government, since it is a firmly Conservative initiative and disliked by the other mainstream parties, including the other coalition party, the Liberal Democrats. However, it would be unusual for retrospective effect to apply to the withdrawal of a tax break or other legal change and as such changes will most likely not apply to change the status or rights of existing hires. 

All in all, the employee shareholder scheme is a valuable and overlooked tool for employers who wish to prioritise workforce flexibility and the ability to dismiss employees simply and cheaply. There will be a particular appeal for businesses already used to administering share-based incentives, as so many in the US are. More generally, depending on the election results, the legal pendulum may start to swing back towards employee protection after May. The opportunity to exploit the current opportunities may be removed shortly so employers interested in UK expansion should act now.

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