Owner-employee’ contracts could be good for growing companies, says lawyer

Nov 04, 2012

 

The proposals offer employers a new means of motivating their employees by offering them shares valued at between £2 and £50,000, which are free from capital gains tax at the point of sale.
 
In exchange, employees may be required to forego some of their employment rights, including their rights in relation to statutory redundancy pay and (with exceptions) unfair dismissal.
 
Law firm Shakespeares believes that the proposals could perform a very positive role in supporting economic growth among fledgling and fast-growth companies.
 
Andrew Kerr (pictured), corporate partner at the firm’s Milton Keynes’ office, said: “The underlying principle here – which is about incentivising workers and promoting loyalty and performance by offering them a stake in the business that employs them – is extremely positive. While we will need to see the detail, these proposals could provide a useful tool for the right businesses, adding to their existing range of options."
 
Share option schemes are common at executive level and moves to encourage employee engagement through ownership with the right type of business should be welcomed. However, Mr Kerr added, a requirement for employees to forgo their employment rights wouldlimit the appeal of this scheme, particularly among larger corporates.
 
The Department of Business, Innovation & Skills is expected to publish its review of employee ownership this autumn and the Office of Tax Simplification will also be reporting its findings later this year.  The current consultation on proposals to introduce owner-employee contracts closes on Thursday (November 8).
 
Mr Kerr said: “These findings will tell us more about how far the coalition could go to remove barriers to employee ownership – in particular tax barriers – and I suspect ‘employee contracts’ will represent just one of the options put forward.”
 
In their current form, however, the proposed ‘owner-employee’ contracts are unlikely to attract a high level of employee support. A survey carried out by YouGov last month confirmed that 63 % of people feel that allowing employers to offer staff tax-free shares for the removal of some employment rights is a bad idea.
 
Mr Kerr said: “Most employees are likely to be sceptical about schemes linked to shares, which after all can go up or down in value. The fact that they would be required to forego employment rights into the bargain would also jar with many of them.
 
“However, for a minority of businesses with a comparatively small workforce, driven by a clear, entrepreneurial vision, ‘owner-employee’ contracts could be a dream come true. They will allow the employer to create a tax-free structure for rewarding staff loyalty and effort as they work together to build a successful business.”
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