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Trading on their rights

Written by Josh Russell on Tuesday, 07 May 2013. Posted in Interviews

How does UK enterprise feel about the success of the contentious ‘rights for shares’ scheme?

Trading on their rights

Given it allows employers to offer shares to employees to forgo key employment rights, labelling the so-called ‘right for shares’ scheme controversial is something of an understatement. An amendment making it to the House of Lords on three separate occasions is a rarity and demonstrates the government’s commitment to the passing of the amendment, irrespective of the opposition. Even during the initial consultation, just three of the 184 businesses surveyed actively supported the scheme – usually enough to put the kibosh on all but the most ideologically driven initiatives. Clearly then, there’s some pretty strong feelings on all fronts.

On paper, the majority of the aims of the legislation are laudable – increasing employee ownership and aiming to curb the costs of growing a business are reasonable goals. However, not everybody is convinced that incentivising employees to waive rights is the best way to achieve them. Even with the additional safeguards added that finally saw the bill pass through the House of Lords, many feel that those under the most economic pressure will feel bound to accept these terms to secure work. Still more believe that the policy is likely to be a non-starter, destined to attract negligible uptake when taking into account the fact that potential administrative costs to businesses will far outweigh the benefits of increased flexibility.

It’s not hard to understand why passing this legislation has been such a bumpy journey for the coalition. But pass it has. So what’s the verdict on this eleventh hour victory for the rights for shares scheme?

 

“Ridiculous piece of legislation” says Darren Fell, founder and managing director of Crunch Accounting

I like the idea of making it easier to give shares to employees because setting up an EMI scheme can be expensive; it requires a good accountant and a good tax specialist – who both know what they’re doing – to set it up and it needs to be approved by HMRC. I welcome easier ways to give shares but I absolutely categorically don’t believe any employee should have to relinquish their rights for the shares.

One thing that the employees will not realise or understand is that if the company goes through another round of funding or many rounds of funding, their shares will get diluted. You might end up with an employee thinking they’ve got £50,000 worth of shares and that if the business sells they will end up making a stack of money; in reality, by the time they get there you may have had three additional rounds, increased the share count and they’ve got absolutely nothing and they’ve lost all of their rights.

I think it’s, quite frankly, the most ridiculous piece of legislation I’ve seen come in yet. And you can quote me on that one.

 

“Bit of a non-event” says James Hall, associate of Charles Russell LLP

I wonder whether it might be a bit of a non-event. There is already a background in employee ownership but without people giving up their rights.

In terms of actual savings, I’m not sure it will bring a saving – certainly in the short term – because they wouldn’t have any unfair dismissal claims in the first two years anyway. I think there is a danger that, if people feel they’ve had rights taken away from them, they might try to come up with more imaginative ways to still bring a claim. The legal fees are still going to be there in trying to defend those, and many companies, particularly smaller companies, will settle things rather than going all the way. Spurious claims can actually be surprisingly expensive to sort out just because you need to go through the whole process.

But it’s a difficult call to make. There has been far more backlash against this than there has been people saying that they’re interested in it. Until it’s tested, whether or not you’ll get some more entrepreneurial companies wanting to go down this route is hard to say because they’re not quite sure how it will actually play out. 

About the Author

Josh Russell

Josh Russell

As editor, Russell is the man in charge of properly apostrophising our publication and ensuring Oxford commas are mercilessly excised. Our digital doyen, he’s also a Photoshop Pro, a dab hand with InDesign and the man to go to if you need a four-hour soliloquy about the UK's best silicon startups.

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