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22 April 2013

Why “Shares for Rights” is a Disaster for Businesses

7 mins

George Osborne’s plan to allow employers to “buy out” workers’ rights with shares in their company has had a rough Parliamentary ride.  The policy was removed from the Enterprise and Regulatory Reform Bill in its House of Lords stages, only to be reinserted when the bill arrived back in the Commons.  The issue is due to be resolved this week. 

Under the scheme, employees would give up their employment rights in exchange for shares, becoming “Employee Shareholders”.  The scheme will, depending on your view, create either an underclass of sub-employees robbed of the ability to assert basic rights, or alternatively a class of super-employees who have a (literal) vested interest in “their” company. 

My view tends towards the former: Employee Shareholders will be worse off than employees.  Mrs Markleham’s exposition remains the best I have read.  I have looked for a corresponding view in support of the policy, but I cannot find one.  I suspect the reason for this is that this is truly a terrible policy, almost impressive in its ineptitude – a rare example of rights being withdrawn to the benefit of no one at all.  There is no point to it, and I suspect there will be no subscribers to it.

You might assume that the removal of workers’ rights will result in a corresponding improvement in the employers’ position.  This would be incorrect.  The policy will also be detrimental for employers.  This is a policy from which no one benefits.

Currently an individual seeking redress for a breach of employment law does so in a claim to the Employment Tribunal.  In nearly all categories of claim, the damages that they are awarded are calculated by reference to the individual’s salary.  This, in turn is subject to a cap for the purposes of these calculations (currently £450 per week), with a few limited exceptions. 

There is some scope for the value to vary from case to case.  The award for loss of future earnings – what the claimant would have earned had the company not unfairly sacked them – depends on the Tribunal’s judgment and will vary from Tribunal to Tribunal and also on the individual facts of the matter.  It is incumbent on an employee to mitigate their loss for unfair dismissal, by taking all reasonable steps to secure alternative employment.   The value of an award for injury to feelings is also open to interpretation (although the categories of case in which injury to feelings awards are made are not affected by the shares for rights).

Despite this, claimants and respondents know (broadly) what they are letting  themselves in for when they litigate.  They can quantify the claim.  This in turn means they can negotiate to settle the claim.  For that reason, 33% of claims in the Employment Tribunal were conciliated by ACAS and a further 27% withdrawn before Trial last year, no doubt largely because of settlement (see para 19 of that link).  In 60% of cases therefore, the expense of the full trial was avoided.

Damages under shares for rights will be calculated by reference to the value of the shares in the company that the Employee Shareholder was granted in exchange for yielding up his rights.  These are not publicly traded shares with a definitive value.  Except in the very rarest of occasions, their value is hypothetical.

The parties will inevitably not agree on the value of the shares.  They will not therefore be able to agree on the value of the claim.  This dispute will need to be resolved by a Judge, having heard evidence, in a full hearing.  The value of the dispute will require a valuation of the company in order to arrive at a valuation of the shares. 

Even if a valuation does exist before the litigation – one may have been prepared for the purposes of the initial share offering to staff – that valuation will probably not suffice, because it will be seen by the Employee Shareholder as being biased in favour of the company, and probably outdated.  If the dismissal is because of a downturn in the company’s fortunes, what effect will this have had on the value of the shares since the valuation was made pre-downturn? 

Bizarrely, it may be in the company’s interest to depress the valuation of its own shares, as this will minimise the value of the claimant’s claim.  The potential for unforeseen complications to arise from this is significant.  Anyone potential share purchaser of the company will seek disclosure of recent Employee Shareholder valuations.  The company could easily come to regret suppressing its own value.

It will also be necessary to calculate (or more accurately speculate) on the future value of the shares – if employment had not ended when it did, what would have happened to the value of the shares?  At what point in that hypothetical scenario would the Employee Shareholder have divested herself of the shares? What therefore is the value of the loss suffered by the individual because of the company’s unfair decision to terminate her employment?

The parties will therefore need to commission expert opinion on the future value of the shares.  This will – by definition – be speculative and will vary significantly between the parties.  The parties are therefore further obstructed from the common ground on which settlement is found.

There is also no incentive for the employee to mitigate his loss by seeking alternative employment.  His loss is based on the value of the shares.  The value of the shares is not affected by any fresh employment he secures.  The current system often works remarkably well, with Tribunal claimants determinedly setting out to mitigate their loss and maximise their damages award, only to succeed in mitigating and landing lucrative alternative employment.  They are denied their day in court, but everyone is better off.  The Employee’s motivation for doing this is not shared by the Employee Shareholder who is under no duty to mitigate.

Over time – and over expensive litigation – some of these issues will be resolved by precedent and common approaches will be identifiable.  This may take many years however and the litigants whose cases form that precedent will be doing so at great risk.

Employers will be forced to litigate for longer, in more complex circumstances and at greater expense than is currently the case.  Senior barristers will be required to become experts in company and asset valuations, and will be accompanied by Court appointed experts.  This will probably be in a Court rather than a Tribunal, meaning that the loser will pay the winner’s costs.  A claim with more than 50% prospects of success is likely to be insured, meaning that the Employee Shareholder may not have to dig as substantially into his own pocket as the Employee would currently have to do in the Tribunal, and the company could end up footing all of the litigation costs, including the Employee Shareholder’s. 

This is a personal point of view and does not represent the views of Bindmans LLP.  It is not intended as legal advice.  Always take bespoke legal advice.

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