Viscount Younger of Leckie
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Viscount Younger of Leckie
That this House do not insist on its Amendment 25, to which the Commons have disagreed for their Reason 25A, do agree with the Commons in their Amendments 25C, 25D, 25F and 25G to the words restored to the Bill by that disagreement, and do disagree with the Commons in their Amendment 25E to the words so restored but do propose the following Amendments in lieu—
“( ) Agreement between a company and an individual that the individual is to become an employee shareholder is of no effect unless, before the agreement is made—
(a) the individual, having been given the statement referred to in subsection (1)(ca), receives advice from a relevant independent adviser as to the terms and effect of the proposed agreement, and
(b) seven days have passed since the day on which the individual receives the advice.
( ) Any reasonable costs incurred by the individual in obtaining the advice (whether or not the individual becomes an employee shareholder) which would, but for this subsection, have to be met by the individual are instead to be met by the company.”
““relevant independent adviser” has the meaning that it has for the purposes of section 203(3)(c);”
The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Viscount Younger of Leckie)
My Lords, after a touch of verbal Houdini in reading out the Motion, I hope that I can offer some clarity to the contents of the clause. Before I discuss the clause in further detail, I am grateful to those noble Lords who met me earlier today. I draw the House’s attention to a further amendment that we tabled this afternoon, which I hope will provide reassurance to the House.
We believe that it should be up to employers to recruit as they see fit, and if a company wants to recruit an employee shareholder, in the same way as an employer may wish to recruit an employee or a worker, it should be able to do so. As has been made clear, no one will be compelled to apply for or accept an employee shareholder job.
I turn to the clause itself. I remind the House of my remarks on 22 April. In that debate, I stated that I had listened to and heard the strength of feeling in the House towards this clause. I also stated that if the House insisted on its amendment to remove the clause, as indeed was the case, I would ensure that the strength of feeling would be conveyed to my ministerial colleagues. I have conveyed the strength of feeling expressed by this House, and I now turn to the amendments laid today and how we believe they improve the clause and address key concerns expressed by the House.
The package of amendments ensures that individuals entering into employee shareholder status are given the opportunity to fully understand the employee shareholder contract, the benefits and the risks involved. The package ensures that the individual will have the space, the time and the means to receive and weigh up the information in order to make an informed decision that is right for them.
First, we propose that the company must give the individual a written statement of particulars setting out the employment rights that are not associated with this status, and detailing the rights, restrictions and other conditions attached to the shares. This will include whether the shares being provided as part of the employee shareholder status have any voting or dividend rights; whether there are rights to have the shares bought back or redeemed; whether an individual may freely sell the shares; and if there are certain other rights and restrictions attached.
This written statement of employee shareholder particulars is separate to that already required by the Employment Rights Act 1996, which sets out the terms and conditions of the job, and which employee shareholders are entitled to receive within two months of starting work with their employer.
Most importantly, once the statement of particulars has been given to the individual, he must then receive legal advice. This advice can be given by a solicitor, a barrister, a fellow of the Institute of Legal Executives employed by a solicitor’s practice, a certified trade union official or a certified adviser in an advice centre. A person employed by the company, such as in-house counsel, cannot give this advice. It must be independent.
Some advice may be free, such as from a trade union official or an advice centre. Where payment must be made for the legal advice, the company must meet the reasonable costs of that advice. This is the case even if the individual does not take up the job offer. Once the legal advice has been received, the individual has seven clear calendar days to consider that advice. Any acceptance by the individual of an employee shareholder contract is of no legal effect until those seven days have elapsed.
This is about giving the individual the space to consider their position. It gives them time.
Lord Burnett
Will my noble friend assure the House that no advice should be given to an employee by the law firm or firms acting for the company itself or any other law firm connected with the company?
Viscount Younger of Leckie
My noble friend makes an excellent point. That is absolutely true. I can confirm that if any legal firms are connected at all with the employer seeking to employ the employee shareholder, they will not be permitted to give legal advice.
Returning to the individuals, as I was saying, it gives them time not to be pressurised into accepting a contract and an opportunity to think about what the contract will mean to them. An individual cannot become an employee shareholder unless this and all the other criteria set out in the clause are met. This package of amendments means that an individual who has chosen to apply for and been offered an employee shareholder job has the information, advice and time that they need to consider whether the job is right for them.
I now turn to the amendment tabled today by the noble Lord, Lord Lea of Crondall. We do not believe that such provision within the clause is necessary. We believe that it should be up to employers to recruit as they see fit, and if companies want to recruit an employee shareholder, as they already do for employees or workers, they should be able to do so.
I take a moment to clarify points that have been raised repeatedly in both Houses. In the debates about this clause, it has been stated that the shares issued to the individual could be worthless. I should like to make it absolutely clear that shares issued as part of the employee shareholder status must be worth at least £2,000. The shares must be fully paid up by the employer and the clause also prevents the individual paying for them.
I understand the concerns raised by my noble friend Lord Forsyth in relation to valuing shares. As I have made clear previously, established practices are in place that cover this. Let me repeat, we recognise that for private companies there is no traded market which enables easy valuation of shares. Private company shares are valued for many different reasons—for example, when someone leaves the company and wants to sell shares, or following the death of a shareholder or if the company is to be sold. Practitioners such as actuaries and accountants undertake this work using standard methods to reach a valuation. They will consider such things as examining the company’s performance and financial status as shown in its accounts for a period up to the date of valuation. They may also consider future plans of the company, by looking at order books and analysing future commitments.
If a private company is considering issuing new shares as part of an employee shareholder scheme, it will probably be taking advice from its accountant, who will be able to advise on how best to value the shares to be issued. In this case, the company will be able to demonstrate how the valuation has been made to the individual. In addition, I reassure the House that we will not allow individuals to use this employment status for tax avoidance.
Viscount Younger of Leckie
Once again, I thank all noble Lords who have spoken. I can only reiterate that the Government would like to give individuals and companies more choice in how they structure their workforce. That is the aim of the employee shareholder employment status—to provide this additional choice. It remains correct that the employee shareholder status will be likely to be taken up largely by new small companies, which my noble friends Lord Flight and Lord King acknowledged. A large number of points were raised during the debate and I would like to address as many as possible.
The first was a very important point raised by the noble Lord, Lord Pannick, and my noble friend Lord Forsyth and concerns the question of the cost of legal advice to the employee shareholder. I just make it clear that the issue is whether they are charged in terms of having a benefit in kind. I can confirm that the Government will introduce an exemption within the benefits-in-kind legislation to ensure that the requirement to provide legal advice will not lead to a tax cost on individuals looking to take up the employee shareholder status, regardless of whether they choose to take up the status. This should be addressed in the Finance Bill.
The second point is a point of clarification and concerns the definition or description of drag-along and tag-along rights. Perhaps at this stage I should defer to the superior knowledge of my noble friend Lord Forsyth. The answer, for the education of the House, is that these rights are sometimes found in a company’s articles of association or shareholder agreements. Drag-along rights refer to the rights of a majority shareholder to require minority shareholders to sell their shares if the majority shareholder sells theirs on the same terms, and tag-along rights, which are more active, are the rights of minority shareholders to procure an offer for their shares on the same terms as the majority shareholders are selling theirs.
The noble Lord, Lord Bilimoria, in a passionate speech, raised the issue of consultation. I should like to clarify that we consulted on how to implement the option, not on whether we should proceed in principle. Therefore, it is not true to say that no one supported the measure, although he did not say exactly that. The consultation responses included some positive responses. As organisations said, businesses of all sizes might be able to benefit because the changes suit the dynamic way that their business operates. Therefore, the Government believe that it is a good additional option for companies and individuals. It adds to the existing status of employee and worker, which has been much covered in previous debates, and it provides those taking it up with the flexibility as well as the opportunity to share the reward and the risk that comes with having an interest in a growing company. As I have said in the past, we recognise that not all companies will wish to take up this new status, and that is fine. What is important is giving those companies that wish to take on people in this different way the opportunity to award share equity.
The noble Baroness, Lady Turner of Camden, raised the issue of withdrawal of employment rights, which I believe she raised in previous debates and which I understand. The argument is that we believe it is wrong to focus on just one aspect. Forgive me if I am repeating myself, but the employee shareholder status must be seen as a package. It is a package of employment rights, mandatory shares and tax incentives. It is the interaction of all three aspects that will motivate staff.
This new status confers a number of benefits for both the employer and the employee shareholder. From an employer’s perspective, the employee shareholder is more likely to generate ideas, as I remember mentioning in the past, for bettering the company, and to have a greater incentive to contribute to the organisation. Indeed, the hope is that they will stay longer than they otherwise might in their particular organisation.
Changing tack, the noble Lord, Lord Myners, raised the issue of multiple use of connected companies. Employee shareholder status is intended to be part of a flexible and efficient labour market in which people can move from job to job if opportunities arise—a point which may not surprise the noble Lord. However, where a person takes up an employee shareholder status in a number of companies which are associated with one another, such as banks and subsidiaries, income tax will be payable on any shares received from whatever company beyond the first £2,000 in value. Likewise, any shares beyond the first £50,000 in value will not enjoy the exemption from capital gains tax. This will prevent multiple use of the scheme for tax advantages, because the relevant limits for the tax exemption will apply to all employee shareholder contracts with connected companies.
I finish on this note. I outlined extensively in my opening remarks the points that have been raised in past debates about the share status. I reiterate that the Finance Bill will be used to sweep up any issues. We will be looking at this extremely carefully.
My noble friend Lady Brinton asked a relevant question as to whether I will be sending around revised guidance to the House. Of course, we will be sending guidance around once we have incorporated all the changes which have come from the various concessions which we have outlined today, made by Parliament and stakeholders. However, consultation continues, and I would not at this stage wish to commit myself to any particular date for passing that on.
The noble Lord, Lord Myners, raised a point about a general anti-avoidance rule. Forgive me if I am repeating myself, but the Finance Bill also introduces a general anti-avoidance rule which will tackle abusive avoidance schemes or contrived arrangements designed to avoid tax. This rather neatly rounds up a quite interesting debate that we have had this afternoon, including from my noble friend Lord Flight and the noble Lord, Lord Myners, on this issue.
The key point about tax abuse which has not been made is that the Finance Bill is an annual process. This issue can therefore be tackled at least on an annual basis if necessary. I confirm, too, that HM Treasury and HMRC will be keeping the scope for tax abuse under constant review.
The noble Lord, Lord Christopher, asked what happens if the legal advice given to putative employee shareholders is erroneous or negligent. Legal advisers are likely, of course, to have professional indemnity insurance which covers negligent advice and its consequences, so there will be safeguards there.
Lord Christopher
The noble Viscount has been very coy about what “reasonable” means. I sought to demonstrate that it could be much more expensive than it might appear at first sight. I do not know of any trade union lawyer, for example, who would do other than say, “Go to the City for advice”. Equally, it may well be more difficult to be satisfied by a valuation on the sale or disposal of those shares. Will there still be available to workers the opportunity to get advice on that?
Viscount Younger of Leckie
I believe that I have spelt out the comprehensive and extensive advice that will be on offer to employees. The noble Lord, Lord Christopher, has brought up the issue of what can be defined as “reasonable costs”. We recognise that the cost of legal advice will depend on individual circumstances. I remind the House that employee shareholder status and its ramifications will entirely depend on the type of company, type of employee and the wishes of the employee shareholder. Those discussions will go on outside any control from government. The costs involved will vary depending on the type of contract or job offered and the level of knowledge of the individual seeking that advice. What is reasonable in one particular instance may not be reasonable in another. Very deliberately, we are not stipulating a minimum or maximum price which would come under the definition of “reasonable costs”. It relates to other areas and sectors in entirely different circumstances. The concept of “reasonable costs”, as I am sure the noble Lord will be aware, is not an unusual matter.
Lord Christopher
Who is to determine the result if there is a dispute about the costs involved?
Viscount Younger of Leckie
There is deliberately no determining factor. This is a matter which has to be part of a discussion between the employer and the employee shareholder. The issue remains that the employer has to decide whether the costs are reasonable. If, for example, the costs are not reasonable, the employee shareholder has the right to complain and raise an issue. The ultimate sanction, of course, is that he may decide not to take up the job at all. That of course remains a matter for him.
The noble Lord, Lord Christopher, raised the question of valuation, which I earlier covered to some extent. He also raised the expense for companies in terms of valuing the shares. We acknowledge that it is not easy for private companies to value shares, a matter which I covered in some depth earlier. As I said, if the company is issuing new shares as part of an employee shareholder scheme, it is likely to take advice from their accountant, who will use standard methods to value the company. Again, I covered that earlier.
The House will be aware that the other place has now voted to retain this clause three times, a point made by my noble friend Lord King. I acknowledge the important role of this House, too. I believe that we have more than fulfilled that role. This House has carefully considered and improved the clause, which is evident from the package of amendments that we have discussed today. With your Lordships’ assistance, we have ensured that this clause now contains important protections for individuals. It is now for companies and individuals to use it if it is right for them.
Lord Pannick
My Lords, I thank the Minister for all his considerable efforts in securing the comprehensive amendment on independent advice. I also thank the noble Baroness, Lady Brinton, and the noble Lords, Lord Forsyth of Drumlean and Lord King of Bridgwater, without whose considerable efforts, the House would not have secured this important protection.
The noble Lord, Lord Adonis, exposed the defects in Clause 27 at Second Reading. He has since then, at every stage of the Bill, used his considerable forensic skills to expose each and every defect in this lamentable provision. I entirely agree with the substance of his powerful criticisms of Clause 27. However, the Government are determined to introduce Clause 27. It is impossible to see what further protections this House could usefully add. Therefore, the question, as it seems to me, is whether this House should continue to stand in the way of the Government’s determination to include Clause 27 in the light of the considerable safeguards that this House has introduced.
This House has had its say. It is now time to give way on this issue to the elected House. I therefore do not intend to divide the House further on this matter. I beg leave to withdraw the amendment.
Viscount Younger of Leckie
I thank the noble Lords, Lord Morris and Lord Lea, for their interventions. As I made clear in my opening remarks, we do not believe that the provision in the Motion of the noble Lord, Lord Lea, is necessary. It should be up to employers to recruit as they see fit. If a company wants to recruit an employee shareholder, as companies already do with employees and workers, it should be able to do so in its own way. Taking the argument further, if an employer wishes to post a notice for, or advertise, an employee shareholder position, they should be free to place this as one role, just as they would be able to do in an advertisement for any other role. While the House has raised concerns on behalf of the individual, and particularly given the concessions we have made, we must ensure that we do not tie the hands of employers. The noble Lord’s Motion would do just that. Therefore, I hope that it will not be supported by the House.
Lord Lea of Crondall
I thank the Minister for his reply. Perhaps I should first mention my thanks to my noble friend Lord Morris of Handsworth, who some 15 years ago was the chairman of the TUC working party on rights at work. I recall that this was part of a hugely successful programme of improving the quality of the contract of employment in many ways. This is the first time I have seen legislation that explicitly states that you can have a contract of employment of less satisfactory quality. That should be a source of concern. It would have been a source of concern in Whitehall in the days of the Ministry of Labour. At the moment we have legislation that is like a dog with three legs. There is input from the Treasury, Customs and Excise and BIS, but because there is no ministry of labour, the collective experience of people who know about recruiting and agreements seems to have been totally lost.
I think that our predictions will come true and that the Government—or the Government in power at the time, because we are only two years from a general election—will see this programme staggering on its feet. All the difficulties, from those raised by my noble friend Lord Myners to those raised in our last debate by other noble Lords on all sides of the House, will come to pass. However, in light of the hour and having had a full debate on this question over many days, I beg leave to withdraw the amendment.