“Beecroft by the back door”: a practical guide to using the government’s “shares for rights” scheme to totally screw over your employees

The government’s “shares for rights” idea has been widely reported over the last few weeks and its fair to say I haven’t read a great many articles in favour of it. Employee ownership, yes. The Nuttall review earlier this year was all in favour of the government encouraging greater employee ownership, producing some toolkits (off-the-shelf template documents etc) and simplifying some company law rules on share buybacks. Even a statutory right for employees to request shares has been mooted, although the government have put that on the back burner for at least three years.

However, nowhere in that review (or in the subsequent government call for evidence) was it suggested that employees be asked to give up their unfair dismissal and redundancy rights (plus others) in order to benefit from a financial stake in the business. This is something the Chancellor has put in at the last minute, to puff up his “deregulatory” credentials at the party conference.

Since then, the suggestion has been doing the rounds that this is “Beecroft by the back door”: in other words, an attempt to introduce Adrian Beecroft’s controversial idea of compensated no-fault dismissal, whereby employers can simply choose to dismiss their employees for a one-off not very big payment, with no comeback.

Lest anyone should think this is mere scaremongering, I have set out below a practical guide to assist Beecroft wannabes to hire new staff with no strings attached.

I give you 2 options:

1. The basic plan

Just insist that new employees accept shares in the company and let them make a small tax-free profit to compensate them for being heartlessly sacked in a few years.

But where’s the fun in that?

2. The fiendish plan.

This requires a bit more strategic planning.

• The scenario: you run a company (let’s call it “The Company” for the sake of argument – and I do like a good argument). You want to take on new employees, but you don’t want them to have unfair dismissal rights. You put an advert in the jobcentre saying “Employee owners wanted: £xxxk per year plus £2,000 signing on bonus payable in shares”.

• You then stroll back to the factory, having given your chauffeur the afternoon off as a result of these pesky Working Time Regulations, and wait for the hoards of hungry unemployed proles to start beating down your reinforced factory gate. When they arrive, select the ones you want, tell them they are all capitalists now, and give them the contracts to sign. If they won’t sign, give the jobs to someone else. (That’s what Gideon means when he says that “employee owner” status is a matter of choice).

• The contracts are for employment with a subsidiary company (for the sake of another argument, let’s call that “The Subsidiary”) which they will be given shares in. The employment contract says that they must sell their shares back when they leave, “for whatever reason”.

• The Subsidiary is a new company you have just bought off the shelf, wholly-owned by The Company. The Subsidiary has no premises, no assets (except some cash – I’ll explain that in a minute) and no outgoings except the salary costs of all its employee owners, which are conveniently funded by the Company anyway.

• Onto the cash: assuming you take on 10 employees, the Subsidiary needs to be worth at least £20,000 in order to give away 10 x £2,000 worth of shares, otherwise you can’t take advantage of Gideon’s little scheme the special employee-owner status. (You will also need to have some shares yourself, otherwise who is going to run the company?). Since the Subsidiary doesn’t actually have any goodwill or make any profit, you will have to inject some cash to make the balance sheet look healthy.

• What if you can’t afford to chuck away £20,000? Don’t worry, because you can just do it on paper. You can give £20,000 to the Subsidiary, and the Subsidiary can then “lend” that money back to you (at zero interest), meaning that the Subsidiary owns £20,000 worth of debt, making the balance sheet look healthy, and you get to keep the money to spend as you will. (You might need some of it to pay off your employees when you get rid of them, but don’t worry, you won’t need it all, as you will see.)

• So, so recap: you have 10 employee owners, you have given them each £2,000 of shares in their employer, The Subsidiary, which is effectively a service company providing employee services to your business, The Company. The shares must be non-voting shares: you don’t want the buggers taking over. But somebody must have the voting shares. Your Company does. And your Company then appoints you as the sole director of the Subsidiary.

• Here comes the fun bit: when you tire of your minions (as you surely will), you can cast them out onto the street without so much as a verbal warning. You ask your accountant (or your spouse, who is also your accountant and probably a shareholder in the Company too, for tax reasons) to value the Subsidiary. To your surprise, it is worth half what it was when you started; those Companies House late filing penalties are a bugger, and someone’s definitely been stealing from the stationary cupboard. A lot. Oh yes and you declared quite a big dividend last year but none of the non-voting shares carry the right to dividends so it all went straight back into your Company.

• So you send your former “employee owners” a cheque for about £1,000 each, and tell them in no uncertain terms to piss off. You then head off for champagne and oysters with your pals Adrian and Gideon, who congratulate you on your free-market attitude and your contribution to the ailing British economy.

I may have simplified things a bit. I know nothing about company valuation. But I’m sure there must be plenty of people prepared to give this sort of thing a try.

I haven’t even talked about the tax situation (which essentially is that the employees in my example pay income tax on £2,000 worth of shares when they are hired, but don’t see any money for several years, until they are dismissed, when they receive only £1,000. That’s poetry, that is.)

The government consultation (such as it is) on how to avoid “unintended consequences” of the new scheme ends tomorrow – 8 November. (Note: there was no consultation on whether “shares for rights” is a good idea. The government don’t like being told their ideas aren’t good ones, they just like to carry out a consultation to work out how best to minimise the collateral damage.) Now it could be that the government will realise the potential for abuse, and legislate to stop this happening (ie to stop employers benefiting from the relaxation of employment rights for employee owners if all they give out are worthless shares in service companies). But frankly, that’s just the sort of complex regulatory red tape that is bound to create satellite litigation in our already over-burdened tribunal system, and would get you drummed out of Whitehall in no time.