The shadow chancellor, John McDonnell, has made headlines by announcing Labour plans to force large companies to put shares into trust for their employees. The specifics are as follows:

• Companies to put 1% of their shares per year into a trust for employees, up to a maximum of 10%.
• Shares cannot be sold and will be collectively managed and voting rights exercised on behalf of employees.
• All employees to receive payments of up to £500 each out of the dividends payable on shares held in the trust.
• Any excess dividends on trust shares above that amount going into a fund to pay for public services and welfare.
• All companies with 250+ workers will be required to participate.

 As you might expect, Pett Franklin are strong supporters of employee share ownership and the intentions here seem good. Mr McDonnell is certainly right that the research shows employee ownership leads to more engaged workers and better productivity. However, we do have concerns about the specific proposals made.

For many companies, £500 per worker will be significantly less than 10% of total annual dividends, leaving a considerable surplus payable to the government’s proposed fund. Further, since the shares cannot be sold from out of the trust, employees will have no share in their capital value. Is it fair to describe this as “employee ownership” when a relatively small proportion of the financial benefit will accrue to employees? Or is this simply a disguised tax on larger companies?

Further, it is by no means clear that state-mandated employee ownership will deliver the same benefits as when ownership by employees is internally driven and accompanied by real cultural change.

Addressing inequality is a worthwhile goal, but the concerns this would simply drive large business out of the UK seem real.

There are already a number of regulations and limits which kick in when companies reach the 250 employee threshold – we commonly encounter this as a limit on the ability of companies to grant EMI options, but it also impacts their eligibility for investment under EIS and for receipt of certain grants, and companies above this threshold will be required to comply with extra reporting requirements from gender pay gap to documentation of data processing under the GDPR.

It is sensible to target investment and allow a lighter touch for regulation of small businesses, but with the – fairly arbitrary – 250 employee limit being encountered more and more, is this likely to act as a disincentive for medium-sized businesses from growing and taking on more employees?

In the meantime, share schemes such as SIP and SAYE already allow employees of large business to acquire shares in their employer, either for free or at a significant discount, while the new “Employee Ownership Trust” delivers majority ownership with full legal and financial control of the company to all employees. 

If you would like to discuss employee ownership further, please contact William Franklin at william.franklin@pettfranklin.com or call 0121 348 7878 and we will be happy to assist.