The loss of important employment protections by individuals, who may not understand the consequences of the new status.

Possible coercion of employees to adopt the new status.

An increased risk of discrimination and automatically unfair dismissal claims.

An increased risk of litigation generally, over the rights of employee owners and the value and transferability of shares.

Employee owners losing out in redundancy situations, where their shares may be worth little.

Women being excluded from the labour market as a result of the change to the maternity leave notice requirements and limitation to flexible working rights.

Possible abusive tax avoidance exploiting the proposals.

Unscrupulous employers using employee owner status to exploit or mistreat individuals.

The complexity and cost for employers of operating the new employee owner status.

Uncertainties about income tax liabilities on acquisition and valuation of shares that were likely to deter uptake.

The need for clear guidance for individuals and businesses, especially smaller businesses, to enable them to make use of employee owner status without extensive professional advice.

There should be no restrictions on the types of shares available for employee owners. It is also not appropriate to introduce further regulation of how the shares element of employee owner status should operate, which might:

For the purposes of employee owner status, valuation should take account of any restrictions on the shares acquired. [PLC comment: This appears to be a change from the consultation paper (see paragraph 19 on page 10 of that document), which suggested that valuation would be on an unrestricted basis. The use of restricted value is not expressly stated in the Growth and Infrastructure Bill, but seems to be implied in the relevant wording, which refers to shares "which have a value, on the day of issue or allotment, of no less than £2,000" (a reference to a minimum actual value). For more information about the importance of unrestricted value and actual value in the context of taxation of employee shares (and other securities), see Practice note, Restricted securities.]

Employers should be able to offer parent company shares to employees, where the employer itself is a subsidiary. The government has tabled an amendment to the Growth and Infrastructure Bill to that effect. However, BIS does not intend to allow employers to be able to offer shares in their own subsidiaries, in order to restrict "the scope for abuse" of the legislation.

[PLC comment: The freedom to use parent company shares could be helpful in respect of potential income tax and National Insurance contributions (NICs) liabilities on acquisition, as shares will be readily convertible assets and so subject to PAYE and NICs liabilities if the issuer is controlled by another unlisted company. The significance of this point will depend on the likelihood of tax liabilities arising on acquisition (for more information, see Government response: tax treatment).

The reference to scope for abuse probably relates to the relative ease with which a parent company can manipulate the value of a subsidiary's shares. It is not clear whether the "abuse" BIS wants to prevent is the artificial inflation of the values of shares after acquisition (or its artificial suppression before acquisition), to maximise CGT relief in a tax avoidance scheme, or the later abuse of employee owners by the suppression of their share values, or both. For more information about a tax anti-avoidance restriction on the use of subsidiary shares in a tax-favoured employee share scheme, see Legal update, March 2010 Budget: no more CSOP options over shares in subsidiaries of listed companies.]

Companies will need to be satisfied that shares issued to an individual in consideration of agreeing to become an employee owner are worth at least £2,000, to avoid any risk that the individual might unexpectedly be able to assert employment rights that the employer thought that the individual lacked.

[PLC comment: The response suggests that an employment tribunal would need to determine whether the employee owner had in fact received £2,000 worth of shares. It is unlikely that many employment judges will be suitably equipped to deal with this issue. In any event, this will give rise to an increase in the number of pre-hearing reviews on the question of employment status, some of which may involve expert evidence on the valuation of shares.]

Forfeiture conditions attaching to employee owner shares "should be left to contractual agreement between" individuals and employers, that is, they will not be statutorily regulated. As harsh forfeiture provisions will affect the restricted value of shares, employers may be constrained from using excessively harsh forfeiture provisions by the need to ensure an individual's shares have a certain worth (see the bullet point above).

[PLC comment: This is at least a change of emphasis from the consultation paper (see paragraph 18 on page 10 of that document), which suggested that an employer would have to buy back shares from leavers at a "reasonable value". There was a marked difference in the responses of employee and employer representatives about forfeiture. That could suggest that failing to constrain employers at all in this respect might not assist the take-up and success of the new status.]

There is a need for clarity to enable the shares element of employee owner status to be implemented effectively by businesses and individuals. The government will address this mainly with new guidance on share valuation and forfeiture. However, BIS may also amend the legislation if it becomes clear that these complex issues require this.

[PLC comment: Guidance may help the parties agree on workable terms, or help employees or job applicants to reject unworkable terms. But where it does not achieve this, there may still be potentially costly legal disputes when employers impose and attempt to enforce harsh forfeiture terms for employee owner shares. This is because the reduced unfair dismissal protections for employee owners cannot exclude:

Employers may also fail to appreciate that the restrictions on employee owners' rights on termination will not protect employers from all termination-related claims. That could encourage a somewhat careless approach to the drafting of employee owner contracts. For example, employers may not appreciate the potential importance of an appropriate Micklefield clause in an employee owner contract, if there are forfeiture provisions that could result in loss related to the value of employee owner shares. (For more information, see Practice note, Micklefield clauses and compensation for loss of share plan entitlements on termination of employment.)

More generally, it is hard to see how guidance can adequately address the fundamental imbalance in contractual bargaining power between potential employee owners and employers, of which excessively harsh forfeiture terms could be one outcome. There may be exceptions where individuals are very senior, or highly employable. But in those cases it may be less clear what the employer will gain from that individual taking up the new status, except to the extent that the CGT exemption acts as an aid to recruitment or retention.]

Plans to monitor whether the introduction of employee owner status increases the frequency of employment tribunal claims for discrimination or automatically unfair dismissal (which employee owners will still be eligible to bring).

The proposed alignment of the minimum notice from an employee owner of a planned return from additional paternity leave with the 16 weeks' notice required for an employee owner's early return from maternity leave and adoption leave. The government has tabled an amendment to the Growth and Infrastructure Bill to that effect. This is also likely to apply to the new system of flexible parental leave, announced in the response to the Consultation on Modern Workplaces (see Legal update, Consultation on Modern Workplaces response: flexible parental leave), for which employee owners will be eligible.

The government has recognised that the extended notice requirement which will apply to maternity and adoption leave may mean that some employee owners return to work later than they would otherwise wish to. Guidance will be provided on how to discuss the length of absences when planning maternity or adoption leave.

The statutory right to request flexible working will be limited to the minimum requirement under the Parental Leave Directive (2010/18/EU), so that employee owners will only have the right to make a formal request for flexible working when they return from parental leave. In order to comply with the Parental Leave Directive, the government must ensure that employee owners have sufficient time to make such request on their return from parental leave. The government's proposal that a period of four weeks would be sufficient was rejected by 61% of respondents, many of whom said that this would not be long enough for a parent to know what flexible working pattern they needed. The government has not yet made a decision on this aspect of the consultation, and will make a further announcement before the end of 2012. [PLC comment: The response makes clear that an employee owner would still be able to request flexible working. They just do not have the right to have that request considered in accordance with the statutory procedure. Given that the current statutory procedure will be replaced in 2014 with a duty on employers to act reasonably (see Legal update, Consultation on Modern Workplaces response: flexible working), it seems that the only benefit to employers will be that they will not be bound by the new statutory code of practice when faced with requests from employee owners.]

The government will work with payroll providers to ensure that they are able to accommodate the new employee owner status, and reflect this in guidance, in response to concerns that payroll provision could be adversely affected by the introduction of the new status.

The employee owner CGT exemption will include anti-avoidance provisions, "including connected persons rules".

On a share-for-share exchange, the employee owner CGT exemption will not apply to any gains arising on the new holding after the exchange takes place. However, gains accrued up to the time of exchange will continue to benefit from the exemption on any disposal of the new holding. For more information about the CGT treatment of share-for-share exchanges (and of other similar kinds of transaction) see PLC Tax, Practice note, Tax clearances: exchange of securities and reconstructions.

Draft legislation for the CGT exemption will be published on 11 December 2012 (when several draft provisions of Finance Bill 2013 are expected to be published for consultation).

The government is "considering options to reduce income tax and NICs liabilities" arising on the acquisition of employee owner shares.

[PLC comment: This will be welcomed, at least as long as measures to minimise tax on acquisition are ultimately adopted.

[Addendum: On 5 December 2012, the government published further details about one proposal that is being considered to deal with income tax arising on acquisition. It may legislate to deem, for income tax purposes, that employee owners pay £2,000 for their employee owner shares, reducing the taxable value on acquisition, to nil in the case of those acquiring the minimum value of shares (assuming that there is no joint election to tax the unrestricted value of the shares when acquired, if they are restricted securities). However, this would also make it clear that there will be an income tax liability, if the taxable value of the shares acquired exceeds the minimum value of £2,000. For more information, see Legal update, 2012 Autumn Statement: share schemes & incentives aspects: Employee shareholder employment status.]

Adding an express statement that employee owner shares must be fully paid up. This was proposed in the consultation paper, but not originally included in the Growth and Infrastructure Bill. The government is concerned to prevent employee owners facing a subsequent liability in respect of nil or part paid shares should the employer become insolvent.

Expressly excluding any other consideration from an individual for employee owner shares, in addition to their agreement to become an employee owner.

Providing for the increase of the £2,000 statutory minimum value of employee owner shares by secondary legislation.

Removing the upper limit (of £50,000) on the value of shares acquired in consideration of agreeing to be an employee owner. However, this value will be retained as an upper limit (as at the time of acquisition) on the value of shares qualifying for the CGT relief. The purpose of this change is to prevent individuals failing to become employee owners (and qualify for the CGT exemption) should they inadvertantly acquire more than £50,000 worth of shares under their employee owner agreement.

Extending the availability of employee owner status to non UK-registered companies.