Labour's Staff Share Plan May Not Be as Generous as It Seems

(Bloomberg) -- A Labour proposal to force companies to hand 10 percent of their equity to workers if elected may not be as generous as it seems, with businesses likely to cut wages and jobs to counter any hit to profits, according to U.K. lawyers.

“If the employer is forced to put these arrangements in place it is a good bet that they will need to re-balance the scales elsewhere to maintain their profitability,” said Crowley Woodford, a London employment lawyer at Ashurst. “The likely net effect is that it will suppress basic salary and in a worst case lead to job losses.”

Shadow Chancellor John McDonnell announced the plan at the Labour Party conference Monday. Under the proposal, public and private U.K.-based companies with more than 250 employees would be forced to give 10 percent of their equity to staff if Labour wins the next election. The shares would be held in Inclusive Ownership Funds that would pay annual dividends to a maximum of 500 pounds ($653) per employee, with anything above that taken by the government for a “social fund” to help pay for public services.

Labour says the policies wouldn’t lead to a drop in salaries or job losses because it’s other proposals would change the view of companies, like requiring one third of board seats in large companies to go to workers.

While the proposals appear radical and go beyond any employee involvement in businesses in continental Europe, the most radical thing about them is actually the “super-tax” that Labour would get from the dividend excess, according to Michael Burd, an employment lawyer at Lewis Silkin.

“While this is being billed as ‘handing 10 percent of equity to employees,’ it isn’t really,” said Burd. “Above the 500 pound per employee cap, it will effectively amount to a super-tax on 10 percent of the company’s dividends.”

Lawyers also raised questions about the possibility of an uneven playing field being created between U.K. companies and foreign companies with subsidiaries in Britain, and whether gig economy workers who often don’t qualify as employees would be unfairly excluded. For those foreign subsidiaries that are caught by the rules it’s not clear whether the dividend would come from local profits or parent company profits either.

The proposals were criticized by business lobby groups as discouraging investors from coming to the U.K. The Confederation of British Industry said Sunday, when the plan was first published, that “Labour’s anti-business positioning is starting to bite.”

““Why would investors here in the U.K., and even more worryingly in boardrooms across the world, choose to put a penny into Britain in the knowledge that their shareholdings will be diluted, and their boards will be subject to significant government interference? Why would they list a public company on the UK market in such an environment?,” said Adam Marshall, Director General of the British Chambers of Commerce, in a statement.

Before his speech, McDonnell acknowledged there was more work to be done.

Responding to criticisms from CBI and others he told Bloomberg News, over bacon and eggs in the nearby Marco Pierre White restaurant, that Labour would work with the lobby groups to refine the proposal: “It is quite radical, but most other countries do have some form of employee ownership.”

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