EOTs – sharing information with employees – what can employees ask to see?
Geldards recently held a training session for trustee directors of Employee Ownership Trusts (“EOTs”) on employee engagement and how the trust can encourage a change in the mindset of employees from being “employees” to “employee owners” to help grow the business. Employee engagement can cover a multitude of activities and touch points with no easy fix. It requires long-term work and management investment to be successful.
Our article in 2023 When EOTs go wrong resulted in a number of employees getting in touch to ask: “What are they entitled to know about the business?” and “How can they obtain information now that it is employee-owned and controlled?”. Their main complaint is that nothing has changed following the change in the controlling interest, and they have seen no benefit to them from the transition to employee ownership and no sharing of information.
As a professional adviser who is passionate about the benefits of employee ownership (“EO”) and works with a wide range of EO businesses, receiving these types of queries is very disappointing. The short answer is that employees have no actual rights under the EOT legislation to demand or receive information about the business. The legislation contains protection for employees receiving benefits from the EOT and the payment of the EOT bonus of up to £3,600 per year income tax-free but not much more.
There are currently no requirements for employees to be trustees of the EOT or be appointed as directors of the trustee company. However, a consultation by HMRC in July 2023 on the future of EOTs indicated a preference for the appointment of employee trustees and ensuring that the seller or founder did not control the trustee. Best practice, and certainly what is encouraged by Geldards, is the appointment of employees as trustee directors along with an independent chair so that the controlling interest in the trust passes away from the sellers.
A lack of sharing information with employees indicates a poor approach and attitude to good governance; there may be a “business as usual” attitude with no obvious change as a result of the transition to EO, other than a founder or seller receiving what could be a lot of tax-free cash. Tax-free cash should not be the primary reason behind a transition to EO.
What can the employees do?
The employees can ask the trustees what is happening with the business including the financial performance. This will be difficult if the trustee is located offshore and is a faceless financial institution. It could be even more difficult if the trustee board is made up of the seller and their trusted advisers and/or friends. It will be a very brave employee who asks what could be a career-limiting question.
We have seen an employee engineer a mass resignation of the employees which led to the end of the EOT and a sale of the business by the EOT to a new company formed by some employees. There was a huge amount of uncertainty and a loss of focus on the business. It was a very risky move for all concerned and cannot be recommended. The employees could be out of a job and facing a claim for breaching their fiduciary duties as employees as well as any restrictive covenants in their employment contracts.
What about the company?
The company may well be missing a trick by not engaging with the employees and sharing information about the business performance. EO businesses have been shown to be more resilient in a downturn and more profitable compared to their non-employee-owned competitors. Employees in an EO business may be more invested in the business and prepared to work that little bit harder – the “employee-owner” mentality. The seller may end up being paid their deferred consideration more quickly by investing in employee engagement. The company could have a happier, more productive workforce with less sick leave and higher staff retention rates.
The message to staff who contact us?
Unfortunately, it is very much “Try and ask for information”. However, at present there is nothing employees can do to force the sharing of information if the seller is determined to retain control.
If the individuals contacting us are directors of the trading company, those individuals have to consider their director’s duties and also the financial position of the company. If the seller has a charge over the assets of the trading company to guarantee the payment of the deferred consideration (not unusual) and is preventing investment in the business, the directors have to consider the overall financial position of the company – can it pay its debts as they fall due in the next 12 months? Is the director fulfilling their director’s duties? A director may not be able to resign and walk away from the problem if there are solvency issues to consider. A risk of insolvency results in a whole host of other issues to consider which is beyond the scope of this article.
Next steps
If you would like to learn more about how you can share information with your employees and what information you should share, you can register to attend the next free EOT trustee event at Geldards Cardiff office on the morning of Wednesday 15 May.
To discuss EOTs generally or any other EOT-related issues please contact Andrew Evans or Debra Martin.