Ueapme Position Paper in Response to the European Commission S Consultation On

UEAPME position paper in response to the

European Commission’s first consultation on

“Financial participation of employees in the European Union”

General Remarks

UEAPME affirms its positive approach to financial participation schemes and is pleased to contribute the perspective of Europe’s SMEs to the re-launch of the debate at European level. SMEs have traditionally not had an active policy on financial participation. Nevertheless, UEAPME recognises the valuable impact which financial participation of employees can have, set out by the European Commission in the paper – generating greater worker involvement, stronger motivation and commitment of the workforce, improved competitiveness, and job creation, and thereby making a contribution to attainment of the Lisbon objectives. UEAPME also perceives the value of establishing certain conditions and guidelines in order to address the major barriers encountered in the implementation of such schemes across borders, particularly with regard to the differences in taxation between Member States, which can only be resolved at European level.

UEAPME has the following comments and suggestions to make in response to the questions posed by the Commission at the end of its document, as to possible measures to be taken at Community level:

1. Should we plan for a Community initiative on financial participation?

UEAPME agrees that the Commission’s proposal for a series of Community measures could be helpful in promoting financial participation. However, it is important that the focus of such an initiative, as far as SMEs are concerned, should be:

1. on providing information, awareness-raising, improving understanding, and
2. sharing practices and policies in the Member States in order to exchange experiences and to identify mutual lessons to be learned through dialogue and the establishment of networks across the European Union.

UEAPME believes that a benchmarking process between the different systems, the promotion, recognition, acceptance and use of different models between Member States and the exchange of good practices and experience could help firms, national administrations and especially fiscal authorities across the European Union to get to grips with the question of financial participation.

2. Is it necessary to lay down general principles at European level – and if so, what principles – to encourage greater and more efficient recourse to financial participation schemes within the European Union?

UEAPME agrees with the establishment of general principles as the means of avoiding unequal treatment between Member States, and guaranteeing the mobility of workers. Furthermore, UEAPME would welcome an initiative aimed at resolving tax differences between the Member States and encouraging a favourable fiscal and legal framework, in order to promote worker mobility, and trans-national financial participation schemes.

Voluntary participation

UEAPME welcomes the Commission’s explicit recognition of the principle of the voluntary nature of schemes, and emphasises that this principle applies both from the point of view of employers and of employees. Employers should be free to decide whether the introduction of a financial participation scheme is appropriate and beneficial in accordance with the particular circumstance of their enterprise, which itself will be conditioned by a number of factors including those of size, sector, its legal status and country in which it is based. And if decide to introduce, what form this should take. Should be a matter left up to the individual employer.

Extending the benefits of financial participation to the whole workforce

UEAPME has no objection in principle to the concept of extending the benefits of financial participation to the whole workforce. However, the decision to do so should rest with the employer, and it should be possible to use financial participation schemes as a means to reward individual employees for exceptional performance. Furthermore, UEAPME points out the need for careful consideration of how this should be done in the case of interim workers, owing to the potential complexities which might arise from the triangular relationship between the interim work agency, the user enterprise and the worker.

Predefined formula

UEAPME has no objection to establishing predefined formulas, but recommends that this should be done at enterprise-level only.

Regularity

The principle of regularity stated in the Commission’s document requires clarification. The assertion that “if financial schemes are to be truly effective, they should be applied on a regular basis to ensure a certain continuity”, needs to be qualified in order to make it clear that profit-sharing schemes only come to fruition when there is a profit to share, and that in a year where no profit is made and there is consequently no payment to the employees, this should not count as an interruption of the regularity of the scheme.

Avoiding unreasonable risk for employees

UEAPME has no objection to finding a way to organise the general pre-information of employees over the risks of financial participation.

SITUATION OF SMEs

UEAPME would like to draw attention to the relative absence of an SME perspective in the document, and their particular needs and interests with regard to the question of financial participation.

Costs

Craft enterprises and SMEs usuallyhave a tight capital base. Their limited financial means together with the high costs of employment in many Member States, mean that they lack the extra resources and flexibility needed to establish financial participation schemes. The costs involved in the initial design, implementation and ongoing administration of schemes, which can be considerable. For so-called “closely held” firms (term used by the Dublin Foundation), there is the additional expense arising from the requirement of an annual appraisal of the company’s value by an independent assessor. According to research carried out by the Dublin foundation in 1999, generally speaking, unless a company is medium-sized or larger, the costs of arising will probably outweigh any tax advantages, although in some countries these costs are tax deductible. The Commission’s suggestion therefore that the absence of financial participation schemes in SMEs can be put down to a “cultural deficit” in some Member States, “above all among SME managers in more traditional industries who would have much to gain if they were more aware of the facts”, is an oversimplification of the situation, which ignores the greater influence of the significant financial constraints of SMEs.

In addition, the avoidance of extra bureaucratic and financial burdens is obviously a major consideration for SMEs, and is supported in the Treaty on European Union (Art 137.2 TEU). Employment relations in SMEs are characterised by their informality, and where these may include a form of financial participation the prospect of the red tape which necessarily accompanies any “formal” process, may be a strong disincentive to transforming predominantly “informal” arrangements into formalised structures.

Types of scheme

The European Commission’s paper classifies the different types of financial participation schemes under three headings: profit sharing, share ownership and share options. These three types have differing levels of relevance and applicability where SMEs are concerned depending upon the size, the sector, and the country where the SME is based. Profit sharing is perhaps the most realistic form of financial participation, although the definition of what constitutes “profit” particularly for micro-business partnerships and small traders may be open to negotiation with the national/federal tax authorities.

Legal status

The legal status of an organisation/enterprise is another important factor which influences whether or not an enterprise makes provision for the financial participation of its employees. For most micro-enterprises, employee share ownership and share options are not an appropriate recommendation, since partnerships and sole trades rarely have equity shares, and therefore employee financial participation in this sense is not an option.

Thus models of share options and profit sharing cannot be exported per se to small businesses, and craft enterprises. Furthermore, as the Commission demonstrates in its document, the balance between the prevalence of different models differs according to the country and the way in which business is organised. It is therefore important that no single scheme is favoured over another, and that the choice is left open to be decided in accordance with conditions, enterprise structure etc.

3. What measures, at Community level should the Commission include in its communication and more particularly, in its action plan?

UEAPME recommends that the following for inclusion in the Commission’s action plan for the promotion of financial participation schemes in enterprises across the E.U.:

• Further research into the different models and possibilities, and adaptability to SMEs
• Providing more practical information for enterprises
• Exchange of good practices and benchmarking
• Awareness-raising measures and advice
• Aligning tax systems across the European Union and promotion of EU-wide tax regimes
• Ensure that small and medium enterprises are not put under pressure and over-burdened through the provisions and measures recommended in the action programme of the Commission
• Recommendation of supportive government initiatives – it is a telling fact that the countries with the most widespread establishment of financial participation schemes, France and the UK, have benefited from supportive legislation and initiatives from their governments who have been active in encouraging financial participation schemes for example, through fiscal advantages.

4. Are the obstacles identified the most important ones and are there others?

UEAPME agrees that the obstacles identified by the Commission in its working document are indeed the most important ones. UEAPME agrees with the Commission that transnational obstacles to the promotion of financial participation and to worker mobility persist, particularly as regards differences in taxation and tax incentives, and the lack of legal clarity concerning the payment of compulsory social security contributions on income from financial participation. UEAPME therefore welcomes the publication of the Commission’s study on company taxation, and review of the trans-national problems connected with taxing share options, and share purchase, referred to in the document, and recognises that there would be some added value in a European initiative, in order to overcome some of the transnational obstacles to financial participation.

5. Should other strands be added to the three main strands identified in the Commission’s consultation paper? If so, what strands?

UEAPME considers that the three strands identified in the Commission’s consultation paper offer sufficient scope for a comprehensive consideration of all the issues raised by the question of financial participation. However, UEAPME reiterates, once again, the importance of recognising the specificity of SMEs in each of these strands, making particular mention of the SME perspective in the general principles, and taking account of SMEs in the measures proposed at Community level and in the forthcoming action plan.

Brussels, October 25, 2001

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