Dangers lurk in new contracts

How George Osborne’s employee-owner contracts could reduce workers’ engagement with businesses

Robert Davies

Chancellor George Osborne last week unveiled proposals to increase employee share ownership by enabling employers to offer a new kind of employment contract called an employee-owner.

Under the proposals employees could be awarded £2,000 to £50,000 of shares that will not be subject to capital gains tax. The ‘price’ for the employee-owner is the forfeiture of a number of rights. These include the ability to bring an unfair dismissal claim, the right to receive a statutory redundancy payment, the right to request flexible working and time off for training, and a doubling of the notification period for the right to return from maternity leave.

We will not know the full story until the details are available but potential employee-owners may be expected to assess issues such as: how liquid will these shares prove to be; what restrictions may be applied to their sale; and will there be instances when the company can insist on forfeiture through bad-leaver arrangements?

Furthermore, although the chancellor described such an approach as a “voluntary three-way deal” between company, employee and government, the accompanying Department for Business, Innovation and Skills press release stated that employers will have the option of making all new offers of employment conditional upon accepting employee-owner status.

One of the main benefits that can stem from employee share ownership is enhanced engagement. We would question whether removing employment rights – especially through a ‘take it or leave it’ form of recruitment – could be seen to dissipate such engagement through a sense of reduced job security and a lack of practical influence.

The Government’s approach to wider employment law reform can be portrayed as containing more than a hint that employment rights – or perhaps more accurately the misuse by employees of certain rights – create unwarranted burdens on business that prevent or dissuade employers from hiring staff and reduce competitiveness. As lawyers advising employers we appreciate that aspects of the unfair dismissal regime can create burdens, but the suggestion that unfair dismissal protection is an inevitable barrier to recruitment seems to lack a firm empirical base, particularly when the qualifying period to claim will increase to two years.

The recently published Nuttall Review of Employee Ownership, which promotes the wider use of employee-ownership, also accepts that a great deal of additional infrastructure is required to make this a user-friendly concept, highlighting a need to reduce the complexity of employee-ownership.

Any company that wants to convert to this business model will require detailed tax, legal and accountancy advice that may ultimately increase rather than decrease administrative red tape and associated costs.

All this begs the question – would it not be more cost-effective and less onerous to use a standard contract of employment and manage employees lawfully?

Val Dougan, a professional support lawyer at Dundas & Wilson, assisted with this article