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31 October 2012

Consultation on ‘employee-owner’ status issued

Following the Government’s recent announcement that it was planning to introduce a new type of employment contract, conferring ‘employee-owner’ status on individuals in exchange for giving up certain employment rights, a formal consultation on the proposals has now been issued. 

As we reported in our recent news briefingthe Government is intending to introduce a new type of employment status known as ‘employee-owner’, whereby an individual is issued with shares in the business worth between £2,000 and £50,000 in exchange for forgoing certain employment rights.

A BIS consultation has now been issued on these proposals, with only a very short timeframe for responses (the consultation closes on 8 November 2012).  The Government has already drafted the necessary legislative measures within the Growth and Infrastructure Bill, which had its second debate in the House of Commons on 30 October 2012.  If enacted, this would introduce a new section under the Employment Rights Act 1996 setting out the provisions governing the employee-owner contract.

The Government has stated its intention for the ‘employee-owner’ provisions to come into force from April 2013.  It therefore seems almost certain that this new form of contract will take effect, although there remain a number of unanswered questions about how the proposals will work in practice. 

The consultation itself provides very little extra detail on the proposals.  In particular, it does not set out how the employee’s shares will be valued on the termination of an individual’s employment, when the employer will have to buy back the shares.  The consultation likewise does not set out any mechanism for resolving disputes about the value of the shares on termination, which could prove to be an area of costly litigation for both parties.  The Government has issued a separate consultation relating to the recommendations of the Nuttal Review, aimed at simplifying the existing process for buying back shares from employees under employee share schemes.

The consultation confirms that ‘employee-owners’ will not be entitled to a redundancy payment or to bring a claim for unfair dismissal, unless the dismissal is for an automatically unfair reason or is discriminatory.  However, the consultation makes no mention of what will happen in the event of a TUPE transfer, when the employee-owner’s employment transfers to a new employer.

It seems unlikely that the new ‘employee-owner’ status will prove attractive to many businesses or individuals, and it is aimed principally at new and fast-growing companies.  Such contracts can only be entered into with the agreement of both parties, meaning that it cannot be imposed on either existing or potential employees (although in practice, a new recruit will probably have little choice).  In addition, the employer would need to put in place a qualifying employee share scheme, which would require specialist advice and careful drafting, before offering these new types of contract.

A copy of the consultation is available here