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16 October 2012

New proposals for “Employee-Owners”

Our employment team reports on the Government’s new ‘employee-owner’ proposals.

What are the proposals?

At the Conservative Party conference earlier this month, the Chancellor of the Exchequer, George Osborne, announced plans for a new kind of employment contract.

Under the scheme, participating employees will exchange some of their employment rights for part ownership in the form of shares in the business they work for. Those participating will be classed as ‘employee-owners’.

The shares given to the employee must be valued between £2,000 and £50,000 in order to qualify for the scheme and will benefit from capital gains tax exemption on any profits.

Legislation introducing the new employee-owner contract is planned to be implemented later this year with the aim that businesses can utilise these contracts from April 2013.  At the moment, we have very few details of the mechanics of the scheme and what will happen to the shares when an employee-owner leaves or is dismissed.  The Government has stated that it will consult on the finer details of the contract later this month.

Which rights are surrendered?

In exchange for shares, it is proposed that employee-owners will surrender their rights:

• to claim unfair dismissal (this will presumably only apply to claims for ‘ordinary’ unfair dismissal rather than automatically unfair dismissal, for example relating to pregnancy or trade union membership);
• to a redundancy payment;
• to request flexible working; and
• to request time off for training.

The Government has also indicated that employee-owners will be required to provide 16 weeks’ notice (rather than the usual 8 weeks’ notice) upon returning from maternity leave.  It should be noted, however, that the requirement to give notice to return from maternity leave only applies if the employee wants to return early.

The employee’s perspective

The Chartered Institute of Personnel and Development (CIPD) has urged the Government to abandon its proposals, insisting that the scheme is an unnecessary “watering down [of] employment rights”. It warns that “employees have little to gain by substituting their fundamental rights for uncertain financial gain” and has expressed concern about job insecurity created by a “two-tier labour market”.

Although the new scheme will be voluntary for existing employees, an employer may make offers of employment conditional upon accepting employee-owner status.  In a competitive market, some may therefore find that they are left with no other option than to accept this type of contract.

The employer’s perspective

The Government claims that the scheme will create the “flexible workforce” required by small businesses.  The CBI has given the proposals a cautious welcome, however, suggesting that it will be a niche idea and not relevant to all businesses.

It may be regarded as more affordable for a business to ‘buy out’ an employee’s rights for £2,000, given that it is not uncommon for compromise agreements and tribunal hearings to cost significantly more than this.  In that sense, the scheme can be viewed as a new form of insurance for employers.  However, the CIPD has queried whether “inviting employees to sign away basic employment rights will deliver the motivated, driven, high performing workforce that small firms need”. Arguably, a dedicated and secure workforce may well provide more fruitful in the long run.

Conclusion

As the old adage goes, the devil will be in the detail. Until the proposal is fleshed out in the full consultation, it is difficult to predict what real impact the scheme will have on the UK employment sector.  Look out for our further report on this proposal once the consultation has been issued.

A copy of the Government’s press release is available here.