Owner-Employee Contracts Are Unnecessary

The Government’s new proposal to introduce contracts which see employees give up rights in exchange for shares in their company is an unnecessary move that is also likely to prove unpopular with businesses or workers.

George Osborne unveiled plans for the introduction of ‘owner-employee’ contracts at the Conservative Party conference in October, stating that staff would forgo rights on issues such as unfair dismissal, redundancy and flexible working to receive at least £2,000 of shares in their employer. Any profit made on the shares would be exempt from capital gains tax (CGT) up to a £50k threshold.

Despite the initial scepticism about this concept, the Government is pressing ahead, legislation is before Parliament (via The Growth and Infrastructure Bill) and the Government has recently published a response to its consultation which has provided some additional information about how this scheme will work.

These type of contracts would be optional for existing employees but businesses will be able to choose to offer only this type of contract to new recruits once the Bill becomes law – which may be as early as April next year.

However, I query whether the proposals will prove to be as effective and innovative as has been claimed. This is because the principle of boosting employee participation and commitment in line with the success of a business is a good idea, but there are numerous reasons why this version of that concept is unlikely to find favour with either employers or employees.

From an employee perspective, the economic climate means shares are not performing well at present. The Office for Budget Responsibility has expressed the view recently that austerity measures may be necessary up until 2018. The percentage of a business allocated to employees through share schemes is traditionally low and so the CGT gain is unlikely to be significant for many. It is likely that employees would look at current trends and see little potential benefit for them if they chose to give up rights.

The reference to “owner-employee status” is misleading, as the status does not change at all; the employees will still be employees and this concept is essentially a repackaging of employee share ownership schemes, which is not a new idea. It is the provision of a financial benefit. The Government appears to have recognised this and has re-labelled the scheme “employee shareholders”. Put simply, this is a good idea for good times – but these are not good times.

There are also several reasons why employers may not be quick to adopt this new type of contract.

  1. Small businesses may be reluctant to give shares away, particularly if they are family or owner-manager businesses. Also, there is no effective open market value for shares in “closed” companies.

  2. Also, what types of shares will be on offer? Businesses will not necessarily want to give voting rights. Will there be good leaver/bad leaver provisions on disposal of shares when employees leave?

If this creates a combination of complicated shareholder arrangements and tax provisions, smaller businesses – the prime targets for this initiative – are unlikely to want to become involved because of an ironic increase in red tape and cost.

One can understand how taking a shareholding could be balanced by a reduction in other financial benefits but it is rather bizarre to have the “price” for this particular benefit to be relinquishing statutory employment rights. This idea smacks to me not of helping to encourage employee engagement and productivity but more of making the removal of employee rights more palatable.

Evidence during the government’s recent consultation into dismissal said that the UK had some of the most flexible employment laws in Europe already in place and that dismissing staff is not as difficult as it is sometimes made out to be.

In addition, the law recently changed to increase the qualification period for unfair dismissal claims to two years. That is surely enough time for employers to assess their employees without the risk of an unfair dismissal claim. Therefore, this initiative is probably unnecessary.

Besides, under existing UK law, an employee can not contract out of some of the rights which it is intended to relinquish, without a compromise agreement (to be renamed a “settlement agreement”) which needs to be linked to an existing employment dispute and involve advice from an independent advisor. It will take primary legislation to effect the necessary changes to this situation and there will be other consequential impacts of such changes.

Tom Flanagan