Government's Plan To Introduce Owner-Employee Contracts Concerns Employment Expert

Unpopular Proposals Branded As ‘Bizarre’ And ‘Unnecessary’

24.04.2013

By David Shirt

The Head of the Employment & Pensions Group at national law firm, Irwin Mitchell, has again raised his concerns about the Government’s ongoing drive to introduce terms into employment contracts which see employees give up rights in exchange for shares in their company.

The proposals, which were unveiled at the Conservative Party conference in October 2012, were debated in the House of Lords on 22 April 2013 and rejected by 69 votes – an even larger number than when they were previously rejected by the Lords in March.

Since then, the Government has proposed a set of amendments based on employers providing further information about the shares in terms of value and whether any voting rights or dividends are attached to them.  The latest concession by the Government would allow affected employees to receive free legal advice on the issue.

Commenting on the amendments by the Government and this latest rejection by the House of Lords, Tom Flanagan, Partner and Head of Employment law at Irwin Mitchell said: “The proposal for owner-employee contracts is almost universally unpopular and it seems bizarre that the Government is intent on getting this new law through. We welcome some of the recent amendment, but they merely scratch the surface and don’t address many of the key issues and concerns that have been raised.

“The most recent concession relating to free legal advice looks like it will have little impact. Employers, especially smaller ones, are unlikely to want to pay for this, if indeed the burden falls on them.  I’d also expect that the majority of independent legal advice would recommend against it.

“I have always queried this proposal and questioned whether it is really about encouraging productivity and rewarding effort or, instead, part of a drive to make the removal of employment rights more palatable. With the Government continuing to try to push this legislation through, my fear is that this proposal is indeed ideologically driven.

"We certainly adopt the Law Society's position on this, that statutory employment rights are not commodities. It is the universality of their status which helps to create a positive business environment."

The owner-employee contract proposal is contained within the draft Growth and Infrastructure Bill and its aim is to allow businesses to award shares worth between £2,000 and £50,000 to their staff. In return, the employee would give up certain rights, including unfair dismissal, redundancy, training rights and also the right to ask for flexible working. 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 if the Bill becomes law. 

Explaining why he believes the laws will not be popular, Tom said: “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. 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 also 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 would not be too unusual if there were a monetary price to pay for shares, perhaps as part of a benefits “menu”, but the idea that an apparent benefit should be paid for by giving up valuable statutory employment rights is very strange, hence my concerns about the real drivers behind this proposed legislation.” 

Tom added: “There are also several reasons why employers may not be quick to adopt this new type of contract. Small businesses may be reluctant to give shares away, particularly if they are family or owner-manager businesses. There is no effective open market value for shares in ‘closed’ companies. 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.

“Evidence during the Government’s 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 has now been 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. This is another reason why this initiative is probably unnecessary.

"This provision is now in what is referred to as the 'ping pong' process - going backwards and forwards between the Commons and Lords. This can't last forever. Because of the need to get this Bill into the Queen's Speech in May, it will be timed out by Thursday or Friday of this week. Whatever concessions are now being made by the Commons, the basic premise remains and it is that with which the Lords take issue. There may well be a sufficient inbuilt opposition in the Lords to create the rare embarrassment of a genuinely high profile piece of legislation not being passed - perhaps a lesson in not trying to hurry through ill-thought out legislation without preparing the ground?"

Read more about Irwin Mitchell's expertise in relation to Employment Law work.