The Government’s Proposals for “Employee–Owner” Contracts

At the Conservative Party Conference in Birmingham on the 8th October 2012 the Chancellor George Osborne MP announced plans for a new kind of employment contract, called an “employee–owner”.

The idea is that new employee owners will exchange some of their employment rights, for rights of ownership in the form of shares in the business they work for, any gain on which, will be exempt from CGT.

According to the Treasury Press Release at the time:-


“Companies of any size will be able to use this new kind of contract, but it is principally intended for fast growing, small and medium sized companies that want to create a flexible workforce”.

 

This description fairly reflects a large proportion of Peninsula’s 26,000 clients, many of whom may be interested in considering whether to opt for this new type of employment contract, and this article is therefore aimed at shedding some light on yet another layer of the Government’s employment law reform agenda.

The Government seemingly have a jaundiced view of employment law, and believe that excessive employment rights for employees are stifling Britain’s economic recovery. Hence, for example, the extension of the right to be able to claim unfair dismissal, from one to two years, as from April 2012.

From that perspective, the thinking behind this scheme appears sound. Under this new type of employment contract, employees will be given between £2,000 and £50,000 of shares that will be exempt from CGT. There is the incentive/reward for the employee.

And in exchange, they will give up certain employment law rights on unfair dismissal, redundancy payment and the right to request flexible working time, and time off for training. There is the incentive/reward for the employer.

Seemingly convinced of the merits of this new scheme, the Treasury Press Release confirms that legislation to bring in these new employee-owner contracts will come later this year, so that businesses can use this new type of contract from April 2013.

According to a Treasury Spokesman:-

“Within a few years hundreds of thousands of workers could be engaged in new employee–owner contracts, giving bosses more flexibility”.

One commentator recently described these proposals as eye catching – “in rather the same way as a motorway pile up”. That is certainly true from an employer’s perspective and let me explain why.

1. The scheme will not deter employee-owners from bringing other types of Employment Tribunal claims under the Equality Act for discrimination, which remain unaffected.

2. The legislation needed is likely to be very complex, and will add to the burden of red tape and regulation for employers with employee–owners, not reduce it.

3. Existing businesses who decide to take advantage of this scheme will create a two tier workforce that is likely to lead to disquiet, resentment, and possible claims, as business owners seek to distinguish without discriminating.

4. The inevitable consequence of this scheme is that businesses who embrace employee–owners will then need to ensure that they are equipped, and have adequate procedures in place, to deal with the administrative, practical and legal implications of having a substantial number of minority shareholders, all of whom will enjoy associated rights as shareholders.

But the real problem with this scheme emerges when one looks at what will happen in the event that a business decides to dismiss an employee–owner. Whilst they will not be able to bring a claim for unfair dismissal, what will happen to their shareholding, as no business will want a former employee to retain shares in their company after they have been dismissed? Particularly if those shares carry voting rights.

A footnote to the Treasury’s Press Release said this:-

“The Government consultation on the employee-owner contract will include the details of restrictions on forfeiture provisions to ensure that if an employee–owner leaves or is dismissed, the company is not able simply to take the shares back but is able to buy them back at a reasonable price”.

Although often onerous and burdensome, at least when a business is seeking to deal with an employee, there is a structured and recognised procedure in place which provides for the termination of their employment, and an employer can chose whether to follow it.

Equally, there are established procedures that can be invoked for the removal of a Director from a company.

However, there are no such procedures for the removal of a shareholder, and herein lies the schemes biggest, and potentially insurmountable, Achilles heel.

If an employee–owner is dismissed, and they are not willing to dispose of their shareholding, then unless the new scheme provides for a mechanism whereby such shareholdings can be acquired, the majority of employers are simply not going to entertain the idea.

Peninsula is very often involved in assisting its clients in the drawing up of Compromise Agreements particularly for Senior Executives and Directors who may very well be shareholders. Invariably the most troubling and problematic aspect of securing agreement concerns, not their status as an employee or office holder, but their position as a shareholder.

A number of questions therefore inevitably arise:-

1. Will the employee–owner be obliged to sell their shares on dismissal?

2. If so, how will that obligation be framed?

3. And if not, in what circumstances will a former employee–owner be entitled to keep their shares, and for how long?

4. If the shares are to be sold, will that be to the company or to other shareholders?

5. And how are shares to be valued? By an independent expert? And if so, who will pay for it?

6. And what if the parties cannot agree upon a share valuation? What happens then?

The devil will clearly be in the detail, and the Government’s Consultation Paper is presently awaited. Whether that will address some of the issues raised in this article remains to be seen.

But on the basis of what has been announced so far, employers would be well advised to proceed with great caution, so as to avoid getting caught up in what looks very much like a motorway pile up.

For any further clarification, please call our 24 Hour Advice Service on 0844 892 2772.