Shares v Rights? The Government’s Proposals for Employee-Owner Contracts

29 OCTOBER 2012

At the Conservative Party Conference on 8 October 2012, George Osborne MP announced the Government’s plans to implement ‘employee-owner’ contracts whereby employees of small and medium-sized companies will forgo certain employment rights in exchange for shares in the company.  These new contracts are due to be implemented in April 2013.

So what exactly will these contracts entail?  Essentially, employees will receive between £2,000 and £50,000 worth of shares in the company by which they are employed.  The proposals indicate that these shares will receive full capital gains tax exemption, in a clear attempt to increase the attractiveness of these contracts to employees.

The major question is: what rights will prospective employees have to sacrifice in order to receive the benefit of these shares?  One of the key rights an employee will be expected to surrender is the ability to bring unfair dismissal proceedings, which he/she would ordinarily expect to be able to do following completion of a two-year ‘qualifying period’.  Employee-owners will also not be eligible for statutory redundancy pay and will be unable to make statutory requests for either flexible working or for time off to undertake any education or training.  Protection against dismissal for the making of any such requests will also be severely curtailed, with the exception being a request for flexible working following a return from parental leave.  However, there will be an increase from the usual eight-week notice period for return from maternity leave, doubling the requisite period to sixteen weeks’ notice of a firm return date.

The lack of detail currently provided makes it unclear whether there will be a ‘bartering’ system whereby the higher the value of shares, the more rights employees will relinquish and, if so, how such the system will be regulated to provide some form of consistency between companies.  It appears however that the option will be available for companies to offer more favourable conditions of employment in a contract of this kind should they so wish.

The proposals do cover important provisions of forfeiture, restricting an employer’s ability to simply withdraw shares from an employee-owner who has his/her employment terminated or leaves of his/her own accord.  The company will, however, be able to buy back such shares at a ‘reasonable price’ (a phrase which will no doubt in itself result in much confusion!).

One might ask, what could be wrong with offering an employee acting of his/her own free will the choice to obtain a financial advantage in return for a guarantee that certain rights will not be pursued through legal avenues at a later date?  In its press release on HM Treasury’s website, it has been confirmed that the proposals will be optional only for employees already under contracts of employment with businesses offering these new contracts.  However, there will be the ability for the companies who wish to take advantage of these proposals to make such contracts the only contract of employment available to any future workers.  Given the current economic climate and job market, one might further question whether there would be unreasonable pressure upon someone who has been out of work for some time to accept an employee-owner contract against his/her better judgment should this be the only option on offer.

If the legal framework is to be implemented in time for the contracts to be available for use from April 2013, there will be an exceptionally limited period for many of the concerns raised about these contracts to be addressed.  Some commentators have questioned whether the Government will attempt to ‘shoehorn’ these proposals into the Enterprise Regulatory and Reform Bill currently working its way through Parliament.  Leaving aside the logistics of achieving these proposals, what one can be sure of is that, despite a clear attempt to avoid litigation in respect of such rights in future, much time will inevitably be spent analysing and litigating on the enforcement and interpretation of these contracts in any event.

Cerys Walters