Employee owners: fair shares or half truths?

Partner and employment law specialist Paul Statham casts a sceptical eye over government proposals encouraging employees to ‘sell’ long-held employment rights for potentially worthless shares…

The internet has been buzzing for the last 2 weeks following Chancellor George Osborne’s announcement at the Conservative Party conference that, from next April, employees can give up certain employment rights in return for shares.

The Government has now issued a consultation document and published the Growth and Infrastructure Bill, including clause 23 that seeks to implement the proposal. The consultation period is extremely short, being from the 18^th October to the 8^th November rather than the normal 13 weeks.

Under the new employee owner contracts, employees will be given between £2,000 and £50,000 worth of shares that are exempt from capital gains tax. In exchange they’ll lose their right to claim not just unfair dismissal but redundancy pay too, the right to request flexible working or time off for training, and they’ll be required to provide 16 weeks’ notice of their date of return from maternity leave instead of the usual eight.

George Osborne’s speech indicated that employee owner status will be optional.  That was only half true, as the press statement revealed. Existing employees will have a choice whether to opt for the new status. But employers will be able to choose to require new employees to enter into this type of contract.

Of course there’s nothing to stop an employer dismissing all the workforce and offering them new employee owner contracts during the notice period in the same way that they currently change terms and conditions to the detriment of employees, and defend unfair dismissal claims on the basis of some other substantial reason justifying dismissal. It will be interesting to see if employment tribunals as readily accept employers’ arguments that they had ‘sound business reasons’ for making the change as they do in cases involving changing terms and conditions to the employees’ detriment.

Although the government states that the new contract is ‘principally’ intended for fast-growing small and medium sized companies, the press statement and consultation document reveal that companies of any size will be able to make use of the scheme. Before the consultation document was published, it would be fair to say that employee owners got a mixed reaction from employers[1] and, having now read it, I don’t see that changing.

Employers will have substantial flexibility in deciding what rights the shares will have – for example voting rights or the right to receive dividends (and, by implication, none of these). Shares will be valued according to their ‘unrestricted market value’, which is the price they might reasonably be expected to fetch on the open market disregarding any restrictions. The government proposal will not impose any valuation requirements beyond those that already exist when valuing companies for other tax purposes.

Employee owners could be required to surrender their shares if they resign or are dismissed. Surrendered shares would have to be bought back at a ‘reasonable value’, but the consultation document gives little guidance on how that will be determined. Without guidance, there will be lots of litigation as to the value of surrendered shares. And there’s no guarantee that employees will even get the £2000 back, because most start-up companies fail, at which point shares would be worthless. In any event, £2000 is only 4 weeks’ pay at median earnings – not a large sum in return for giving up so many employment rights.

The consultation document also makes clear that shares will be subject to the usual income tax and national insurance contributions when acquired, making their capital gains tax exemption far less attractive than when George Osborne first mentioned it.

Mainly because some rights are guaranteed by EU law, the consultation paper makes clear that automatically unfair reasons for dismissal will still apply to employee owners, as will claims for discrimination under the Equality Act. So an employee owner who alleges dismissal was for ‘whistle-blowing’ or because of race will still be able to bring a claim for unfair dismissal or unlawful direct discrimination. That, too, might make the scheme less attractive to employers.

It is quite possible that employees otherwise denied rights on dismissal will look to bringing automatic unfair dismissal or discrimination claims, as it would be their only opportunity to get recompense.

Employee owners will have their right to request flexible working limited to when they return from unpaid parental leave, and within 4 weeks of that return. This will clearly have a disproportionate affect on women workers on maternity leave who frequently exercise the right to request flexible working at the end of their leave.  They will also have to give 16 weeks’ notice of return instead of 8 if they propose returning before the end of their maternity leave. How many nurseries or child carers are prepared to commit at least 16 weeks in advance?

The government consultation seeks views on the level of advice and guidance individuals should be given to be fully aware of the implications of taking on employee-owner status. But, with the tone of the consultation paper being in favour of reducing the burdens on business, it’s not anticipated that guidance will be extensive or involve independent legal advice as occurs with ‘compromise’ agreements.

My main concern is that the proposal may be used to pressure vulnerable workers into signing away their employment rights. I can well imagine some job sectors where employee owners will become the norm through competition driving terms and conditions to the lowest common denominator. Sham shell companies will be set up granting worthless shares, and unemployed workers will be offered £2000 of ‘shares’ on a ‘take it or leave it’ basis. The value of shares can be kept artificially low by having separate companies, one for the employee owners and the other for the true owners. The company value can be reduced by the owners paying themselves inflated salaries. The employees will be told they have signed away all their employment rights and not just those specified in the scheme… and it’s unlikely that they’ll question this. Paid holiday, other working time rights and minimum wage law will not be applied, and they will know no better. Unless they are union members, they’ll not be able to afford advice (or the fees they’ll be charged from next year in employment tribunals) in order to bring claims. Disputes over the value of shares will have to be litigated in the High or County Court, with the same problems of cost and access to justice.

In time, this model becomes the norm across other areas of employment. George Osborne said in his speech ‘western democracies like ours are being out-worked, out-competed and out-smarted by new economies’. But is the way to compete really by reducing rights at work to the level of those in new economies?

There may, however, be an alternative reason for the proposal. Some commentators have suggested that it may be possible for entrepreneurs to set themselves up as employee owners, grant themselves £50,000 of shares, and pay very little tax in the process. Is this, I wonder, an intended (rather than unintended) consequence of the proposal?