Trading rights for shares – the latest big idea

So the latest Government proposal on employment law is to create a brand-new employment status of  ‘owner-employee’ – someone who has fewer employment rights than other employees but who has been given a bunch of shares to make up for it. As @HRBullets helpfully points out, the reaction to the proposal has been mixed at best – even from the employer lobby. But who knows? This might be the next big thing. let’s at least take a look at what is being proposed.

Here is what the Chancellor said in his speech. For the sake of space I’ve put it all into one paragraph, instead of the 12 paragraphs set out in the text:

So today we set out proposals for a radical change to employment law. I want to thank Adrian Beecroft for the work he has done in this area. This idea is particularly suited to new businesses starting up; and small and medium sized firms. It’s a voluntary three way deal. You the company: give your employees shares in the business. You the employee: replace your old rights of unfair dismissal and redundancy with new rights of ownership. And what will the Government do? We’ll charge no capital gains tax at all on the profit you make on your shares. Zero percent capital gains tax for these new employee-owners. Get shares and become owners of the company you work for. Owners, workers, and the taxman, all in it together. Workers of the world unite.

Leaving aside the truly dreadful prose style, this is obviously a rather sketchy outline of the proposal. There is more detail in the BIS / HM Treasury press release which rather alters what the Chancellor is saying. 

• Osborne says the scheme will be best suited to small and medium sized companies, but the press release makes it clear it  will apply to companies of any size.
• Osborne says it is a voluntary three way deal, but the press release makes it clear that employers can insist on new hires accepting the arrangement.
• Osborne does not mention that the CGT exemption will only apply to between £2,000 and £50,000 worth of shares

And what ‘rights of ownership’ will the employee gain in return for giving up unfair dismissal and redundancy rights? If this scheme comes into operation the vast majority of employees will receive a financial benefit. Its not as though they’ll be able to control the pay of the Chief Executive or anything.

Oh and it isn’t just unfair dismissal and redundancy rights they’ll lose. Also sacrificed will be   their right to request flexible working or make a training request (Nooooo! Anything but my right to make a training request – have some pity!!). 

Finally, ‘owner-employees’ on maternity leave will have to give ’16 weeks’ notice of a firm date of return from maternity leave, instead of the usual 8′ (ANORAK NOTE: actually women on maternity leave only have to give 8 weeks’ notice if they are returning early; if they are returning at the end of their maternity leave they don’t need to give any notice at all actually.).  

The big question is: is this ‘a thing’ or not? Is this a genuine shift in how employment law works or is it just one of those meaningless Conference announcements that dies a slow death in consultation or ends up withering away on the statute book with no-one paying it any attention?

The suspicion is that even though you can dress this proposal up as a benefit for employees – sorry ‘owner-employees’ – the reality is that it allows employers to buy out an employee’s rights at a bargain basement price. Suppose I want to recruit an employee without the risk of incurring unfair dismissal liability further down the line. I issue the new employee with £2,000 worth of ‘shares’ in the business. As a  result he becomes an ‘owner-employee’ and four years later I sack him without good reason and buy back his shares for £2,000. A price well worth paying, I might think, to avoid the need for an expensive compromise agreement. 

Could that happen? Well, it depends. It depends on how the scheme is written and what safeguards it contains. In particular it depends on how the future value of shares issued to the employee is calculated and what provisions exist dealing with when and how the employee can cash the benefit in.

If there are no proper safeguards then this will certainly amount to ‘compensated no fault dismissal’ by the back door as the New Statesman warns. If proper safeguards are in place, then this will be a highly complex but limited tax break of interest to just a small number of employers and employees and we can safely ignore it.

The press release includes the following in its ‘Notes to Editors’ section:

2. The Government consultation on the owner-employee contract will include the details of restrictions on forfeiture provisions to ensure that if an owner-employee 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.

This is the absolute crux of the proposed scheme – and as yet we have no details of it whatsoever. We will just have to wait and see what the consultation says – apparently it is due out this month. 

So I don’t know whether this will turn into a ‘thing’ or not. But one thing I do know with absolute and piercing certainty: these contracts will not be ready for use by April 2013 as the press release claims. No way. Absolutely not. The only way that could happen is if the Government hurriedly inserted something into the later stages of the Enterprise And Regulatory Reform Bill, allowing no time for full consultation, careful drafting or proper Parliamentary scrutiny. That would produce a badly drafted law full of loopholes, not properly integrated with other employment rights (TUPE will be fun), and resulting in years of wrangling in the courts and tribunals. There is just no way a Government would let that happen just to make it look as if they were…

Oh.