Owner-Employee Contracts

21 Jan 2013

Last autumn the Government launched a consultation about proposals permitting employees to give up some of their employment rights in return for shares.  The Chancellor of the Exchequer, George Osborne announced plans to introduce the new 'owner-employee' contract, essentially, a type of employee share scheme.  Whilst it is not an unusual incentive for a company to offer employees a share in the business, some might take a more sceptical view that this could be deemed a more subtle way of introducing rights (or rather fewer rights) in line with the earlier proposed no-fault dismissal.

It is proposed that under the scheme, employees will give up various employment rights, including time off for training, the right to request flexible working, as well as redundancy and unfair dismissal rights, and will be required to provide 16 weeks' notice of their date of return from maternity leave in place of the current 8.  In return for waiving such rights, an 'owner-employee' contract would allow employees to be given between £2,000 and £50,000 of shares in the company they are employed by.

Existing employees will be able to choose whether or not to adopt employee-owner status and companies will be able to choose to offer only 'owner-employee' contracts to new employees from April 2013.

Despite the fact that 92% of responses to the consultation on owner-employee contracts were negative or neutral, the Government intends to push on. Why?

The Government’s view is that:

  • employees will not be coerced into surrendering their rights because the new arrangements will be entirely voluntary.  They may also be restricted to new hires if employers so wish; 
  • claims of discrimination or automatically unfair dismissal will not increase because the contracts will be negotiated freely between the employer and the employee;
  • regulation concerning the operation of employee share ownership is not required.  It is enough for employers to issue paid up shares with a minimum value of £2,000.  Everything else can be left to the contractual arrangements which will be made between the parties.

Our view:

Most employers would be grateful for avoiding much of the tricky minefield of employment rights in return for offering a financial 'incentive' that may, ultimately, be worthless: £2,000 shares today may not amount to £2,000 shares tomorrow.

Prudent employers will surround employee shares with so many conditions in Shareholder Agreements that employees will be invited to swap limited employment protection for worthless pieces of paper.  The promised £50,000 exemption from CGT will help sell schemes but other issues concerning the potential income tax and NIC liabilities remain to be addressed.