Consultation on proposals for a new "owner-employee" status contract

31st October 2012 The Government has announced plans to introduce a new type of "owner-employee" contract. The proposal is that this may be optional for existing employees, but that any new employee that wishes to have this type of contract would be required to waive various employment law rights in return for owning shares in their employer's business. 

The proposal is that the employee would effectively waive various employment law rights, such as protection from unfair dismissal, and rights to any future redundancy payment, and the right to request flexible working arrangements in return for a shareholding worth between £2,000 and £5,000, which will in turn be exempt from any future capital gains tax liability. Under the proposals existing companies and new companies will be able to choose to require new employees to enter into this new form of legal arrangement. However those companies will be able to insert more generous employment conditions into the contract of employment if they wish. The Government want to introduce legislation to enable this new type of contract to be available from April 2013.

This proposal comes amongst a number of proposed and actual changes to employment law that the Government claims should make the UK labour market more flexible, and to give business greater choice over the types of contracts that can be offered to workers.In the consultation paper issued on this subject the employer would be allowed to include a clause in their contracts that require the employee to surrender the shares when the employee leaves their employment, is dismissed or is made redundant. At that point the employer would be required to buy back the employee's shares at their "unrestricted market value". The consultation paper goes on to say (rather optimistically in our view) that the Government "is keen to ensure that this new employment status does not impose any valuation requirements beyond those that already exist when valuing companies for other tax purposes."

In our experience a major area of dispute ( together with cost and time and frustration) is the difficulty faced in valuing a shareholding owned by an employee that is leaving (or has just left) the employer. Frequently this process involves reports from accountants and independent valuations of the company and shareholding. The Government has not stated that any dispute over this would be referred to the Employment Tribunals, so in the absence of that it would appear that such disputes would be litigated through the County or High Court (with the costs risks that are associated with those courts).

It looks to us like this is an attempt by the Government to reintroduce the concept of "no fault dismissals" through a different route. We take the view that employee ownership, in terms of staff owning shares is a positive move, giving the employees a stake in the success of the business, and an added incentive to make the business succeed. However, it is a different thing to effectively require those employees to waive important legal protections in return for the shareholding. We also think it is important for any business to ask itself the question of whether the new type of contract provides greater benefits or greater problems to the business. After all, the benefit of protection against claims of unfair dismissal can be easily and quickly lost in protracted arguments and litigation over the valuation of shares. In addition, not all businesses will want to give their employees rights that come with owning shares, in terms of the effect on decisions made about the company. The Government has already raised the qualifying period of employment from 1 year to 2 years before an employee is protected against unfair dismissal, so the question arises why would a company want to introduce complications over shares and potential arguments on the valuation of a shareholding from day one of employment, when the main legal right being signed away in return would not (with some exceptions) be relevant until the employee has been employed for 2 years.

Consultation closes on the 8th November 2012.

If you need advice on any of the issues raised in this article do not hesitate to contact us at Hallett Employment Law Services Ltd.