The Government's latest consultation paper has now provided more detail on the Chancellor's proposal announced earlier this month for a new type of employment status – the "employee-owner".
The concept is simple: employees will give up certain employment protection rights in return for part ownership in their employer's business in the form of shares valued between £2,000 and £50,000. Although the Government will consult separately on tax, it is understood that the shares will be exempt from capital gains tax on a disposal of the shares but subject to income tax and national insurance contributions when the shares are acquired.
The employee-owner will have to give up the right to unfair dismissal (except where the dismissal would be automatically unfair, such as for whistleblowing or in connection with a TUPE transfer).
The employee-owner would also have only limited rights to request flexible working and, if an employee of a larger company, would lose the right to request training.
There would be no right to statutory redundancy pay on dismissal.
The employee-owner would be required to give 16 weeks notice to return early from maternity or adoption leave, rather than the usual eight.
The consultation paper envisages that the arrangements in relation to the shares would be a contractual matter between the employer and the employee, probably through an employee share scheme. There would be no restriction on the type of shares which can be issued or the rights which apply to them.
A key issue for both parties will be the arrangements on dismissal or resignation. The consultation paper proposes that the employer may choose to include a forfeiture clause requiring the employee to surrender shares at a reasonable value when their employment ends. It is unclear, however, whether there will be a requirement in the legislation for the employer to do that, although this would be an issue which will be explored in the consultation process.
What these proposals mean in practice
The Chancellor has indicated that employee-owner status will be optional for existing employees, but both established companies and new start ups can choose to offer only this type of contract for new hires. Some large companies have already indicated that this new type of arrangement will not work for them and many employers will be deterred by the cost of running an employee share scheme.
A further deterrent for employers will be the cost of share valuations and the requirement to buy back shares – this may inhibit an employer's wish to dismiss unsuitable or unwanted employees, even though they have sacrificed unfair dismissal rights. The Government has said that it will be consulting on the buy back process in the near future so some of the concerns which employers might have may be resolved in that process.
It is possible that some start up and growth companies in certain industry sectors may find the new arrangements attractive, particularly where the company already uses employee share schemes. Although there may be start-up costs, once a share scheme is properly running, an employer may start to experience the benefit of the waiver of rights, particularly when it needs to carry out redundancies.
Whether an employee will wish to accept a particular job with limited rights will depend on the value they attribute to unfair dismissal or redundancy protection. Skilled employees may consider it is worth sacrificing some employment protection in return for shares, particularly if the employer is required to buy back the shares at a reasonable value on dismissal.
The consultation paper is silent on the level of advice or guidance which will be required for employees to understand what rights they are giving up. Currently, an employee who signs away his employment protection rights on termination of employment under a compromise agreement must receive advice from an independent advisor on its terms and effect. No such similar arrangement is proposed here, but many will argue that potential employee-owners should be protected in the same way.
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