Employment Update: Consultation on new employer owner status

The Chancellor of the Exchequer, George Osborne, recently announced controversial plans to create a new legal status of ‘employee owner'. Employee owners will receive shares in their employer's company worth between £2,000 and £50,000 (exempt from capital gains tax) in exchange for giving up unfair dismissal rights, statutory redundancy pay, the statutory right to request training and the statutory right to request flexible working. They will also be required to provide 16, rather than eight, weeks' notice to their employer of an intention to return early from maternity or adoption leave.

Osborne's unexpected proposals have attracted some critical attention. The unions have argued that the plans represent another attack on workers and will not create jobs or growth. CIPD have commented that employees have little to gain by substituting their fundamental rights for uncertain financial gain and employers have little to gain by creating a two tier labour market. The British Chamber of Commerce, however, has described it as an innovative and imaginative proposal that deserves to be tried out, but one that is unlikely to be a game-changer.

The Department for Business, Innovation and Skills has now published consultation documentation providing further detail about the Government's plans. It acknowledges that the UK has one of the most lightly regulated labour markets in the developed world. However, the Government's main aim, which runs through many of the recent employment law reforms, is to improve the flexibility of the labour market. It also wants to remove the perceived barriers around the fear of being taken to tribunal, which it believes is deterring businesses from hiring. The key areas subject to consultation are as follows:

Employment status – the proposed employee owner status is intended to be distinct from existing types of employment status, including being an employee or worker. Employee owner status has two defining characteristics: an equity share and reduced employment rights, as outlined above.

Employers – companies of any size will be able to use this new status but it is principally intended for fast-growing companies that want to benefit from the flexible arrangement.

Shares - the Government intends that all types of shares will be eligible for use. These shares may carry rights to dividends, voting rights or rights to a share in the company's assets if it is wound up. The Government expects that this will take effect as part of a contractual arrangement between the employer and employee owner. Employers would choose to apply restrictions on the shares they issue and would be allowed to include a clause in contracts requiring the employee to surrender the shares when the employee leaves, is dismissed or is made redundant. However, the Government notes that, to protect employees, it will require that if shares are surrendered, the employer would have to buy back the employee's shares at a reasonable value.

Valuing shares – for the purposes of the limits on the shares that can be awarded, shares will be valued according to their unrestricted market value at the time that they are awarded (i.e. the price that the shares might reasonably expect to fetch on the open market, disregarding any restrictions). The Government acknowledges that, depending on the design of the forfeiture and buy back requirements, and any tax requirements, a further valuation of the shares may be needed.

Guidance – the Government is seeking views on the appropriate level of information and guidance that individuals might need to ensure that they understand how employee owner status will affect their particular circumstances before they accept or reject an offer.

Unfair dismissal – employee owners will still be entitled to claim unfair dismissal where the reason for dismissal is automatically unfair (e.g. an employee owner could not be dismissed for whistleblowing or taking maternity leave). Anti-discrimination legislation is also unaffected by these proposals.

Redundancy pay – under the new proposals, an employee owner would not be entitled to a statutory redundancy payment.

Flexible working - employee owners will only have the right to request flexible working when they return from parental leave and it is proposed that the request will need to be made within four weeks of return.

Training – employee owners will not have the statutory right to request training that is available to employees in businesses with 250 or more employees.

Maternity/adoption leave – employee owners will be required to give 16 weeks' notice of their intention to return early from maternity or adoption leave, instead of the current eight weeks' notice. If an employee owner does not give the full 16 weeks' notice, their return can be delayed under the 16 weeks' notice period has elapsed.

The contrasting and varied reactions to date make it difficult to predict how many employers will choose to offer this new employee owner status. The supposed benefit of reduced employment rights may simply be outweighed by the practical and legal implications of considering how many, and what types of, shares to offer employee owners, arranging share valuations and structuring buybacks.

The consultation closes in just three weeks, on 8 November 2012. Legislation to bring in the new employee owner contact will be introduced via the Growth and Infrastructure Bill, with the aim of employers being able to offer the new type of contract from April 2013.