• New “Employee Owner” Status

    The Government has published a consultation on the detail of implementing ‘employee owner’ status. Under the proposals, the Employment Rights Act 1996 will be amended to create a third employment status of ‘employee owner’ in addition to that of employee or a worker. ‘Employee owners’ would receive between GBP2,000 and GBP50,000 worth of shares in return for losing employment rights such as unfair dismissal and redundancy pay. The consultation will close on 8 November 2012.

    In his speech to the Conservative party conference George Osborne stated that the scheme would be ‘a voluntary three way deal’ between the employee, company and Government. A subsequent press release stated that ‘employee owner’ status will be optional for existing employees, but that both established companies and new start-ups can choose to offer only this new type of contract for new hires. Whether employee ownership will be ‘voluntary’ for employees is not mentioned in the consultation which states only that ‘businesses will be able to offer individuals contracts under this new status’. However, BIS has now confirmed to IDS that ‘companies can offer employment on this basis [employee owner] alone to new hires if they choose to. It is then up to the individual to decide whether what is on offer is suitable to them’. In other words, the new contracts will be ‘voluntary’ for employees on a take-it-or-leave-it basis.

    The consultation reveals that all types of shares will be eligible for use under contractual ‘employee owner’ share arrangements. The Government anticipates that employers will apply restrictions on the shares that they issue – e.g. they may or may not carry rights to dividends, voting rights, or rights to a share in the company’s assets if it is wound-up. Furthermore, employers may contractually require an ‘employee owner’ to surrender the shares if he or she leaves, is dismissed or made redundant. If shares are surrendered, the employer must buy back the employee’s shares at a ‘reasonable value’. While the consultation considers how shares should be valued when first awarded, it does not seem to consider issues of how an ‘employee owner’ could sell the shares, or what is a ‘reasonable value’ at which the employer may insist on buying them back. Although the shares will be exempt from capital gains tax they will be subject to income tax and NI contributions under the normal rules that apply for shares acquired by reason of employment. The Government also expects that the shares will not be eligible for any tax-advantaged employee share schemes. Following a recommendation made in the Nuttall Review of the employee ownership business model the Government will separately consult on simplifying the process of buying back shares so that companies and shareholders have fewer regulatory restrictions and processes to comply with.

    The Government does not intend ‘employee owner’ arrangements to impose any valuation requirements beyond those that already exist for valuing companies tax purposes. The Government seeks views on whether ‘in certain circumstances’ an employer should be able to buy back shares at less than market value. Presumably this would operate where an employee was dismissed. Thus, an ‘employee owner’ who considers him or herself to have been unfairly dismissed would not be able to seek compensation from a tribunal nor receive the full market value of the shares which were meant to compensate them for the loss of this right.

    Automatically unfair dismissal will be largely unaffected by the ‘employee owner’ proposal. However, it will not be automatically unfair for an employer to dismiss an employee owner who requests flexible working, unless, as required by the EU Parental Leave Directive, he or she is returning from parental leave. Nor will it be automatically unfair to dismiss an employee, employed for over six months in a company of over 250 people, for requesting time off to train. As the Directive is silent on how long parents returning from parental leave have to make a flexible working request, the Government will impose a time limit of four weeks from his or her return. The Government believes that ‘employee owners’ without the right to request flexible working will find it easier to discuss working patterns with their employer ‘because they have a vested interest in the business’.

    Among other things, the consultation also makes clear that ‘employee owners’ would retain the right to bring dismissal-based discrimination claims, and seeks views on the appropriate level of information and guidance for individuals to ensure they understand the implications of ‘employee owner’ contracts. Interestingly, the impact assessment notes that ‘certain individuals may be more attracted to the employee owner status when it is not in their best interest to do so’. This conclusion contrasts with the Government’s statement in the consultation’s foreword that the ‘employee owner’ contract will help companies and individuals participate in ‘a mutually beneficial arrangement’.

    The equality impact assessment also states that companies may discriminate if they offer ‘employee owner’ contracts to those more likely to exercise those rights denied to employee owners, and if this tendency occurred more frequently in groups defined by reference to a protected characteristic. The Government considers that ‘although discriminatory behaviour might be encouraged’, this is not a problem as companies would need to show objective and proportionate justification of any indirectly discriminatory use of ‘employee owner’ contracts.

    Legislation to bring in the new employee owner contracts was introduced via the Growth and Infrastructure Bill, which had its First Reading on 18 October, with the aim of companies being able to offer the new type of contract from April 2013. The associated capital gains tax exemption will be legislated for as part of the Finance Bill 2013.

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