A proposed new employment contract that would require employees to give up employment rights for shares in their organisation could still leave employers open to claims for unfair dismissal under European regulations.
The owner-employee contract, announced at the Conservative Party conference on 8 October by Chancellor George Osborne, could see employers offering employees between £2,000 and £50,000 of shares in the organisation, which are exempt from capital gains, in exchange for the employee giving up UK rights on unfair dismissal, redundancy, the right to request flexible working and time off for training. They would also be required to give 16-weeks notice of a firm date of return from maternity leave as opposed to the usual eight.
If the proposals go ahead, despite employees signing a contract relinquishing their rights on unfair dismissal, employers may still be faced with claims under European discrimination rules, which will remain in place.
Mark Hammerton, partner in the employment and pensions practice group at law firm DWF, said: “Employers will be well counselled not to assume they have a free hand due to the limited scope of employment claims which are being waived.
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“Fire at will is too simplistic. So, while basic unfair dismissal claims and redundancy payments would not be available, there is a risk that disenchanted individuals will nonetheless allege that they have been exited because of sex, race age or disability discrimination. These latter types of rights will not be waived under the owner-employee contracts.”
The government will be launching a consultation on details of the new contract later this month. Legislation to bring the proposed contract in is expected to come later in the year, with the aim that organisations will be able to use them from April 2013.
At the moment, these alternative contracts have only been outlined in rough form, leaving many questions unanswered. The status of the shares is a key aspect that needs further clarification, particularly as to whether they would need to be given or purchased and whether they would carry voting rights in line with being a true owner. Depending on how the legislation is drafted, there may be ample scope for any such voting rights to be limited, leaving the real owners in charge of the company, despite the sacrifices made by the employee-owners. Additionally, no mention has been made of whether these employee-owners would be classified as worker employed or self-employed for tax purposes.
Like the other changes proposed by the coalition, the glaring omission is that the waiver of rights cannot include discrimination claims. These tend to be more costly and acrimonious to deal with than a straightforward unfair dismissal claim. As a disgruntled ex-employee is unlikely to take a dismissal lying down these plans could just see a proliferation of costly discrimination claims instead.
I am not sure there is a problem to be fixed in terms of incentivising and motivating employees. Employers can already offer bonuses, long-term incentive plans or give them shares or options. As a result, what is given here with the one hand does not compensate what is taken with the other.
Clearly, the proposal could be very beneficial for smaller businesses that currently struggle with their legal obligations in relation to unfair dismissal and redundancy. However there are risks that this could create a two-tier workforce.
We welcome this latest contribution to the debate on employee ownership, but while growing employee ownership should be part of the UK’s industrial policy, such growth does not require a dilution of the rights and working conditions of employees – indeed employee ownership often enhances them.
Ownership matters. Employee ownership, creating businesses whose employees have significant ownership and involvement, offers a brilliant mechanism to spread business ownership from the few to the many whilw increasing productivity and innovation.
Whether the scheme would have the intended effect of reducing the number of employment claims is debatable. First, there must be a strong suspicion that those employees most likely to pursue employment litigation are those least likely to agree to such an arrangement. Further, employees and their union representatives may have a serious concern that, by entering such an arrangement, they may find themselves more exposed to being selected for redundancy or unfairly dismissed. Also, female employees may be reluctant to sacrifice their ability to request flexible working arrangements. It is, however, debatable whether maternity returnees having requests for flexible working turned down would be prevented from bringing a claim for indirect sex discrimination. Therefore, the opt-out from the statutory right to request flexible working may be more illusory than substantive.
While the government’s proposals refer to this scheme being intended for fast-growing small and medium companies, it is debatable whether they would regard the practical arrangements as being worthwhile. It strikes me as more likely that large companies with existing widespread employee share ownership are likely to be interested in such an arrangement. Nevertheless, the potential for such schemes being seen as divisive by employees and their representatives is manifest.
It is good to see new thinking on employee ownership. Where employees can freely choose more risk in return for the chance of a tax-free capital reward, there is little to quarrel with. For the rest, we look forward to examining the proposition in detail.
There is nothing new in trying to align workers’ rewards with their employer’s financial success. But the suggestion of a windfall of shares in exchange for giving up employment rights is novel and imaginative. As I understand it, any employee would have an option. He would need to be persuaded that the shares were worth more than the potential claims he was required to surrender. Notably, unfair dismissal and redundancy. We were told the shares would be valued at between £2k and £50k, whereas the maximum claim for unfair dismissal is between £73,640 and £86,100, depending on length of service and age, albeit the average award is far lower. One wonders whether the administrative hassle would be worth the candle for small employers.
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.
It is far from clear how attractive the offer to give up employment rights in return for shares will be to prospective employees of small firms. More important, it is highly doubtful whether inviting employees to sign away basic employment rights will deliver the motivated, driven, high-performing workforce that small firms need.
Existing, highly successful, mutually-owned firms do not thrive on employee ownership alone, but on the high trust, high engagement, all-pulling-in-the-same-direction cultures they have. Employee ownership works best where it is accompanied by great management, rather than enhanced job insecurity.
How many employees will in reality take this up? Shares in private businesses cannot be sold on the open market, so any value could only be released by the employee selling them back to the business or transferring them to another employee. The government is suggesting a reasonable value on termination, but that begs a raft of questions as to evaluation.
Moreover, even if employees took the maximum £50,000 share this could be less than expected unfair dismissal compensation if their employment was terminated without good reason. Employee share ownership models can incentivise performance and give employees a stake in the business, but employees are unlikely to be willing to give up the safety net of unfair dismissal rights without the guarantee of some financial benefit either during or on termination of employment. So it is difficult to see which employees will embrace this change.
The employment rights that can be ‘traded in’ for shares are restricted to UK employment rights rather than any rights under EU law – for the obvious reason that the Government can’t allow an opt out from European laws. So for example the Government can’t use this arrangement to allow employers to escape from restrictions on working hours or obligations to provide paid holiday under the Working Time Directive.”
The government’s ambitions could be frustrated to some extent by European law or other UK employment laws. Some of the protections offered to employers here are illusory. For example, even if employees could not claim unfair dismissal, they would be free to bring other types of tribunal claim, particularly discrimination claims.
These reforms wouldn’t – and couldn’t, under EU law – protect employers against those risks. So a woman dismissed for being pregnant would still be able to sue for a discriminatory dismissal, even if her right to claim unfair dismissal had been traded in. EU law also requires employees to be protected against dismissal for exercising certain rights granted under European Directives; for example, taking maternity or parental leave or refusing to opt out of the 48-hour average working week.
When we see the detail of these proposals, some categories of unfair dismissal claims will not be capable of being excluded by the grant of shares.