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New ‘Owner-Employee’ Contracts:

As reported in the press this week George Osborne announced plans to introduce ‘owner-employee’ contracts from April 2013 under which:

Employees will give up employment rights such as unfair dismissal and redundancy.
In return the employee will get shares in the company worth between £2,000 and £50,000;
Any gains on those shares will be exempt from capital gains tax.
Companies would have to buy back shares if employees are dismissed at a “reasonable” price.

So far reception has been mixed. As noted by some commentators:

Sacked employees may resort to discrimination or whistleblowing claims instead to enforce their rights or try to find loopholes in the contract.
Not all entrepreneurs will be happy to give away ownership and voting rights to staff. You might want to offer shares to key staff, but not the janitor.
What is a ‘reasonable price’ when buying back shares? Share valuation can be notoriously difficult, especially for small unlisted companies when share value can be easily manipulated. Giving up employment rights for as little as £2,000 may not attract the right calibre of staff While the government states that the amount offered is to be negotiated, the reality is that employees are rarely in a position to do so.
Will employees leaving voluntarily be able to keep their shares? Employers will probably require the shares to be sold back.
It is unclear whether the waiving of legal rights will include automatically unfair dismissals (for example for asserting the right to be paid the national minimum wage)
It is unclear what happens to the shares and the contract if the business is sold.

The government wants to encourage employers to take on staff, but these proposals will not be for everyone. It is quite possible that the idea may be diluted or quietly dropped once the details are properly thought through, as appears to have been the case with the proposals for no-fault dismissals. We will keep you posted.

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