Earlier this week, the Government announced a new proposal which, if implemented, has the potential to fundamentally change some key aspects of employment rights.
The proposal would give employers the option of giving employees shares worth between £2,000 and £50,000 (on which no capital gains tax would be payable by the employee) in return for the employees agreeing that they will not have rights to:
- claim unfair dismissal
- claim a redundancy payment
- make a request for flexible working or for time off for training.
Under the proposal, employees would also have to give 16 weeks’ notice (rather than the current 8) of a firm date of return from maternity leave if they return early.
The Government has said that it will consult on some details of the proposal later this month and intends to legislate later this year so that the new arrangements can come into force in April 2013.
Whilst the proposal has certainly grabbed the headlines, it is not clear that the change really would save employers money. For example, the “new kind” of employees that it creates (with no rights to claim unfair dismissal) may be encouraged to resort to claims such as discrimination and whistleblowing. These claims are generally more costly for employers to defend and there is no cap on the compensation that can be awarded.
Employers might also find that they have to deal with disputes as a result of employees owning shares. These could involve how to value the shares, how shares can be sold or employee-shareholders seeking to exert influence over the company’s actions.
Employers might easily be misled under the new regime. It doesn’t follow that simply because an employee doesn’t have the right to make a request for flexible working, an employer would be safe to refuse to consider a request. For example, the employer could still be liable for discrimination if the refusal is more likely to disadvantage women than men and cannot be justified.
Practically, what would happen if an employer gave an employee £50,000 worth of shares and the employee resigned shortly after joining, or their performance was so poor that the employer dismissed them. Could the employee sell their shares and keep the money?
The changes to legislation that would be necessary to implement this proposal would be substantial. For example, thought would need to be given not just to how to amend the law relating to unfair dismissal and the other specific rights listed above, but also how the changes would interact with other employment laws and what would happen to the shares when the employee leaves the company. The difficulty for the Government is that it cannot repeal rights entrenched by European law. So for example, the Government’s ability to amend the transfer of undertaking laws (set out in legislation known as “TUPE”) is limited. Where such a transfer takes place, the law must give employees an adequate remedy if they are dismissed in certain circumstances.
There are more philosophical questions too. Does the Government really intend to allow employers of any size to simply refuse to recruit staff unless they sign away some of their employment rights in return for perhaps only £2,000 worth of shares? If so, this might be a more fundamental change than would have taken place if Adrian Beecroft’s proposals for “compensated no fault dismissal” had been introduced. The Government suggests this will not affect existing employees, but in the right circumstances it might be possible for employers to lawfully dismiss existing employees and offer to re-engage them only on the new type of contract.
Given the number of potential issues, it seems unlikely at present that the proposal will come into force or be widely used, except perhaps by those who own a substantial stake in a company to save tax (for example an IT contractor using their own company). But if the proposal does go ahead and the new contracts are commonly used, this could mark a fundamental shift in UK employment law.
We will continue to update you as the proposal develops.