You were probably as surprised as we were to hear yesterday that George Osborne was entreating the workers of Britain to unite.  It soon turned out that George is not swapping his pinstripes for a hammer and sickle.   Rather, he is proposing a faintly unlikely unison between employers, employees and the taxman.   

Under a new form of contract to be introduced as early as April 2013 employees would be granted equity of between £2,000 and £50,000 in their employing company in exchange for giving up some of their “gold-plated” employment rights.   For “gold-plated” read “the ones not underwritten by Europe” – chiefly the right to claim unfair dismissal and a redundancy payment.  The government’s contribution will be to exempt profits made by these new “owner-employees” on sale of their shares from capital gains tax.   

Regular readers of Employment Law Worldview will recall that according to the Government’s own research, unfair dismissal does not even rank in the list of Top 10 regulations discouraging employers from recruiting, so it is perhaps surprising to see a further, perhaps even more illogical, policy for creating economic growth founded on eroding unfair dismissal rights.  

In addition to giving up the right to claim unfair dismissal, owner-employees will also give up the right to request flexible working and time off for training, and will be required provide 16 weeks’ notice of a firm date of return from maternity leave, instead of the usual 8 .The detail of the proposed scheme is not yet clear, with consultation on the new contracts due take place next month.  The Government suggests that the contracts are principally intended for fast growing small and medium sized companies that want to create a flexible workforce”, but there are several issues which will need to be addressed if the proposals are to be in any way helpful in achieving that aim.  

For starters, what if the owner-employees do not turn out to be as highly motivated as the employer expects and the business opts to dismiss for performance reasons?  A footnote to the Treasury press release explains that next month’s consultation will include “the details of restrictions on forfeiture provisions to ensure that if an owner-employee leaves or is dismissed, the company is not able simply to take the shares back but is able to buy them back at a reasonable price.”  There is a fairly obvious risk that unfair dismissal litigation will simply be replaced by claims from disgruntled former owner-employees that they have not been paid a reasonable price for the shares on exit, and/or that they have suffered the loss of future growth in the share price.   And will the employer merely be “able” to repurchase the shares or obliged to do so?  On top of that, owner-employees will retain their rights under the Equality Act 2010 and so, although unable to claim unfair dismissal, may simply opt to claim instead that they have been dismissed for discriminatory reasons.    

There is also a perhaps more fundamental problem in that the new scheme may not hold much attraction for either employers or prospective employees.  Whilst businesses will have the option of making the new-style contracts compulsory for new starts from April 2013, it remains to seen whether many of them will think that diluting the equity in their business is as good an idea as George thinks it is.   If you hope to sell your fast-growing company then the last thing you want is for part of the shares to be held by possibly alienated individuals who might take pleasure from scuppering the sale.  Likewise, prospective recruits may not consider that taking a small number of shares of uncertain cash value (and even more uncertain marketability) in a business which can fire them at will represents great value for giving up their protection against unfair dismissal.