In his recent speech to the Conservative Party Conference, the Chancellor of the Exchequer, George Osborne, announced a new kind of employment contract, dubbed the “employee owner contract”. The announcement follows on the heels of the Beecroft Report, which makes far-reaching recommendations to changes to employment law, and The Nutall Review of Employee Ownership, which sets out the perceived obstacles to promoting employee ownership and a “framework for knocking them down”. It also ties in with Nick Clegg’s desire to get “employee ownership into the bloodstream of the British economy".

But, employee ownership is not a new concept, so what exactly is this new ‘employee owner contract’?

Under the employee owner contract, the employee would agree to surrender certain legal rights at work, such as rights to make a claim for unfair dismissal, redundancy pay, flexible working hours or time off for training. In addition to this, the period of notice to give a date of return after maternity leave would be extended from 8 weeks to 16. The Government’s side of this bargain is to offer employees with between £2,000 and £50,000 worth of shares an exemption from capital gains tax on profits made from those shares.

A press release by HM Treasury followed Mr Osborne’s announcement, stating that employee-owner status will be optional for existing employees, and new and existing companies alike may choose to offer this type of contract for future employees. The release goes on to outline that companies will have the option to include more generous conditions of employment in their employee owner contracts.

A novel idea?

The concept of employee ownership is not a new phenomenon – John Lewis and Waitrose being a couple of high profile examples. Research has shown that employee owned companies are more profitable, employees are incentivised, less days are taken off through illness and stress, and they are generally happier work places.

The tax benefits angle isn't particularly new either. The Enterprise Management Incentives (EMI) scheme has been successfully running for a number of years. This scheme offers tax advantaged share options to help out smaller, higher risk companies attract and retain a skilled workforce to encourage growth and profitability. EMI schemes mean that a qualifying employee pays no income tax or national insurance on the exercise of the option. Other share schemes exist too, which offer favourable tax treatment for employees.

So Who Benefits?

HM Treasury’s press release indicates that this scheme is aimed at “fast growing small and medium sized companies” But it may be doubtful whether such companies will have the resources to commit to setting up such schemes, and it also assumes that such companies will be willing to offer shares to their employees. Of course, it also assumes that employees will be happy to sacrifice important employment rights in the hope that either (i) being a shareholder means they play a greater role in the company (this may or may not be the case – it depends what other rights they have as shareholders); or (i) on leaving employment that the shares are of a value equal to or greater than the financial value of the rights which they sacrificed in the first place (but it is worth pointing out here that such shares will not be readily marketable).

It does seem a curious move for the Government to try to incentivise share ownership in exchange for forfeiting employment rights. Will the benefits of employee ownership (such as a happy and motivated workforce) still exist if those very employees have been forced to give up some of their employment rights? Companies might also have concerns about implementing such schemes if it might damage their reputation. Indeed, Justin King, CEO of Sainsburys, warned that such schemes create a concern that “businesses only want to do bad things”.

Writing this as an employee of a partnership and not a company, it’s probably also worth considering just how many people this could affect. According to Government statistics published in 2011:-

  • there were around 4.5m businesses operating in the UK which employed over 23.4 million people;
  • there were around 2.8 million sole proprietorships in the UK, 450,000 partnerships, and 1.3 million limited companies; 
  • of the 1.3 million companies, just under half were ‘one-man bands’ which leaves around 750,000 companies with employees and therefore companies to which the proposed regime might apply.

Is this all a fuss over nothing?

This proposal is yet to undergo a consultation process but the intention is that companies can “use the new type of contract” by April 2013.

It is encouraging to see employee ownership being discussed so prominently, but it does seem that there are many more questions than answers about how this scheme will operate in practice, and how many companies (and employees) will take up the opportunity. As we have already explained, schemes already exist for employees to become shareholders, without the need to sacrifice their employment rights, so it remains to be seen whether this new contract will catch on. As it stands, we’re inclined to agree with John Longworth of the British Chambers of Commerce who is of the view that the proposal is “unlikely to be a game changer”.