The Government has recently launched a consultation in relation to its widely reported proposal to create a new class of employees, the "employee owner". As part of the proposals, employees will be given shares in their employing company in return for giving up certain key employment rights.

In the consultation paper, the Department for Business Innovation & Skills (BIS) states that this new employment status will "give businesses greater choice about the contracts they can offer to individuals, and ensure appropriate levels of protection are maintained". It is clear from the wording of the consultation document that the new employment status is designed to reduce the risk to employers of being taken to an employment tribunal and the cost of providing some employment rights, which are seen by some employers as being a barrier to hiring employees. However, it remains to be seen whether the proposals will actually result in less litigation or encourage employers to hire more staff.

Details of proposals

Under the proposals, employee owners will receive shares between £2,000 and £50,000 which will be exempt from capital gains tax. Although the sale of the shares is intended to be free of capital gains tax, there is currently no indication about what the implications will be for income tax and National Insurance Contributions.

"Employee owners" will, in return, give up their rights to bring claims of unfair dismissal, certain rights to request flexible working and training, and statutory redundancy pay. Under the plans, individuals would also need to give longer notice to return early from maternity leave or adoption leave (16 weeks rather than eight).

However, employee owners will retain their right to bring a claim of automatic unfair dismissal (for example, if they were dismissed on grounds of whistleblowing or for having taken maternity leave) and discrimination. As regards flexible working, employee owners would still be able to apply for 18 weeks unpaid parental leave per parent per child (an entitlement derived from EU law) as long as that application was made within four weeks of the employee’s return to work.

"Employee owners" would also be entitled to statutory minimum notice, collective redundancy consultation, the national minimum wage, annual leave and would transfer to a new employer in the usual way under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE).

Under the proposals, employee owner status will not be able to be imposed on existing employees, but companies will be able to offer new employment exclusively on an employee-owner basis if they wish. The Government intends that all types of shares will be eligible for use under the new arrangements, which may - or may not - carry rights to dividends, voting rights, or rights to a share in a company’s assets if it is wound up.

Obligation to surrender shares

The consultation paper states that employers will be able to include a clause in the contract requiring the employee to surrender their shares if they leave the business, are dismissed, or are made redundant, but the employer will be required to buy the shares back at a "reasonable value" - although no mechanism for determining what amounts to a "reasonable value" has been announced. One can immediately see practical difficulties in terms of reaching agreement on what is a "reasonable value" for the shares in such circumstances, resulting in an increase in disputes over the valuation of such shares and a need for employers to carry out expensive independent company valuations.

Furthermore, there is no indication from the Government that employment tribunals will be given the jurisdiction for resolving such disputes, which means that employers and employees may be required to contest proceedings before the civil courts, with the associated costs consequences.

Practical difficulties for employers

There may also be further practical difficulties for employers that may make the scheme unattractive - some private companies might need to set up a trust in order to be able to buy back their shares at all, and some employers might find themselves without sufficient liquidity to buy back the shares if the value has risen significantly.

Further, it is possible that the proposals, if implemented, could potentially result in an increase in discrimination and whistleblowing claims if employees do not have the right to bring ordinary unfair dismissal claims, which are generally more costly for employers to defend.

Purpose of consultation

The consultation, which will close on 8 November, is designed to seek views on how the Government will implement the new employee owner status in practice, and what its implications will be. The consultation does not extend to whether the new status should be created at all: Government has already indicated that it intends to legislate to give effect to its plans, probably in 2013.

We will report on key developments in future editions of the Employment Brief.