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'Owner-Employee' Contracts: Boosting The Economy Or A Step Too Far?

'Owner-Employee' Contracts: Boosting The Economy Or A Step Too Far?

At a training seminar I recently attended, I was shocked to discover that the average student who graduated from University 3 years ago (the year I graduated!) will have had 13 different jobs by the time they are 35. It seems that the days of having a job for life are behind us: unemployment rates are higher than ever before, and there’s a general sense that people in secure roles are extremely lucky. Competition for vacancies is fierce, and even once you have that new role, how long will it last?

In an attempt to boost the economy and to decrease unemployment levels, the Chancellor of the Exchequer, George Osborne, has announced plans for a new type of employment contract, where employees will exchange some of their employment rights for shares in the business for which they work.

The plans for these new types of contract are still very much in their infancy, and the Government is proposing to consult on them later this month. Under the terms of the current proposal, it appears that employees entering into these contracts would surrender their employment rights relating to unfair dismissal, redundancy, the right to request flexible working and time off for training. In addition, employees will be required to provide 16 weeks’ notice of a firm date of return from maternity leave (currently eight weeks if an employee wants to return early from maternity leave). In exchange, the employees would be given between £2,000 and £50,000 of shares in the Company, which are exempt from Capital Gains Tax. It is envisaged that Companies could utilise these contracts from as early as April 2013.

As with all of the recent proposals to reform employment law, these changes raise a number of critical questions: Will employers make job offers conditional on accepting this type of contract? What will happen to existing employees? Will employees be required to seek independent legal advice? Will these contracts be desirable for employees or employers? Will employees with such shares have shareholder rights?

From an employee’s perspective, one key point to note is that given the current economic climate, shares aren’t performing particularly well. Furthermore, the percentage of shares given to the employee is unlikely to be high and, as such, employees may be reluctant to give up some of their key employment rights for such a low return.

There’s also a question around the bargaining position of potential candidates who are desperate to secure employment: these very substantial concessions may be something employees can live with now, but will they feel differently ten years down the line when their salary is significantly higher and their employment is terminated unfairly?

From an employer’s perspective, although evidence suggests that owner employee businesses are performing well, given current market conditions, if the business is a small/owner-managed, will they be reluctant to give shares away to employees? Will the administrative hassle of such an arrangement be worth the potential benefits?

It is clear that many of the key details regarding these proposed contracts have still to be fine tuned. However, despite the Government’s best intentions, the response to this proposal would seem to be mixed at best. It will be interesting to see the Government’s approach in this regard and we will keep you updated with more details of this proposal, as they unfold. Watch this space!

Nichola McKay