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Out of the Blue: Osborne's Employee/Owner Proposal has More Questions Than Answers

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Today the Chancellor announced radical plans to create a new class of Employee/Owner, workers who would forfeit their rights in return for tax-free shares. Osborne promises to stimulate jobs, particularly for start-ups which could recruit an entire workforce in this way. However, it is unclear what consultation or business support underpins Osborne's bold scheme.

The disadvantages for employees already feeling the pressure of wage restraint are plain. It is clear that the Unions do not favour Osborne's proposal and may stall its introduction in unionised industries and the public sector.

Under the Tory proposal, a range of rights would be forfeited including most significantly the right to claim unfair dismissal. People would also forego the right to a statutory redundancy payment, although the amounts of such payments are relatively low. Women returning from maternity leave would have to give 16 weeks' notice of their return, an increase from the current requirement of eight weeks.

However, the advantages for employers may prove illusory. The scheme leaves intact European-derived equality legislation. Employers will not be able to "fire at will", without risk of a discrimination claim being brought. While compensation for unfair dismissal claims is capped, currently at £72,300, the sky is the limit for discrimination damages. Certain categories of discrimination can be easily seen and guarded against, for example race discrimination, but others can be invisible, such as discrimination on the grounds of disability or sexual orientation. Only a proper dismissal process will afford an employer the opportunity to ensure that the decision to terminate will stand up in court.

Even at the outset, the employer faces dangers if the Employee/Owner contract is offered to some types of employee and not others. For example, if an employer offers the contract only to job candidates who women of childbearing age, those women may complain they are discriminated against by being shut out of the job security that male candidates would receive. But the male candidates might also complain that they are discriminated against because they are not offered the tax break!

Although aimed at small to medium sized businesses, these employers are least likely to be listed companies, to have existing share schemes or to have the legal and HR resources to help navigate this new landscape. This complex proposal will undoubtedly bring administrative costs - and added to this is the cost of the shares themselves.

No details have yet been released as to what happens when employment ends. Does the individual stop being an employee, but continue to be an owner? If so, the shares can be retained, then the employer is stuck with the employee even after firing them. But if the shares had to be bought back by the firm from the departing employee, that would mean that any departure inflicted a business cost - even amicable departures.

Both sides face real risks as to the future value of shares. It is hard to see how employees, particularly those not on high salaries, would want to forego job security for shares in a firm that may not thrive. But there is also a danger for firms. It might be superficially attractive to be spared the risk of litigating a complaint of dismissal, but under this scheme the employer and employer could end up arguing over when the shares should be bought back and at what price.

The last decade has been turbulent for employment law, with rapid changes in the law and huge development in equalities legislation. The impact of these changes has meant that many employers have invested in training management on redundancy and dismissal, and in putting together employee handbooks and policies. While the practical requirements of unfair dismissal law may frustrate some employers, at least they have become settled and relatively predictable.
It is worth remembering that the Coalition has already made it more difficult to claim unfair dismissal by extending to two years the minimum time an employee must have been in post.

My prediction is that many employers, especially smaller firms, will see the Employee/Owner contract as bringing little marginal benefit. They will prefer to avoid another swathe of administrative cost and stick with the risks they know. Many of these employers will not want to squander the goodwill and flexibility employees have shown them in recent years - every successful business knows the best way to stop legal claims is to have a happy workforce.

It is high-earners who could profit most from the Employee/Owner scheme. They will see the opportunity to make their remuneration package as tax efficient as possible. The proposal has most obvious synergy for City workers, whose high salaries disincentivise them from bringing unfair dismissal claims and who are paid large bonuses, often in shares. These employees will be paying higher rates of income tax and CGT, and so have much to gain from today's proposal. Ironic, perhaps, that a proposal to help small business may in fact bring benefits to that most unloved of employees: the banker.