11/10/2012 12:34 BST | Updated 29/01/2013 06:06 GMT

Owner-employees - Worse News Than Beecroft

It would be sad to see hundreds of years of employment law progress being swapped for £2,000 worth of shares which can be bought back on dismissal 'at a reasonable price'.

Few marketing executives would clamour for an endorsement from Adrian Beecroft given the press's negative reaction to his plans to make it easier to fire workers. However, this is exactly what George Osborne's new plan to create 'owner employees' has received. Adrian Beecroft reportedly called the plans "a real shot in the arm for Britain's entrepreneurs". But how does the new concept of an owner-employee compare with Beecroft's proposed 'compensated no-fault dismissal'?

The Beecroft report called for, among other things, the introduction of compensated no-fault dismissal for all businesses. This would have allowed employers to dismiss anyone without reason - provided they made an enhanced leaving payment after a brief consultation period. As in redundancy situations, there would be a notice period of one week for every year of employment up to a maximum of twelve weeks, together with a tax-free payment related to the employee's salary, age and years of service, up to a maximum of £12,000.

The business secretary, Vince Cable issued a call for evidence on no-fault dismissal for micro businesses but in the government's response to the consultation stated that it would not be pursued as the operation of two parallel processes (unfair and no-fault dismissal) may complicate, rather than simplify, matters for employers, especially if the use of no-fault dismissal led to an increase in discrimination claims, which can often be more complex and costly than unfair dismissal. The Government stated that it believed that employer confidence was more likely to be improved by preventing compromise agreements being used as evidence in unfair dismissal claims.

The Chancellor obviously did not agree with the Government's response to the no-fault dismissal call for evidence as his proposals are more radical than those consulted on by Vince Cable or even those proposed in the Beecroft report itself.

Under the new owner-employee contracts, employees will be given between £2,000 and £50,000 worth of shares that are exempt from capital gains tax. In exchange, they will lose their right to claim not just unfair dismissal but redundancy pay, the right to request flexible working or time off for training, and will be required to provide 16 weeks' notice of their date of return from maternity leave, instead of the usual eight. Unlike Beecroft's plans, in the event of a dismissal, there would be no consultation period, redundancy-style notice or pay-off.

Owner-employee status will be optional for existing employees, but employers will be able to choose to require new employees to enter into this new type of contract. Although the government states that the new contract is 'principally' intended for fast-growing small and medium sized companies, companies of any size will be able to use the contracts. The government will legislate later this year to enable companies to use the new owner-employee contracts from April 2013 and consult later this month on, among other things, the details of restrictions on forfeiture provisions to ensure that companies can buy back the shares at a reasonable price if an owner-employee leaves or is dismissed.

Arguments that the government accepted in relation to no-fault dismissals - that two parallel systems would increase complexity for employers and lead to an increase in claims based on EU anti-discrimination rights - apply equally to this proposal. However, the owner-employee concept raises yet more problems, such as:

  • will owner-employees be able to make automatic unfair dismissal claims based on EU rights e.g. dismissals connected to maternity or the entitlement to paid annual leave?
  • how will the value of unlisted shares be judged?
  • will it be possible to issue a different class of shares to owner-employees e.g. with fewer voting rights?
  • can an owner-employee sell their shares during employment?
  • why should the employer be able to buy back the shares at a 'reasonable price' rather than their open market price, especially where an owner-employee is dismissed in circumstances which would otherwise be unfair dismissal?

The CBI considers the plans to be a niche idea and not relevant to all businesses. Sadly, I think the CBI will be proved wrong if the Chancellor manages to subdue Liberal Democrat opposition and legislate for these new contracts. If one employer in an industry were to require all new staff to become owner-employees it could acquire a significant competitive advantage in that industry leading to others following suit. As George Osborne said in his speech to the Conservative Party conference, "western democracies like ours are being out-worked, out-competed and out-smarted by new economies". I can already imagine businesses arguing that owner-employee contracts must be used in order to compete with more lightly regulated workforces in BRIC countries.

It would be sad to see hundreds of years of employment law progress being swapped for £2000 worth of shares which can be bought back on dismissal 'at a reasonable price'. However, one effect of attacking individuals' employment rights could be a resurgence in union membership as workers seek the protection of collective labour rights. If that were to happen, the right wing of the Conservative Party may be less happy with this policy than George Osborne had originally hoped.

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