“Owner-employee” contract proposal raises more questions than answers

The Chancellor of the Exchequer, George Osborne, this week announced proposals for the introduction of a new type of employment contract, known as an “owner-employee” contract. The proposal is subject to consultation, but clearly raises more questions than answers.

The press release can be found here: http://www.hm-treasury.gov.uk/press_91_12.htm
The proposal is that employees would be given between £2,000 and £50,000 worth of shares in the employer’s company in return for giving up their rights to bring a claim for unfair dismissal, redundancy pay and the rights to request flexible working and time off for training. Female employees would also have to give 16 weeks’ notice of a firm return date from maternity leave. Any gains in the value of the shares will be exempt from capital gains tax.

Owner-employer status will be optional for existing employees, but employers will be able to require new employees to enter into this type of contract. We have no real detail of how the contracts will work and, in particular, what will be done to prevent abuse. Issues which immediately come to mind are: 

• How will the shares be valued when the employee’s employment is terminated? The Government says that the company must buy the shares back at a “reasonable price”. How will this be calculated and who will pay for the valuation? Will “bad leaver” provisions under which the employee forfeits shares in certain circumstances be allowed?
• What will be done to prevent existing employees from being pressurised into enter into the new contracts against their will? Will they be required to enter into compromise/settlement agreements to waive rights already accrued? Employers might be attracted to the prospect of buying off all of their existing employees’ employment rights in return for shares worth only £2,000 each.
• Will employers be allowed to place restrictions on the voting, capital and dividend rights of owner-employee shares?
• Will there be any restrictions on eligibility? It is easy to imagine founder director-shareholders of companies using the scheme to gain significant tax advantages.  

The Government will consult on details of the new contract later this year with a view to legislation coming into effect so that companies of any size can use the owner-employee contracts from April 2013. Hopefully answers to these questions and more will be revealed during the consultation process.

 To discuss this or any other employment and HR law issue get in touch at contact@integralegal.co.uk