12 October 2012

By Nicola Countouris, Mark Freedland and Jeremias Prassl

Three employment law experts look into the "deeply worrying" shares-for-rights trade off proposed by George Osborne this week

On Monday morning, the Chancellor of the Exchequer announced plans for the introduction of a new 'owner-employee' share ownership scheme. Whilst the exact details of the proposed reform are yet to be confirmed, an initial press release sets out some drastic changes:

"Under the new type of contract, employees will be given between £2,000 and £50,000 of shares that are exempt from capital gains tax. In exchange, they will give up their UK rights on unfair dismissal, redundancy, and the right to request flexible working and time off for training, and will be to required provide 16 weeks' notice of a firm date of return from maternity leave, instead of the usual 8."

As Alex Hern notes over at the New Statesman, this means that:

"For the princely sum of £2,000 of equity, companies can completely and permanently buy out their employee's protections again unfair dismissal and redundancy, and their rights to flexible working and time off for training, as well as severely curtailing their maternity leave flexibility."

From a legal and economic perspective, the proposals are deeply worrying on a host of different fronts. It is completely unnecessary, first, to take away employment rights in order to make workers owners of the business: it has been settled law for over fifty years that even an employee who is the sole shareholder of a company can still have full access to employment rights, and there are many different routes to achieve the economic incentive alignment that do not deprive workers of their fundamental employment rights, as the successful example of John Lewis demonstrates.

Second, the new share ownership scheme is to be set up in a way that allows companies to force employees to sell their shareholding at a 'reasonable price' when the employment is terminated. Companies will frequently lay off people in tough economic times – that is, in periods where their share price is low. In reality, workers might thus frequently find that the 'reasonable price' of their shares will be considerably lower than the amount at which they were originally vested. This will be especially true in the case of non-listed companies, where share prices cannot be readily ascertained.

Third, and in spite of the assurances offered by Mr Osborne, these plans are likely to bring the UK on a direct collision course with EU employment rights – in particular as regards EU equality legislation - and with the EU Court that will surely not be impressed by a concept of 'ownership' that is merely notional.

In reality this new 'owner employee' status will amount to little more than a sham: it is a gratuitous attempt to allow employers to opt-out from compliance with basic and fundamental employment rights, encouraging bad 'human resources' practices as well as extensive litigation.

Even the Financial Times has noted the 'fundamental problems' with this socially regressive reform proposal, where workers will be bearing all the risks associated with the holding of shares without enjoying any of the benefits typically deriving from employment, self-employment, or share-ownership. It is hoped that the proposed reforms, completely divorced from the needs of British society, will never see the (legislative) light of day.

Nicola Countouris (UCL and IER), Mark Freedland (Oxford and UCL), and Jeremias Prassl (Oxford)

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