Employee-owner status: a radical but unwanted addition to the statute book
Author: Darren Newman
Consultant editor Darren Newman argues that the Government's proposed new "employee-owner" status is both unwanted and ill thought out.
The Government's brief consultation on the creation of "employee-owner" status has come to an end. According to the proposal, an "employee-owner" is an employee who has agreed to forego some key employment rights, including the right to claim unfair dismissal, in return for being given between £2,000 and £50,000 worth of shares in the employing company.
The consultation period was shorter than normal - just three weeks - so many may have missed it. It was also limited in scope. The Government was not asking whether or not introducing this new employment status is a good idea, which was taken as a given. The consultation was purely about implementation, asking about the details of how the new scheme could work.
I think those interested in employment law are entitled to feel aggrieved about this. It is surely not too much to ask that, before introducing such a radical change, the Government consult the business community about whether or not the change is needed or would at least be welcomed. Instead, the policy was announced out of the blue by the Chancellor of the Exchequer at the Conservative Party conference. One even wonders if the Chancellor had consulted the ministers at the Department for Business who will be responsible for pushing through the legislation.
The timetable for implementation is ambitious. The initial press release that came with the announcement said that the first employee-owner contracts would be available from April 2013. That seems doubtful, given the time it takes for legislation to get through Parliament, but a clause has already been included in the Growth and Infrastructure Bill to amend the Employment Rights Act 1996. It is clear that the Government is treating the introduction of this new employment status as a priority.
This in itself is puzzling because it is not a change for which the business community had been pressing; indeed the reaction to the proposal has been lukewarm at best. It has been suggested that it is simply the latest manifestation of the Beecroft proposal for compensated no-fault dismissal, with the twist that, instead of a small pay-off, the employee is given a few thousand pounds' worth of shares in return for giving up the right not to be unfairly dismissed. Whether or not this is the case will depend on the detail, and the clause currently found in the Bill will have to be amended substantially as that detail is worked out.
For example, one issue for consultation was how the value of the employee's shares will be calculated. This is key because, although this is not yet reflected in the Bill, the Government intends that the employer will be entitled to buy back the shares at the end of the employment. The question is at what price. It is easy to issue shares with a nominal value of £2,000 to £50,000, but much more complicated to work out the market value of shares in a privately owned company. When shares are simply a contractual benefit, the parties are free to agree whatever mechanism for valuation suits them. However, when an employee has given up unfair dismissal rights in return for those shares, a clear statutory definition of how that is to be done is needed to prevent employers from imposing an unfair valuation mechanism. This issue is absolutely central to whether being an employee-owner is a status that an employee might genuinely choose, or a con designed to introduce no-fault dismissal by the back door.
I have no idea what a fair and workable method of valuation would look like. However, from what we have seen so far, neither does the Government. Perhaps the responses to the consultation will produce a straightforward and reasonable way of arriving at a valuation, but this issue is so important that it seems astonishing that it was not considered before the Government committed itself to putting employee-owner status on the statute book.
Putting aside the practical considerations, the thing that really jars about this proposal is its incoherence. Why should the ownership of shares be made conditional on giving up key employment rights? It is as if the law is giving with one hand and taking away with the other. Much of the criticism of the proposal comes from those who advocate wider employee share ownership, on the basis that making share ownership conditional on surrendering the right to claim unfair dismissal sends out the wrong message.
It remains possible that this proposal will be abandoned when it becomes clear that it is unworkable, or simply not welcomed by the business community. If the new status is introduced, it may end up being used only rarely because employers find the technical requirements too onerous. Either way, this exercise shows that governments simply cannot resist making employment law more complicated. Even if employee-owners turn out to be a rare species, employment law textbooks will have to include at least one extra chapter, and a whole new avenue for litigation will be opened up. If we put this proposal alongside the employment law measures currently making their way through Parliament in the Enterprise and Regulatory Reform Bill - almost all of which make the law more, rather than less, complicated - we can see how hollow government talk of employment law simplification is.
