Giving up employment rights for shares

Oct 12, 2012 | Business Principles

Chancellor George Osborne has announced in a speech to the Conservative Party Conference that workers will be offered shares in their companies in return for giving up some of their employment rights.

Osborne reckons this will create a “motivated and flexible workforce”, however I’m not so sure. Here’s my guide to what is planned, and what the major problems are.

What will happen?

From April 2013, under a voluntary agreement, companies could give employee shares in their business if the employees gave up their right to claim unfair dismissal, redundancy pay, flexible working and time off for training, and for women, an increased notice period for return to work after maternity leave.

The employees would get between £2,000 and £50,000 worth of shares, and would not have to pay capital gains tax on them.

So what’s the problem?

There are several fundamental flaws with this scheme, which seems mostly aimed at headline-grabbing rather than thinking through what will actually really benefit businesses.

It won’t make things easier

Although the idea might be to make dismissing staff at will easier for businesses, the reality is that complicated shareholding agreements and tax breaks to administer will put many businesses off, especially small businesses. For many small businesses it will be better to avail themselves of the current two year grace period during which employees can’t claim unfair dismissal anyway, and are not entitled to redundancy pay.

Do businesses really want to give away shares?

My focus is on small to medium sized businesses, and certainly smaller businesses do not usually give away a slice of ownership. There may be only one or two shareholders in place, and creating enough shares and capital in the business to enable that business to give away £2,000 worth to all or several employees just isn’t practicable or cost-effective.

It will disincentivise the workforce, not motivate them

There’s nothing like a two-tier workforce to create motivation problems, and unless all employees were on these new terms, which is unlikely, that’s what would be created. Those without shares would have less interest in the business and less incentive to perform.

Self-fulfilling prophecy

Signing away rights to claim unfair dismissal and redundancy pay would create a self-fulfilling prophecy in that those employees would automatically be the first to go in any kind of cost-cutting exercise, and would receive less favourable treatment than those who retain their rights and benefit from proper procedures and fair decision-making.

What about discrimination rights?

Discrimination rights would not be able to be signed away, which is of course a good thing. However just as with the increase in unfair dismissal service requirement from one year to two, it’s likely this new change would see an increase in discrimination claims or other claims not signed away in the scheme.

Truly voluntary?

It’s always possible that some workers could feel coerced into taking part in the scheme, and it will apparently be perfectly legal for employers to force new recruits to accept these contracts. In an economy where jobs are hard to come by, how voluntary is this really?

Lack of support from business

Business leaders’ reactions have also been less than enthusiastic. Justin King, the Chief Executive of J Sainsbury, which employs more than 150,000 people and is one of the biggest employers in the UK has criticised the plans, questioning what “the population at large will think of businesses that want to trade employment rights for money” and challenging the government to instead look at reducing barriers to employment and lowering National Insurance.

The CBI have said the scheme “is a niche idea and not relevant to all businesses”, while the Chambers of Commerce described it as “unlikely to be a game-changer”.

This scheme is offered as being more palatable than the Beecroft proposals of no-fault dismissals for smaller businesses, but are not the answer in my view.  I can’t see them achieving the aim of a motivated workforce, and I can’t see them achieving the aim of making things easier for businesses, small businesses in particular.

I’m also sceptical as to whether it will be realistic to get the necessary legislative changes made in time to start using the new contracts from April next year. Six months is an incredibly tight timescale for that, and in light of the reaction from both sides of the employment relationship, perhaps George Osborne needs to go back to the drawing board on this one.

If you would like advice on giving up employment rights for shares in your business, contact us at [email protected].