George Osborne announced a new and bizarre scheme during his Tory Party conference speech this morning. The Treasury put it like this:
The Chancellor of the Exchequer, the Right Honourable George Osborne MP, has today announced plans for a new kind of employment contract called an owner-employee.
New owner-employees will exchange some of their UK employment rights for rights of ownership in the form of shares in the business they work for, any gains on which will be exempt from capital gains tax.
Companies of any size will be able to use this new kind of contract, but it is principally intended for fast growing small and medium sized companies that want to create a flexible workforce.
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 required provide 16 weeks' notice of a firm date of return from maternity leave, instead of the usual 8.
Owner-employee status will be optional for existing employees, but both established companies and new start-ups can choose to offer only this new type of contract for new hires. Companies recruiting owner-employees will continue to have the option of inserting more generous employment conditions into the employment contract if they want to.
Legislation to bring in the new owner-employee contract will come later this year so that companies can use the new type of contract from April 2013. The Government will consult on some details of the contract later this month.
So, someone starts work with a high risk employer that's growing fast and in exchange for giving up their employment rights they're offered shares in the company instead so it can have the right to fire them at will.
Now, let's think this through. The obvious problem is that the only time the company will (you hope) want to fire you is when it's doing badly. So at that point it's fair to presume the shares you've been given are near enough worthless. Which will create a triple whammy: no job, no compensation and shares worth the square root of zilch. Why bis any employee going to pt for the scheme in that case?
Second; let's be clear that in small growing companies owners do not want the ownership spread around because if that happens selling is very, very much harder to achieve and is much more costly to arrange as the number of people needing to agree rises too fast to manage. That's why if such companies do issue shares they invariably have shareholder agreements that require that if someone leaves they have to sell their shares. Usually that is on what is called 'bad leaver' terms - which means you get a rubbish pay out. So, back to square one again: lose your job and get a poor payout (at best). So still no employee take up.
Third, if favourable payout terms are required on leaving under this scheme small employers just won't do it: it won't be worth the hassle. Why? Just valuing the company every time someone leaves and has to be paid off will cost more than settling the redundancy pay.
Let's put it another way: instinctively this scheme won't fly with employees or small employers.
So let's describe it as a U turn in the design stages right now.
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Isn’t the idea that employers won’t take people on unless they sign up to this? That it will be the only contract on offer? A way of spreading the belief that people’s employment rights are privileges rather than rights? A bit like employing people only if they sign a working time directive waiver.
No employer will have to offer it though….and you can be sure none will
who the hell comes up with these ideas? you would have thought someone would have thought about the practical implications of this before announcing it – the idea that an SME wants dozens of shareholders to contend with is bizzare.
There’s a growing number of SMEs who choose to do exactly that – make their employees shareholders. These employee owned firms demonstrate that when employees have a stake in the business in which they work, then they tend to be more profitable, productive, innovative and have happier staff and customers. Moreover, employee owned businesses tend to remain in their communities, protecting jobs and retaining local wealth. I fully understand why any government would want to increase the number of employee owned businesses in their economy.
However, this scheme is poorly thought through and demonstrates a total lack of understanding as to what underpins the success of the employee owned sector. It is precisely because these companies treat their employees better, give them access to information, enable them to influence the business that leads to the success. Yes, they share in the rewards but very rarely to the extent that CGT comes into play!
Two weeks ago the Lib Dems had a sensible debate on this same topic – today George Osborne has demonstrated disrespect and disregard to what is an important part of the economy – moreover, he has insulted workers everywhere.
I agree with Richard (!). Stupid idea from the Planet Stupid was how I tweeted it. I originally put a question mark at the end of it, for which I apologise…
Press release says that it will not be possible to only offer bad leaver terms (I paraphrase). However, I’m less sanguine about Richard’s ‘no employee take-up’: see this from the press release:
“Owner-employee status will be optional for existing employees, but both established companies and new start-ups can choose to offer only this new type of contract for new hires.”
Translation : “You want a job? Take it or leave it.”
Oh, and since when was CGT the issue for employment-related securities? And why doesn’t the press release say whether there will be an income tax liability on the grant of the shares?
Mike
Glad we’re on same side: bad leaver terms will happen – just imagine the scale of the minority discount, like it or not
This really is whacko stuff…
As for the take it or leave it – it’s the employers who won’t take it
Richard
Richard, I haven’t the knowledge to judge on this, though I trust your judgement enough to be sure you are more likely to be right than the ineffable “Gideon”.(otherwise known as George) Osborne, and certainly argee with all you and others say on the swivel-eyed nature of this proposal
What strikes me very forcibly, however, is that this is yet another example of the unremitting hostility of the Tories to anything that approximates to employee rights. They simply do NOT think workers should have any rights – which is very strange, given the very wide definition of “worker” under the 1996 Employment Rights Act – and I quote:
PART XIV INTERPRETATION
CHAPTER III OTHER INTERPRETATION PROVISIONS
230 Employees, workers etc
(3) In this Act ” worker ” (except in the phrases “shop worker ” and “betting worker “) means an individual who has entered into or works under (or, where the employment has ceased, worked under )—
(a) a contract of employment, or
(b) any other contract, whether express or implied and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual;
and any reference to a worker ´s contract shall be construed accordingly.
Under this definition, Bob Diamond was a “worker”! It would seem to me that the Tories are attempting a new “divide and rule”, by re-designating those of whom they can say “S/He is one of us” = “worker”, deserving of protection, and “S/He is NOT one of us” = “serf”. not deserving of protection.
Notwithstanding the problems highlighted in the article and by other commenters, another problem is that a fast growing company often needs to seek private equity to fund different stages of growth. In my experience at least, complex shareholder arrangements are often unattractive to investors.
Seems that once again, Messr’s Osborne & Cameron lack of understanding of how the world works lets them down again.
It is extremely depressing to realise the that beecroft’s cigars and brandy bravado is transformed directly into policy, and reported with even less thought.
Venal whimsy is enacted through legislation, rule through law, not of it.
I absolutely support the idea that employees should be able to influence the management of the business they work in. With the company priorities set up the way they are – to maximise return for the shareholders – shareholding could be a way to achieve that. However, it absolutely should not be conditional on giving up any hard-won rights, and I’d rather see the company’s hierarchy of priorities adjusted to put customers and employees before shareholders, or workers’ rights extended, than giving out shares.
Indeed