Partner Article

Employee-owner contracts: the need to know

James Hall, Associate in the Employment Team at Charles Russell LLP, shares his expertise on the proposed ’employee-owner’ contract form.

On Monday, George Osborne announced a new ‘employee-owner’ form of employment contract as an alternative to the traditional ‘master-servant’ structure. Under this proposal, which is due to be consulted upon later this month with a possible commencement date of April 2013, employees would receive between £2,000 and £50,000 in shares with Capital Gains Tax exemption in exchange for giving up certain employment rights. It is proposed that these rights would include: unfair dismissal; redundancy; right to request flexible working or time off for training; and the requirement to give 16 weeks notice of return from maternity leave, rather than the current 8 weeks. Importantly, rights in relation to discrimination would remain, which could impact on how shares are or should be allocated.“

At the moment, these alternative contracts have only been outlined in rough form, leaving many questions unanswered. The status of the shares is a key aspect that needs further clarification, particularly as to whether they would need to be given or purchased and whether they would carry voting rights in line with being a true ‘owner’. Depending on how the legislation is drafted, there may be ample scope for any such voting rights to be limited, leaving the ‘real owners’ in charge of the company, despite the sacrifices made by the ‘employee-owners’. Additionally, no mention has been made of whether these ‘employee-owners’ would be classified as worker employed or self-employed for tax purposes.“

Some commentators consider that these new contracts would only be attractive to niche businesses, especially start-ups. In the event that it is possible to strictly control voting rights, then it seems likely that big businesses may also be very interested in this approach, seeing it as a way of restricting employment rights for a relatively small financial outlay. Whilst it should not be ignored that the ‘employee-owners’ could be in a position to make significant gains on their ‘investment’, questions should be asked about how much information they will be given as to the health and prospects of the company, not to mention whether the number of shares that they will own will be commensurate with their position and the rights they will be giving up.“

This was posted in Bdaily's Members' News section by Charles Russell LLP .