This initiative is more about removing employment rights than boosting business growth, says Tom Flanagan

The Government's plans to introduce 'owner-employee contracts' were unveiled, unheralded, in George Osborne's after dinner speech at the Conservative Party conference in October 2012. They were debated in the House of Lords on 22 April 2013 and rejected by 69 votes – an even larger number than when they were previously rejected by the Lords in March. 

The Government then proposed a set of amendments, by way of concession, and, on 24 April, the House of Lords voted in favour, paving the way for the proposals to become law on 1 September 2013.

The owner-employee contract proposal (renamed employee shareholders, as a Government concession) is contained within the Growth and Infrastructure Bill, and its aim is to allow businesses to award shares worth between £2,000 and £50,000 to their staff. In return, the employee would give up certain rights, including unfair dismissal, training rights and the right to ask for flexible working. These contracts would be optional for existing employees, but businesses will be able to choose to offer only this type of contract to new recruits. 

The principle of boosting employee participation and commitment in line with the success of a business is generally a good idea, but there are numerous reasons why this version of that concept is unlikely to find favour with either employers or employees. 

From an employee perspective, the economic climate means shares are not performing well at present. It is likely that employees would look at current trends and see little potential benefit for them if they chose to give up rights. The reference to 'owner-employee status' is also misleading, as their status does not really change – the employees will still be employees. This concept is essentially a repackaging of employee share ownership schemes, which is not a new idea, hence the concession in the name employee shareholders. 

It would not be unusual to put a monetary value on the shares, perhaps as part of a benefits 'menu', but the idea that an apparent benefit should be paid for by giving up valuable statutory employment rights is very strange and poses a question about the real drivers behind this legislation. Is this proposal really about encouraging productivity and growth, or is it part of an ideological drive to make the removal of employment rights seem more palatable? 

The rights that employees can be required to give up are something of a hotchpotch. The common thread appears to be that they are UK law rights and not ones that emanate from Europe. In other words, these rights are earmarked for removal because they can be removed without offending the UK's Community obligations. That, in itself, suggests this is about removal of employment rights, rather than providing any encouragement to businesses to grow or increase productivity.

There are several reasons why employers are unlikely to make use of this initiative. Small businesses, the prime target of the exercise, may be reluctant to give shares away – for example, if they are family or owner-manager businesses. There is no effective open-market value for shares in a 'closed' company. Companies may also not want to give voting rights over to workers. 

Complex arrangements

The whole scheme is likely to create a complex web of shareholder arrangements and tax provisions so that smaller businesses are unlikely to want to become involved because of an ironic increase in red tape. 

With further irony, the cost is also likely to be greater because of the concessions that permitted the Lords to finally agree to the bill's passage. 

The bill was passed after a further concession was offered by the Government that would ensure that, for an employee-shareholder agreement to be valid, employees have the opportunity to take independent legal advice, the reasonable costs of which are paid for by their employer. This concession was on top of the previous ones: 

• a seven-day 'cooling-off period'; 
• employers must provide a written statement with full details about the shares and the rights they carry; 
• any jobseeker who refuses the offer would not forfeit social security benefits; 
• the first £2,000 of shares would not attract income tax; and 
• existing employees would be protected from detriment if they refuse to switch. 

The final concession of requiring independent legal advice is also likely to lead to many employees being advised that it is not in their interests to agree to the offer, while triggering the possible involvement of numerous law firms or a stronger trade union presence in the day-to-day interaction between an employer and its employees. This includes advisers having to be involved every time a new employee is taken on.

This initiative has all the hallmarks of creating unintended consequences, largely, it seems, through having been ill-thought out to begin with. 

The Law Society's stated position on this is that statutory employment rights are not commodities. It is the universality of their status that helps to create a positive business environment.

All of this leads to the position that this initiative is almost universally unpopular and, combined with the burden of red tape and additional cost, is unlikely to be used a great deal.

Meanwhile, on research to date, the jury is out on whether the UK's employment laws actually do inhibit growth and whether, therefore, removing even some of them would have any positive effect on growth. 

More effort should be put into providing clearer information and guidance to employers about the real impact of employment law, so that they can understand how to live with it. This initiative is not likely to make that task any easier.

Tom Flanagan is a partner and the national head of employment at Irwin Mitchell.