Owner-employee contracts - Bad for business?

The government has courted controversy and confusion over plans for a new employment contract.

The so-called ‘owner-employee’ contracts offer employees a bundle of shares in the company for which they work – but in exchange, the worker is required to sign away many of their most basic employment rights.

Chancellor George Osborne placed the contracts at the heart of his otherwise policy-light speech to Conservative Party conference this week. But, while he may have expected a rapturous reception to the proposals, they have in fact been met with consternation.

What is the government proposing?

The government wants to introduce an entirely new form of employment contract. Under these arrangements, employees would be required to give up their rights relating to unfair dismissal, redundancy, flexible working, and time off for training. They would also have to give 16 weeks’ notice of their return from maternity leave, as opposed to the usual eight weeks. In return, they would receive as little as £2,000 worth of shares in the company. The shares would be exempt from capital gains tax.

The new contract will be available from April 2013. Crucially, business owners will be free to offer only the owner-employee contract – meaning that new employees will effectively be forced into accepting the arrangement.

What has the reaction been?

Reaction has veered from confusion to outrage. Unions suggested that the plans are simply a way to introduce the widely derided Beecroft report, which recommended that the government confer on firms the power to fire employees at will. Many have pointed out that firms’ ability to offer only the new contract will inevitably produce a situation in which employees are forced to give up their rights simply in order to secure work.

But, perhaps surprisingly, the private sector has not reacted with much enthusiasm either. There are major questions regarding the practicalities of the contracts. Paramount amongst these is a concern over the valuation of the shares. It is unclear who will set their value, and what recourse there will be for employees who do not believe they have got a fair deal. This concern is particularly acute given that the negotiation will often happen during a period of acrimony between employee and firm.

Many are also worried that even existing employees will be forced into taking the new contracts. There have been suggestions that employees could be laid off just before the end of the period after which they could bring an unfair dismissal claim, and forced to move to the new contract in order to keep their role.

What happens next?

There remain questions about whether or not the new contracts will even be introduced at all. The government intends for employers to have the option to use them from April 2013, but the backlash has been such that there is already speculation that the plans might be quietly shelved.

But whether or not they end up being introduced, the new contracts pose a series of important questions for business owners. They seem illustrative of a continuing shift towards so-called ‘flexibility’ – that is, towards a situation in which it becomes easier and easier for employers to sack employees. As a business owner you should think about whether that flexibility will make for a happy, productive workforce – or whether you should instead be taking steps to ensure that your valuable employees want to stick with your business. Read our tips on employee retention for more.