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The Government mandarins are at it again.  This time the Department for Business Innovation and Skills‘ proposed ’employee owners’ scheme is to go ahead.

Under this scheme employers are to exchange shares in their organisation (worth £2,000 upwards plus up to £50,000 being exempt from capital gains tax) with the employee who will surrender  their statutory right to unfair dismissal statutory redundancy pay, and the right to request both flexible working and time off for training. I note the automatic unfair dismissal rights will be unaffected.

In a move that is enrage many, the Government admits that these proposals mean that pregnant women are to be treated differently.  Currently all women must provide 8 weeks’ notice of their return from maternity or adoption leave, but this will increase to instead of the usual 16 weeks if you are an owner!  Is there some male bias in this proposal?

The Deputy Prime Minister Nick Clegg has extolled the virtues of the John Lewis model of employee ownership, but is this a realistic comparator?   I think not. To my mind, the Government’s proposals to make staff shareholders could be of little benefit either to them or their employers!

Perhaps unsurprisingly, the response to the government’s consultation was overwhelmingly negative: out of around 200 respondents, only three said they would take up the scheme and fewer than five thought it was a good idea. Employee Ownership Association has also criticised some of the proposals.   What is very surprising is that the government is pressing on with its proposal, despite advice that it may give rise to serious problems.

I know of some employers who will embrace these changes and then set up procedures to ensure that the multitude of minority shareholders are not given a true voice.  This will lead to a negative impact on corporate governance, especially if those employees become disgruntled. Many commentators agree, ’employees do not make passive shareholders. Corporate democracy will add a layer of complexity and frustration to day-to-day decision-making and governance.’

Boon for lawyers and mediators.  I can see that the employment relationship will change, an employee owner contract will become an extensive document and shareholder agreement etc. etc. since it will have to govern the offer of shares, and how and when they can be transferred back to the company. It will need to be carefully drafted to avoid triggering prospectus requirements, liability for any misrepresentation and litigation.

Of course there are some employers who already have share schemes in place, how will the new regulations govern the new employee owner relationship?

Another aspect that some commentators have overlooked is the needs of Investors.  Employers will need mechanisms for buying back shares, giving rise to issues regarding the valuation of those shares. They will need to avoid circumstances that contravene FSMA regulations in their dealings with employees with regards to shares. They could also find that employee shares could hinder external investment in the company. For example, employees will receive favourable treatment if the business becomes insolvent, potentially depleting external investors’ capital protection.

Read the BIS consultation here.