Third time lucky?

In October 2012, George Osborne announced the government's plans to add 'employee-owner' as a third category of employment status to the current categories of employee and worker in the Employment Rights Act 1996. A first draft of the scheme can now be found in the Growth and Infrastructure Bill. Companies will be able to issue capital gains tax-exempt shares worth at least £2,000 to employee owners, in return for protection against employment rights, including most unfair dismissal claims.

The subsequent consultation exercise was open for only three weeks '“ a considerably shorter time frame than the usual three-month period '“ and drew near universally negative responses from businesses, emp-loyees and their professional advisors. As the government's consultation response dryly notes, only 'a very small number of responses welcomed the scheme'. Overall, over 90 per cent of respondents suggested that its introduction as proposed would have negative or mixed consequences.

The new scheme raises a range of concerns, from loss of worker protection and employee choice to status abuse, tax avoidance and the scheme's complexity ?and cost.

Complexity

The government's response documents employers' and workers' struggle to understand and correctly apply the two existing statuses of worker and employee. The addition of a third category adds an unnecessary layer of complexity, especially in light of the recent decision in Autoclenz v Belcher [2011] UKSC 41, where the Supreme Court held that in determining a worker's employment status, the relevant evidence was not necessarily limited to the written contractual agreement between the parties. Such arguments could easily be translated into the employee-owner scenario: if an individual continues to behave and be treated as an employee on a daily basis, with weak or no evidence of ownership (e.g. because of the low value or lacking voting rights of his or her shares), the courts are likely to disregard the employee-owner contract in favour of more traditional classifications. In spite of the government's reminder 'that all employment relationships are an agreement between two parties', this would be the case especially if the transition to employee-owner contracts (or their being offered to new joiners) becomes an automatic standard practice, along the lines of the now near-universal opt-out employees are asked to sign in order to waive their rights under the provisions of the Working Time Regulations 1998.

The government's only response to these concerns is a promise to 'reorganise employment status guidance so employers have a simple guide to the types of statuses available to them and what it means for their businesses'.

Categorising worker sta-tus is however one of employment law's oldest chestnuts, and it is doubtful that a straightforward guide could suddenly be produced. It is therefore not surprising that 56 per cent of respondents expected an increase in tribunal claims as a result of the introduction of the new status.

Interaction

The precise range of employee-owners' statutory rights remains unclear. The government response raises the issue of redundancy consultation thresholds, without however addressing the point. The status' application is particularly unclear as regards workers' rights to organise and bargain collectively. Without specific legislative amendments to key statutes such as TULRCA 1992, it is difficult to see how the proposed scheme could operate within the current tripartite classification, thus leaving employee-owners outside the scope of collective rights.

Such an exclusion would open the entire scheme to challenge under the Human Rights Act 1998, given the European Court of Human Right's recent emphasis on strengthening article 11 ECHR in Demir v Turkey [2008] ECHR 1345.

Who is the relevant employer?

Employees' share ownership will be particularly problematic in corporate group structures or companies held by private equity firms. In which entity would employee-owners be given shares? The government has accepted that if shares would always be held in the employees' immediate contractual counterparty, it could become very difficult to value the shares of that subsidiary. As a result, the proposal has been extended to shares issued by a group's parent company. While this solution addresses the immediate concern, it opens up challenging questions as to whether the parent entity could consequentially be considered to be an employer for other statutory purposes.

Little benefit, significant cost

In addition to the three topics highlighted, the proposals raise serious concerns about their compliance with EU law, potentially discriminatory effects (in particular as against female workers), and their encouragement of tax avoidance schemes: the Office for Budget Responsibility expects the cost of this to rise towards £1bn. None of these issues are addressed by the only significant change resulting from the consultation process, the proposed relabeling of employee owners into employee shareholders '“ a modification which furthermore raises difficult issues in relation to the Nutall review of employee ownership. Given the near-unanimous objections raised by employer and worker repre-sentatives alike, it is hoped that the new scheme may yet be dropped before the Growth and Infrastructure ?Bill is enacted.

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