HR & Management

Controversial owner-employee contracts could be good for growth

4 min read

16 November 2012

Gary Davis believes owner-employee contracts could be a dream come true for small businesses with an entrepreneurial vision.

At a time when the Coalition is running out of ways to incentivise growth, its latest proposals allowing employers to offer owner-employee contracts to their staff in exchange for surrendering their employment rights, could prove to be both popular and effective among entrepreneurial businesses.

The proposals, which were set out in a government consultation recently provide employers with a new means of motivating their employees by offering them shares valued at between £2 and £50,000, which are free from capital gains tax at the point of sale. In exchange for signing up to these owner-employee contracts, employees may be required to forego some of their employment rights, including their rights in relation to statutory redundancy pay and (with exceptions) unfair dismissal.

While they are unlikely to be appealing to all businesses, the much-criticised proposals could perform a very positive role in supporting economic growth among fledgling and fast-growth companies.

As such, it is a shame that these proposals have attracted so much negative commentary as the underlying principle here, which is about incentivising workers. Promoting loyalty and performance by offering them a stake in the business that employs them, is extremely positive and could be adopted more widely. We will need to see the detail but these will not be forced on anyone, so for the right business, they may be a useful tool to add to their existing range of options.

Share option schemes are commonly used and have proved valuable at executive level. In light of this, any move to foster employee engagement through an ownership stake with the right type of business should be welcomed. 

However, the decision to tie in the requirement for employees to forgo their employment rights will limit the appeal of this scheme, particularly among larger corporates and employers with a strong ethical stance, some of which are already operating employee ownership models without this added downside.

The Department of Business, Innovation & Skills is expected to publish its review of employee ownership this autumn and the Office of Tax Simplification will also be reporting its findings later this year. These findings will therefore tell us more about how far the coalition could go to remove barriers to employee ownership, in particular tax barriers. I suspect employee contracts will represent just one of the options put forward.

In their current form, the proposed owner-employee contracts are unlikely to attract a high level of employee support. A survey carried out by YouGov earlier this month confirmed that 63 per cent of people feel that allowing employers to offer staff tax-free shares for the removal of some employment rights is a bad idea.

Subsequently, most employees are likely to be sceptical about schemes linked to shares, which, after all, can go up or down in value. The fact that they would be required to forego employment rights into the bargain would also jar with many of them. However, for a minority of businesses with a comparatively small workforce, driven by a clear, entrepreneurial vision, owner-employee contracts could be a dream come true. They will allow the employer to create a tax-free structure for rewarding staff loyalty and effort as they work together to build a successful business.

Gary Davie is a corporate partner at Shakespeares.