New employee contracts come with a warning

Employers need to look carefully at new employee contracts before adopting them and demand could be much lower than predicted, as Peter Jackson discovers talking to Pam Sidhu.

As an idea, it seemed fair enough. Under its Growth and Infrastructure Act, the government introduced a new employee-shareholder contract

Available from this month, the new contract allows staff to give up some of their employment rights in exchange for a minimum of £2,000 worth of company shares. It was introduced by the Government in an effort to encourage businesses to hire workers by removing the risk of being taken to employment tribunal and to encourage employees to have a stake in their businesses.

However, business owners need to carefully weigh up the pros and cons of the new kinds of contracts warns Pam Sidhu, employment law expert at Birmingham commercial law firm The Wilkes Partnership. Sidhu, who was previously at the Birmingham office of Pinsent Masons, says that firms need to look at the costs of the new contract before they offer it.

She explains: “While on first look there are some benefits for business in having employees give up certain employment rights and in theory become more engaged in the company, there is also a series of disadvantages that need to be taken into consideration.”

Employment rights that employee-shareholders give up include the right to claim unfair dismissal, the right to statutory redundancy payments, and the right to request flexible working and time off for study or training. In exchange for this, businesses will issue shares of at least £2,000, with each employee receiving Capital Gains Tax exemption on gains made from the first £50,000 worth of shares. In essence employees accept diluted employment rights in exchange for being more engaged in the business.

Sidhu says: “The decision to offer these contracts should not be taken lightly, as there is a lot of red tape surrounding this employment status. Firstly, businesses are obliged to provide independent legal advice to any employee they offer this contract to, with the company footing the bill for this regardless of whether the contract is accepted.

“There are also certain key employment rights that these employees would retain that don’t help to make things easier for employers, including the right to claim for unlawful discrimination. At tribunal, it is this specific type of case that often ends in the most substantial costs for businesses.’’

They also retain whistle-blowing rights and health and safety rights.

Sidhu says: “There are also a raft of questions raised by this introduction, such as what happens if the employee shareholder sells their shares during employment and how small businesses should go about deciding on a value for their shares.”

She adds: “It was an interesting idea when it was first floated but there are so many rules around this new status that it can be very confusing for businesses to decide whether they want to go for it or not. I think the government has made it more complicated than it needed to be. Maybe they should have been more blunt and said no employment rights whatsoever.’’

However, many employment rights originate in Europe and the government no doubt felt its hands were tied in trying to remove them, which would could explain the retention of discrimination rights. Whistle-blowing rights originate in English legislation but are so topically that it may well have been felt it was politically too awkward to try to remove them.

Sidhu believes there could be litigation over some of the rights being given up which could, of itself, lead to discrimination claims. For example, taking away the right to flexible working could be seen as discriminating against women, for whom such rights are more important when they want to have families.

The new employee-shareholder status is completely voluntary, with it left up to a business on whether it will offer the contracts. It is then up to existing employees to decide whether to accept the offer of a new employment status, with businesses given the option of offering only this type of contract to new recruits.

Sidhu says: “Instead of the SMEs this scheme was intended to help, take up is much more likely to be from senior employees in large organisations, many of whom will already hold shares as part of their remuneration packages.”

Someone with an existing material stake in the employer’s business – 25% or over – does not qualify for the scheme, which could deter some family-owned businesses. Some larger employers are accustomed to staff share ownership schemes might use it to reward senior executives who would benefit from the tax incentives.

As Sidhu says: “Very highly paid senior executives will be least interested in their employment rights. For example, the right to claim unfair dismissal is only worth a year’s pay and is up to a maximum of £74,000. For an employee earning £100,000 with generous notice provisions under their contract, they won’t be too bothered about their employment rights.’’

However, so far, none of The Wilkes Partnership clients have shown any interest in taking up the new employee status.

Businesses which are considering the offer of this type of contract are urged to seek legal advice to allow them to fully understand both the up and downsides.