Legal Issues – Employee-Owner Contracts

The latest Government proposal in its shake up of employment law is the intended introduction of employee-owner contracts, which it wants to see introduced from April 2013. The idea is that employers can give employees between £2,000 and £50,000 of shares (which are to be free of capital gains tax on disposal) provided they give up certain employment rights, including the right to claim unfair dismissal or a statutory redundancy payment and the right to flexible working or time off for training, and give increased notice (from eight weeks to sixteen weeks) in the event they are returning from maternity leave. Existing employees can decide whether to opt in or not, but new employees will potentially be required to sign up to these new arrangements.

Whether you agree with the principle or not, there are a number of legal issues associated with this proposal. Not least that under current legislation, in order to sign away the vast majority of employment rights (including the rights above), the employee either has to sign an ACAS COT3 agreement, or a compromise agreement on which s/he has to have taken legal advice. Unless it is intended that such formalities are to be entered into prior to the commencement of employment, the legislation will need to be amended if employers are to adopt such contracts. Also, from a tax perspective, is there likely to be any real advantage to the employee, who will benefit from a £10,600 capital gains tax annual exemption in any event?

There are practical difficulties to be overcome too. How are the shares held by a departing employee to be valued when it comes to selling them back to the employer? Can the shares be issued by the employer subject to a ‘bad leaver’ type provision? Will the employee have to remain in employment for a minimum amount of time to qualify for the full value of the shares? The Government is to commence a consultation on their proposal this month where no doubt these matters will be debated.

And in a stop-press moment, the Supreme Court (by a majority decision) has ruled that equal pay claims can be brought in the civil courts where they are too late to be brought in an employment tribunal. This is a highly significant ruling, not least because the time limit for bringing claims in the civil courts (5 years in Scotland, 6 years in England) is far longer than the normal six month time limit in employment tribunals. In addition, the Supreme Court ruled that the employees concerned did not even have to demonstrate why it was that they failed to put in employment tribunal claims in time. This could see thousands of employees, who may previously have thought their equal pay claims were too late to do anything with, simply turning to the civil courts instead.

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