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How will the owner employee status work?

The economic downturn has meant that business owners have had to be more creative with both their business ventures and motivating their staff. Recently it seems that even the government is following pursuit, as last month the Chancellor of the Exchequer, George Osborne, announced plans for a new kind of ‘employee owner’ employment contract, as part of the plans to improving the UK economy and creating greater employment flexibility.

The government aims to allow companies to offer the new type of contract from April 2013.

What’s new?

Under the new status, employees will be entitled to between £2000 and £50,000 of shares, which will be exempt from capital gains tax, in exchange for giving up the following rights:

1.    Unfair dismissal rights (although they are still protected from being automatically unfairly dismissed if dismissal relates to whistleblowing or taking maternity leave); 

2.    To request flexible working (unless they are exercising the right when returning from parental leave please see below);

3.    To request time off for training;

4.    Statutory redundancy pay;

Further employee owners will also need to give longer notice of 16 weeks (as opposed to the current 8) to return from maternity leave or adoption leave.

Employers may contractually allow an employee owner to surrender their shares if they leave, is dismissed or made redundant. When shares are surrendered, the employer would have to buy back the employee’s shares at “their unrestricted market value”.

What remains the same?                                                           

The following rights will be preserved:

1.    The right to bring discrimination claims upon dismissal.

2.    The right to request flexible working when returning from the EU derived entitlement to 18 weeks of unpaid parental leave per parent per child. The current proposals are to require individuals making such applications to do so within 4 weeks of returning to work.

Conclusion

On the face of it the government proposals seem great for start-ups, who will gain the opportunity to recruit new employees before their cash-flows allow it. However inevitably there remain concerns as to how the status will work in practice and how it will be perceived by potential employee owners. After all, it can only increase flexibility in the workforce, if there is a willingness to enter into such relationships.

One of the major concerns for employers and employees alike is how shares will be evaluated on departure of employee owners, particularly in circumstances where departure is not amicable. The government proposals set out that on departure shares should be given “their unrestricted market value”, however in practice this may require expensive valuation exercises. Furthermore the proposals do not suggest that the employment tribunals will have jurisdiction to hear such disputes, therefore this opens up the question of whether disputes will involve expensive litigation through the County Courts for breach of contract.

However it is very important that at present we do not lose sight of the fact that when businesses recruit owner employees, they will be able to insert more generous employment conditions into the contracts if they wish. Both parties may also wish to agree provisions dealing with share evaluations on departure at the outset to avoid lengthy litigation in the future.


Samira Cakali

Samira Cakali is a pragmatic and approachable solicitor advocate with extensive contentious and non-contentious experience in the fields of employment law as well as civil litigation, within a range of commercial businesses from SME’s to multinationals as well as senior executives.

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