7 problems with Osborne's 'owner-employee' scheme

The latest stunt from George Osborne is a new kind of employment contract called an owner-employee. Having messed up the economy, why not dabble in another minister’s portfolio!

New, so called owner-employees will be required (optional for existing staff) to swap some of their employment rights for  between £2k and £50k of shares in the business they work for, any gains on which will be exempt from capital gains tax. The rights are unfair dismissal, redundancy, the right to request flexible working/time off for training and providing 16 weeks’ notice of a firm date of return from maternity leave, instead of the usual 8. Legislation will come later this year so that companies can use the new type of contract from April 2013. The Government will consult on some details of the contract later this month.

This Beecroft style proposal has all the hallmarks of a wheeze suggested to the Chancellor over one of those expensive fund raising dinners. It also has the attraction of diverting attention from the mess he is making of his own portfolio at the Tory Party conference. A few initial problems spring to mind.

·         These workers will ‘own’ nothing. A handful of shares does not give an employee any real ownership say in the running of the business. But they do take the financial risk of the real owners running down the business and making the shares worthless. We have seen this happen in other employee share ownership schemes.

·         The most likely time an employer will want to sack a worker is when the firm is doing badly. At that time the shares will probably be worthless. So no job, no redress and no cash.

·         Growing small firms actually don’t want to spread ownership because it could impact on the ability to sell the firm. That’s why they insert ‘bad leaver’ terms into the share ownership provisions. If the Treasury blocks this option, as their PR implies, the scheme becomes unattractive.

·         How will the small firm find the capital to do this and what effect will it have on their profit and loss account or share capital account? This could have a knock on effect on their profitability that won’t help borrowing. (hat tip to Richard Murphy)

·         You can already sense dodgy law firms suggesting ways this could be exploited to cowboy employers. For example, cut the pay of new starts by £2k and replace it with shares under this scheme and, for not a penny, you are exempt from unfair dismissal etc.

·         The problem with this and other attempts to weaken unfair dismissal is the unintended consequences. If straightforward unfair dismissal is not available workers and their advisors are more likely to look at the underlying causes of the dismissal. This brings much more complex and expensive legal action into play, including discrimination.

·         As tax law is involved there will inevitably be some complex procedural requirements. In fact the very red tape the Chancellor is so fond of complaining about. Many employers will simply say it isn’t worth the effort. Particularly as very few of them think employment rights are a problem anyway.

With a bit more time I am sure I could come up with many more. The Treasury risk register on this one would make interesting reading. Although I suspect this nonsense was cobbled together so quickly that officials will be scurrying around trying to give the appearance that it will work.