Shares for employment rights – another quack remedy

One advantage of being extremely busy is that, by the time I get around to blogging about stuff, everyone and his cat has already had a go. George Osborne’s shares for rights scheme is another one for the ‘so much wrong with this it’s difficult to know where to start’ category. But quite a few people have anyway and most of them think the whole idea is bonkers.

Leaving aside the legal and moral objections for a moment, I’m not even sure that buying out employment rights with £2,000 worth of shares would make commercial sense for most organisations.

The median unfair dismissal award was just short of £5,000 last year. To get £2,000 in statutory redundancy pay an employee would need 4-5 years service and to get to £5,000 would need around 10 years service. Neither is payable for the first two years anyway.

So £2,000 per employee to hedge against the possibility that, sometime around 5 years hence, you might want to get rid of some of them quickly and it might cost you double that. Even if you had 10 employees and you sacked 4 of them, £20k would more than cover your redundancy costs.

Yes, there are legal costs to fighting tribunal cases but there are also costs to setting up employee share schemes. Most firms need to take advice from lawyers and remuneration consultants before implementing such schemes. And there is no guarantee that sacking an employee and buying back their shares would be any cheaper than paying them a redundancy settlement. Legal disputes between shareholders can be just as expensive as those between employer and employee.

As the FT’s Jim Pickard points out, there are a number of things those who control the company could do to manipulate the share price:

1] The founder could double or triple his salary and perks. That would push down the company’s profitability, meaning that the shares may pay little or no dividend.

2] The founder could lend the company money (perhaps from his own offshore entity) at an exorbitant rate, say 12 or 15 per cent. That would again push down profitability so that the shares would have no yield.

3] The founder could make large profits in the company but insist on re-committing them to capital investment rather than distributing them to shareholders. Again, no yield.

All grounds for protracted court cases as employees challenge the basis of the share valuation. To an employee dismissed without compensation, challenging the amount they were paid for their shares would be their only chance of redress. The cases would simply shift from one type of law court to another.

If the company already had a share scheme, and had therefore already incurred the costs, it might make some sense to trade the shares for employment rights with new employees. Robert Peston thinks the investment banks and other City firms will hire all their employees on this basis. Perhaps so but I suspect the attraction there would be the tax avoidance rather than the loss of unfair dismissal protection. City types tend to be fired at the drop of a hat but with payouts far exceeding anything they’d get at an employment tribunal, which is why they rarely bring claims. There is little point in buying them out of something so few of them do anyway.

All considered, then, I can’t see Osborne’s scam being very attractive even in hard commercial terms, which is probably why the reaction from business leaders has been a collective Meh!

The CBI’s John Cridland said:

I think this is a niche idea and not relevant to all businesses.

Sainsbury’s boss Justin King went further, warning that it would undermine already low levels of trust in business.

Bosses of smaller businesses didn’t sound too keen either. My favourite comment came from Darren Fell of Crunch Accounting:

With this new proposal the government are really grabbing at straws. This is an HR minefield. Yet more headaches for small business owners, and endless consultancy fees for HR firms.

And if HR people coining it isn’t enough to put you off the idea, read what the lawyers have to say.

Here’s barrister Lucy Bone:

The scheme leaves intact European-derived equality legislation. Employers will not be able to “fire at will”, without risk of a discrimination claim being brought. While compensation for unfair dismissal claims is capped, currently at £72,300, the sky is the limit for discrimination damages. Certain categories of discrimination can be easily seen and guarded against, for example race discrimination, but others can be invisible, such as discrimination on the grounds of disability or sexual orientation. Only a proper dismissal process will afford an employer the opportunity to ensure that the decision to terminate will stand up in court.

As many of us said when the idea of scrapping unfair dismissal was suggested by Adrian Beecroft, any aggrieved employee who is in a position to do so will just lob in a discrimination claim. Again, George’s plan might just replace one type of claim with another.

As Darren Newman says, any legislation will be fiendishly complex and take ages to draft or, at least, it will if it’s done properly. Alternatively, if rushed in, it will be full of holes.

[O]ne thing I do know with absolute and piercing certainty: these contracts will not be ready for use by April 2013 as the press release claims. No way. Absolutely not. The only way that could happen is if the Government hurriedly inserted something into the later stages of the Enterprise And Regulatory Reform Bill, allowing no time for full consultation, careful drafting or proper Parliamentary scrutiny. That would produce a badly drafted law full of loopholes, not properly integrated with other employment rights (TUPE will be fun), and resulting in years of wrangling in the courts and tribunals.

So, either way, lots of work for lawyers too. And this was supposed to be about getting rid of red tape.

I haven’t even touched here on the impact on trust in the workplace and employee engagement. I will save that for a future post but Simon Caulkin pretty much nails it here:

Shares-for-rights harks nostalgically back to a low-trust, low-wage, low-engagement workplace that is incompatible with a knowledge economy.

All things considered, then, I doubt that this scheme will ever become law. It will most probably get shot down during the consultation process as business leaders, civil servants and, eventually, even government ministers come to see that it is more trouble than it is worth.

Which, in a way, is a pity. George Osborne’s shares for rights scheme would be an excellent way to test the claim that employment law is holding back our economy. If employment protection really is such a millstone round employers’ necks, then freeing yourself from at least some of it would be well worth £2k per employee.

If, on the other hand, employment protection is only a minor factor affecting Britain’s economic performance, as most of the data seem to suggest, then the take-up of this scheme would be negligible.

Which is probably why the plan will never see the light of day. It is a very complex, laborious, lawyer-and-consultant-intensive way to deal with a relatively minor problem. It would take up a lot of government and management time for little or no benefit. In short, it is yet another quack remedy we could well do without.

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12 Responses to Shares for employment rights – another quack remedy

  1. Pingback: Shares for employment rights – another quack remedy - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. John D says:

    I note the comment by barrister Lucy Bone above ‘…While compensation for unfair dismissal claims is capped, currently at £72,300, the sky is the limit for discrimination damages.’
    At £2K, it might work out a cheap form of insurance to guard against spurious claims of religious discrimination being brought before tribunals and courts in future?

  3. All fair points, but the £2k buys more than exemption from unfair dismissal laws – it also allows employers to dismiss out of hand requests to work part time & limits maternity rights.

  4. Adrian has it. The rights bought out would principally affect women. I foresee a forest of sexual discrimination claims.

  5. Laughing boy says:

    This is fab for company directors who will get £50k of equity cgt free. Trebles all round. All in it together Gideon…

  6. Neil says:

    Most businesses would prefer to recruit new staff (or take on contractors) without ~25% agency fees. That adds up to way more that £2000 per head – and that’s what needs looking at.

  7. Charis says:

    Nailed the aspect of this that frustrates me the most. Having completely wrongly identified the problem they somehow manage to find a solutions that not only doesn’t fix what they think the problem is but makes it worse. It’s breathtaking.

    Before you get on to the annoyance around addressing the wrong issues and the fundamental ethical/moral issues with this one. I would so much rather that if you’re going to be unethical, it should at least be effective. This proposal seems to be neither.

  8. it doesn’t seem like a very good idea either politically or as a practical HR thing. the latest thing i wonder is whether it would be legal to ask people if they want to waive their rights during the selection process – presumably not. so you ask them if they want to once they’re in the job? and if they say no you sack them then? and have to recruit again? baffling.

  9. The title of the government’s own press release makes it perfectly clear that what is being waived here is not the employee’s rights but capital gains tax.

    This will be of interest to “private investors”. In other words, someone who might previously have invested as a sleeping partner might now become an owner-employee (but one that does no meaningful work). It may even allow private equity firms to set up shell companies, with one owner-employee and £50k capital, to raise debt for acquisitions.

    This will also encourage debt-financing over equity-financing for startups, so that initial valuations can be kept artifically low. Perhaps Osborne is trying to engineer greater demand for his funding for lending scheme.

  10. Pingback: What You Can Get Away With (Nick Barlow's blog) » Blog Archive » Rights for shares: raise the white flag

  11. Pingback: “Shares 4 Rights” scheme mooted by Chancellor of the Exchequer | LabourBlawg

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