Rewarding employees for business success? by Tom Flanagan, Partner, Irwin Mitchell on 02-Dec-2013

The flagship Government initiative allowing organisations to offer shares in return for removing certain employment rights is likely to fail because an overwhelming proportion of firms think it will be damaging to their business. Tom Flanagan, Partner and Head of Employment at Irwin Mitchell, reports on a survey of over 500 companies as a follow-up to his original editorial that discussed the introduction of the 'Shares for rights' legislation.

The so called 'shares for rights' contracts were introduced by the Government at the start of September 2013, with the aim of helping to kick-start economic growth and encourage businesses to recruit more easily.

The proposals, which were brought in as part of the Growth and Infrastructure Bill, allow businesses to award shares worth between £2000 and £50,000 to their staff. In return, employees give up certain rights, including unfair dismissal, redundancy, training rights and also the right to ask for flexible working.

The contracts are optional for existing employees, but businesses will be able to make this type of contract part of the package for new recruits.

According to the research, 80% of businesses have not heard about the new contracts, whilst only 10% of all the businesses surveyed thought it was a good idea.

Out of the 20% who said that they were aware, only 1% said they were considering introducing them. Virtually none (0.1%) of all businesses questioned said they were planning to introduce shares for rights contracts.

Interestingly, nearly three quarters (72%) said that they thought the initiative would make it more difficult to recruit.

Over half (55%) said the contracts would have a negative impact on employee retention, whilst nearly a quarter (22.9%) said that they thought this type of conduct would be a hindrance to good employee relations.

Pointing again to the low awareness of the new contracts, out of those businesses surveyed that claimed to have heard of them, only 40% knew which rights were included.

Less than half (44.8%) of those aware of the concept said that they knew it was the responsibility of the employer to pay the reasonable legal costs of the employee in taking advice on whether to accept the terms.

"The Government will be disappointed with the results here, but we have always said that these contracts are both unnecessary and potentially damaging," said Tom. "It's certainly not surprising that they are almost universally unpopular. I have always wondered whether this proposal is really about encouraging productivity and rewarding effort or, instead, part of a drive to make the removal of employment rights more palatable. There is a fear that this is not about helping employers, but something which is ideologically driven."

"The idea of boosting employee participation and commitment in line with the success of a business is a good one, but there are numerous reasons why this particular method doesn't tick the right boxes for employees and businesses."

"One is that, in the current climate, employees are likely to look at current trends in relation to share prices and see little potential benefit for them if they chose to give up rights. Also, whilst it would not be unusual if there were a monetary price to pay for shares, perhaps as part of a benefits 'menu', the idea that this type of benefit should be paid for by giving up valuable statutory employment rights is very strange, hence my concerns about the real drivers behind this legislation."

"From an employer's point of view, I would expect that small businesses would be very reluctant to give shares away, particularly if they are family or owner-manager businesses. There is no effective open market value for shares in 'closed' companies."

"The Government now risks bringing in the requirement of a combination of complicated shareholder arrangements and tax provisions. Smaller businesses – the prime targets for this initiative – are unlikely to want to become involved because of an ironic increase in red tape and cost."

"The late concession of employees taking independent legal advice before signing the contract – and the employer paying their 'reasonable' legal fees of doing so, rather like Settlement Agreements at the end of employment – could create unforeseen consequences. In effect, it might mean the involvement of lawyers and / or trade unions every time an employer wants to recruit a new employee."

"Evidence during the Government's consultation into dismissal said that the UK had some of the most flexible employment laws in Europe already in place and that dismissing staff is not as difficult as it is sometimes made out to be. In addition, the qualification period for unfair dismissal claims is now two years. That is surely enough time for employers to assess their employees without the risk of an unfair dismissal claim. This is another reason why this initiative is probably unnecessary," concludes Tom.

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