UK: New "Owner-Employee" Status

Last Updated: 19 October 2012
Article by Kemp Little’s Employment Pratice Group

At the Conservative Party Conference on 8 October, the Chancellor George Osborne announced plans for a new employment status: "owner-employee". Owner-employees would be issued shares in the company they work for in exchange for waiving some of their UK employment rights. Any gain arising on a disposal of these shares would not be subject to capital gains tax.

The new employment status is aimed at helping fast-growing small and medium sized companies ("SMEs") to achieve a flexible workforce, which the government believes will promote growth amongst such companies and in the wider economy.

The new "owner-employee" status has many similarities with the concept of "no fault dismissals" for SMEs which was being floated by the Conservative party as part of its "Red Tape Challenge" following the Beecroft report, but which was blocked by the Liberal Democrats. In particular, the "owner-employee" status would enable SMEs to hire and fire staff at will by only paying statutory minimum notice (unless the contract provided for greater notice).

Under the new status, "owner-employees" would:

  • Be given between £2,000 - £50,000 of shares that are exempt from Capital Gains Tax;
  • Waive rights to:
    • Unfair dismissal;
    • Redundancy pay;
    • Right to request flexible working;
    • Time off for training; and
  • Be required to give 16 weeks' notice of return to work following maternity leave, rather than the usual 8 weeks.

Owner-employees would still be eligible for existing employee share ownership schemes such as the Enterprise Management Incentive.

In the event that the employment is terminated either by the company or the owner-employee, the company would be required to buy back the shares at a "reasonable" price. The government will consult on how to achieve this. The proposed rules will permit a company to require the employee to transfer the shares, but only for a "reasonable price". It will be interesting to see if the new legislation sets out a valuation mechanism, otherwise there may well be an increase in disputes between employers and owner-employees about what is a "reasonable" price.

The status would be optional for existing employees but both established companies and new start-ups would be able to choose to require new employees to enter into this type of contract (although employers will be able to insert more generous employment conditions into the contract if they wish to do so).

It will be interesting to see what procedures employers are required to go through when asking employees to take on this status and what information they are required to give to staff before they can sign up to the owner-employee status, particularly in light of the duty of trust and confidence owed by an employer to its staff. To date it has been notoriously difficult for employees to waive their rights (and illegal for employers to coerce their employees into waiving their rights).

This may well become a new battleground, in which owner-employees later turn around and say that the employer did not fully explain the implications of the new status at the outset and therefore they should not be bound by its consequences.

Whilst we welcome moves by the government to promote economic growth and flexibility for employers, especially within the SME community (many of whom are technology companies), we question the effectiveness of the plan and whether it will meet its intended goals.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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