House of Commons overrules Lords to reinstate employee shareholders

The creation of an equity-linked employment contract had been likened to "slavery" by peers in their debate on the Growth and Infrastructure Bill. The House of Commons can overturn changes made by the House of Lords.

Share plans expert Matthew Findley of Pinsent Masons, the law firm behind Out-Law.com, said that it was "no great surprise" that the Commons had voted to reinstate the scheme.

"The Government has always said that it will proceed with the proposal notwithstanding the opposition it encountered in the House of Lords," he said. "Even if it did want to change its mind, politically it is very difficult for the Government to do so as the proposal was launched with much fanfare at the Conservative Party conference last year and is widely understood to be a 'pet' project of the Chancellor's."

Enterprise Minister Michael Fallon has, however, confirmed that the new employment contracts will be "explicitly" voluntary. The House of Lords had raised concerns that people claiming out of work benefits could face sanctions if they refused to apply for, or turned down offers of, employee shareholder jobs under the proposals as drafted.

'Employee shareholder' status has been proposed as a third form of employment status, alongside 'employee' and 'worker', taking effect as a new form of equity-linked employment contract. In exchange for giving up certain employment rights, employees will become owners of a stake in the business they work for by being given shares in the employer company worth between £2,000 and £50,000. Any profit on employee shareholdershares (not exceeding £50,000 in value at the time of acquisition) will be exempt from capital gains tax (CGT) when the shares are sold.

In exchange, an employee shareholder will not have certain rights which a "standard" employee would have, including those in relation to unfair dismissal, redundancy and certain statutory rights to request flexible working and time off for training. Employee shareholders will still be protected from 'automatic' unfair dismissals, such as those stemming from discrimination or as a result of whistleblowing. Existing employees cannot be forced to take up employee shareholder status, but employers can choose to offer only the employee shareholder status to new joiners.

Introducing the debate in the House of Commons, Fallon defended the "imaginative" proposal. However, he acknowledged that it would "not suit all companies or individuals".

"British companies are competing in a global race to increase their competitiveness and create wealth," he said. "What is at stake here is choice and a new status hat companies can use to give themselves a competitive edge and more flexibility in deciding how to structure their work force. By combining share ownership and favourable tax treatment - with the appropriate steps to prevent any tax avoidance - we are giving companies, especially young companies, a tool that may tip the balance in their favour as they seek to attract high-calibre individuals who can have a disproportionately positive impact on how the company performs."

Fallon said that the Government would amend guidance for Job Centre advisers to "state explicitly" that a jobseeker could not be forced to apply for an employee shareholder job.

"The draft guidance ... will mean that a jobseeker cannot be compelled to apply for an employee shareholder job, nor can their jobseeker's allowance be reduced or cut if they turn down an offer of an employee shareholder job or refuse to apply for an employee shareholder job," he said. "This explicit change to the guidance puts beyond any doubt our intention that no one should be forced into this new status."

In his Budget statement last month, the Chancellor of the Exchequer said that the start of the scheme would be delayed until 1 September 2013. He also provided more details about the tax treatment of shares awarded under the new contracts.