Growth and Infrastructure Bill

Lord Flight Excerpts

Wednesday 6th February 2013 Lords Chamber

[Lord Strasburger]

My Lords, I declare an interest. Before I joined this House I was a serial entrepreneur. I have started many businesses from scratch. The most recent one employed 200 staff after being in business for four years. I am a big fan of giving employees a stake in the success of the business so that their goals are aligned with those of the founders. It never crossed my mind that my staff should need to forfeit their employment rights in exchange. Snatching these rights is hardly the best way to win their hearts and minds. Managers who feel they need to diminish the rights of their staff to get their full commitment to the success of the business are bad managers and will almost certainly fail. This idea is complete nonsense.

[Lord Flight]

My Lords, when these proposals were announced, I was somewhat lukewarm towards them, for some of the reasons that other noble Lords have spoken about today. However, as I thought about the proposals rather more, it seemed to me that there is some sense to them. They are not proposals for everybody. They are not for individuals who work for the public sector or for large companies; they are relevant to individuals who are by nature high risk-reward in their approach. They are willing to be high-risk takers to build up capital for themselves and their families. The proposals are, as has been articulated, for small and medium businesses, and are certainly not appropriate for larger businesses.

The proposals at present are really rather simple and straightforward and may be capable of improvement but not, I hope, of too much embellishment or the whole point of the principle would be undermined. People have the option whether to participate. If you wish to be an employee entrepreneur, here is the chance to benefit with equity on an extremely tax-attractive basis, but you are going to be taking risks just like the entrepreneur himself. One of the problems with small-company share schemes, as I have experienced in my own career, is that they are very limited. Where options have to be used they end up being taxed at nearly 60% and are not particularly attractive. The carrot of tax-free capital gains is attractive.

The subsequent amendment that I will address shortly suggests a template for and guidance on the new scheme. Particularly as it is new and untried, that is needed. The principle of requiring advice I can go along with to some extent, although requiring barristers seems perhaps to be jobs for the boys. The principle of the scheme seems pretty straightforward. It does not require anyone of huge intelligence to understand the quid pro quo.

Moreover, some of the potential problems have already been addressed via amendments in the other place. There are measures intended to stop any form of coercion. Employees also retain the great majority of their employment rights. Partly paid issued shares cannot be used, so people would not be left with a liability if a company went bust. If shares are inappropriately valued, the deal returns employees to their normal employment status. I am not sure how far one should really go to spoon-feed the principles. If someone is not a natural risk taker, this is clearly not for them, and they should not look to accept a job with this sort of deal.

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[The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Viscount Younger of Leckie)]

Noble Lords will not be surprised to know that I was expecting a somewhat lively debate on this general issue of shares for rights. I very much appreciate noble Lords’ contributions. Before I turn to the amendments in the group—Amendments 81D, 82A, 82B, 91 and 92—I should take this opportunity to inform the House about the clause. I will have the chance to expand on this during a stand-part debate, but the House might like to understand why the Government are creating the new employment status and what it is aimed to achieve.

The Government are creating a new form of employment contract that companies limited by shares can use. This new status will be known as “employee shareholder”. The employee shareholder will be granted shares in the employing company or the parent company but will not have all the rights of an individual with employee status. The Government are taking this action to offer companies and people more choice, and are giving choice to companies on how they structure their workforce to ensure maximum growth and flexibility, more choice for people in the type of jobs that are on offer to them and new opportunities to benefit from growth and meet their long-term aspirations.

This Government, from the outset, have committed to reforming employment laws, and are doing so through the employment law review. Establishing the employee shareholder status is different. With this change, the Government are creating a new type of employment relationship. It is an employment relationship where both the company and person share the risk and rewards for business more than any other employment type.

I now want to address the amendments tabled by my noble friend Lady Brinton and the noble Lords, Lord Adonis and Lord Pannick. This clause is not about making a new employment status compulsory for all. It is about adding to the employment statuses that already exist. It sits alongside existing employment statuses such as employee and worker.

Employment law does not stipulate that individuals should have legal or financial advice before accepting a job with the employment status of either employee or worker, or taking up share ownership possibilities. It would be anomalous to impose these requirements for the new employee shareholder status. Neither do we want to stipulate that employers must pay for legal advice. Noble Lords will appreciate that legal expenses can be high, which would be a burden both in administrative and cost terms, in particular for the type of fast-growing company to which this is most likely to appeal.

There is nothing in the clause that prevents individuals from seeking independent advice. This is about creating a new voluntary employment status and not about creating additional burdens for employers.

As for employment contracts, it is important to leave these to employers and individuals to negotiate, discuss, and agree to, although employees are entitled to receive a written statement of employment particulars within two months of the start of their employment. Government are committed to reducing burdens arising from regulation and therefore wish to keep administration requirements to a minimum.

The status, as we have already said, will be most attractive to fast-growing businesses, which will spend time looking for and investing in the right people to help their business grow, and will be willing to give fully paid up shares to the right candidate. These employers will have to invest in employee shareholders by giving them shares, which is a cost to them. It is likely that they are exactly the type of employers who would then struggle to find the additional cost and time to fulfil the amendments my noble friends and the noble Lords are suggesting.

[Lord Flight]

Just before my noble friend passes over this matter, I would like to raise one issue that is not clear to me. When the grant of shares is given, is the value of them treated as taxable income? If so, I certainly think that it should not be part of the deal as something that is tax attractive.

[Viscount Younger of Leckie]

I thank my noble friend for that question. The shares are treated as taxable income, although they are shares, so there would be tax at whatever level payable on the shares received.

I should now like to answer some questions that have arisen. The noble Lord, Lord Pannick, stated that there was no demand for this new status. I can understand his concern from other comments made this afternoon. This new employment status will not be appropriate for all companies or be taken up across the board. It simply adds to the options and flexibility available to companies and individuals in determining their employment relationships.

My noble friend Lord Flight has eloquently mentioned this particular issue in his speech. The new status will probably appeal mainly to fast-growing and small start-up companies and individuals as this is the level where employment rights are seen to impact the most.

I would like to address directly the points raised by my noble friend Lady Brinton to say clearly that this particular employment shareholder status will not suit the examples that she cited in or near the Cambridge area. My noble friend Lord Strasburger also cited some example and I suspect it would not suit—

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[Lord Pannick]

My Lords, I agree with all that has been said by the noble Lord, Lord Adonis. Clause 27 is wrong in principle. It contains inadequate safeguards both in relation to the loss of welfare benefits for those prospective employees who do not wish to give up their statutory employment rights, and also in respect of the need for legal and financial advice for those who are prepared to give up those rights. Clause 27 will also be expensive to the Treasury if there is a take-up, or there is going to be very limited demand. I note that the noble Viscount has attempted to provide the evidence on which the Government estimate that 6,000 companies may be interested in Clause 27. I look forward to seeing that material. I, too, very much hope that the Government will listen to the debates that we have had this afternoon, and take the wise step of withdrawing Clause 27 before we come to consider it again at Report.

[Lord Flight]

My Lords, although I welcome the suggestion that the Chancellor might allow there to be no income tax on grants of up to £2,000, as I understand it, the spirit of the provision is more about the go-getter employee shareholders. I would suggest that if there is income tax on amounts over £2,000, this scheme will not get anywhere because the amount of tax that people pay will be quite disproportionate to the risk they are taking on their equity and to the values—as the noble Lord, Lord Pannick, pointed out—of what they are giving up. It is important to sort out by the time we return on Report precisely what the income tax position will be.

[Baroness Brinton]

My Lords, I am grateful for the comments of the noble Lords, Lord Adonis and Lord Pannick. I will not repeat the detail but there are three or four brief points that I would like to make.

I remain concerned about the clause in principle. After our debate today I am even more concerned about the confusion surrounding jobseeker’s allowance recipients going for job interviews and about some of the details of the eligible tax benefits. It is also clear that employers do not want it: the estimate of 6,000—given the response to the consultation to which the noble Lord, Lord Adonis, referred—really says it all. Very few employers want it.

The noble Viscount referred to the balance of the risk and reward but there is another “r” in the equation that he did not mention. He omitted reduction—the reduction of rights for employees certainly seems to counterbalance the risk/reward of a long-term holding of shares. That remains one of the most worrying elements of this clause.

Finally, I want to reiterate the point about breaching the coalition agreement specifically in relation to flexible working. I believe that the coalition agreement talks about flexible working for all employees, not excluding one particular small cohort who may have shares that may be of value at some point in the future, but also in relation to any compensation for unfair dismissal where the proposals of the Government are worse than Beecroft.

I hope the Minister will take on board the comments that were made this afternoon. I would prefer the clause to be removed, but it will certainly need substantial amendment at Report if it is to be anywhere near fit for purpose.

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Moved by

[Lord Flight]

95: After Clause 28, insert the following new Clause—
“Guidance on employee shareholder status
The Secretary of State shall, within two months beginning with the day on which this Act is passed, set out in guidance—(a) the preferential tax treatment applicable to employee shareholder status including illustrative examples;(b) the respective rights of—(i) employee;(ii) employee shareholders; and(iii) worker employment status;(c) an explanation of how employee shareholder status gives individuals a share in the risk of companies; and(d) a model employee shareholder contract for early stage companies.”

[Lord Flight]

My Lords, the amendment was intended to be part of the debate on Clause 27. Given that the employee shareholder status is new and that there are still differences of view about its structure, it is obvious that there will be a need for guidance and, in particular, a need for a model employee shareholder contract for early-stage companies. I beg to move.

[Viscount Younger of Leckie]

My Lords, in Amendment 95 my noble friend Lord Flight proposes a new clause relating to the publication of guidance on the new employment status. He makes a good point on the need for guidance. The Government agree that guidance should be available to help companies and employee shareholders fully understand all the implications of offering or accepting these contracts. It has always been our intention to publish guidance on the new status. The issue of guidance is an important one. Good, clear and accessible guidance will be vital to both companies and employee shareholders. We want to ensure that people enter into these contracts with their eyes open.

I will outline what the Government propose to publish by way of guidance and explain what that guidance will cover. The .gov.uk website is the new centralised place for publication of government services and information. The website already has a number of pages that provide an overview of the different types of employment status—such as worker and employee—and list the rights that are attached to them. We will provide an equivalent page on the new employee shareholder status.

Within these overview pages there are links to more detailed information on each individual employment right, and these pages will also be updated to take account of the new employment status. People who look for information on employee shareholder contracts will be very clear which rights they are entitled to and which rights do not apply to the status. This will help them to decide if an employee shareholder position is suitable for them.

Changes to these pages are being revised at the moment and we will be in a position to share draft copies with you before this clause is debated on Report. The Government will also update guidance on the tax treatment of shares and capital gains tax to make it clear to employee shareholders what their obligations are and to set out how the associated capital gains tax exemption and other relevant tax treatments will work.

Any contract of employment is an agreement between an employer and employee and is the basis of the employment relationship. We believe that contracts work best when people and companies are free to decide the terms that best suit their business needs, and to attract the right people to their companies. We will provide guidance for companies to enable them to understand the new status. Companies would do well to take note of the comments of my noble friend Lord Flight on the importance of drawing up good employment contracts that apply equally to the statuses of employees and workers.

While I understand my noble friend’s intention behind this amendment, we believe it is not necessary to legislate on this matter. To state this in the Bill would just introduce more legislation, which in turn would create more red tape for businesses. As the Government have already committed to publish guidance, I hope that with these assurances my noble friend will be willing to withdraw his amendment.

[Viscount Younger of Leckie]

My noble friend makes a very fair point. Of course I will copy in all noble Lords who should or would like to be copied in.

[Lord Flight]

I thank the Minister for his response. I am pleased to find that the matter is in hand. I therefore beg leave to withdraw the amendment.

Amendment 95 withdrawn.