Growth and Infrastructure Bill

Lord James of Blackheath Excerpts

Wednesday 6th February 2013 Lords Chamber

[Lord Morris of Handsworth]

My Lords, the issues in this debate on Clause 27, and the other amendments, have not changed. I take the view that the objectives of the clause and the conditions attached to wider share ownership were wrong then and remain wrong. The issues that British industry faces today are not to do with wider share ownership. Of course, it is to be welcomed if we can provide greater security, commitment and skills; it is very much part of a process of commitment and evolution within the workplace.

At Second Reading, I said that I was no stranger to the concept. I worked in my company for 18 years and was awarded employee preference shares. I welcomed them, and they caused no harm. But I have to tell noble Lords that they did not influence my loyalty, commitment or motivation in that company. I gave of my best because it was a decent company, with its terms and conditions as well as security. Everything that went with it could be described as a model experience. I did not even give the shares a thought. I could not find my share certificate when the time came to dispose of them. That is how little they meant to me. I was no exception in that regard among the more than 3,000 people employed in that company because the company culture was right and the company met the needs of the industry.

We really ought to look at the deficiencies of Clause 27. It does not address training, productivity or investment, be it investment in people, community or the wider concept of society. I do not see too many words about skills in the clause and do not begin to understand how it could be deemed necessary to bring it forward to secure the loyalty and overall commitment that industries need. Indeed, it could be argued that Clause 27 will have a perverse effect on employee relationships within the workplace, because if the workplace is about anything it is about unity, working together and equity of treatment and approach. What we are doing here will possibly sow the seeds of a divided workforce operating in small units where some people are shareholders and some are not. The legislation does not provide equity of security because at the outset your legal rights have to be forfeited. I am old fashioned enough to think that workers’ rights cannot be bartered for sale on the stock market because that brings nothing back into a company.

I say to the Government that sooner or later we will need to address the wider concept of industrial partnership but from a totally different perspective. We are discussing a “buy today, sell tomorrow” concept. If your shares are tradable, do you have any loyalty once you have disposed of them? You certainly do not have any rights because you gave those up at the start point, but do you have any real security? I do not think so. Therefore, I believe that the points that were made at Second Reading and the points so ably made today by the noble Lord, Lord Pannick, in respect of the legality of the issues involved in the different statutes lead to the necessity to rethink this clause. The clause really needs to get back to considering what industry needs, what is required and what will increase productivity, not just a “buy today, sell tomorrow” culture.

[Lord James of Blackheath]

My Lords, it would be extremely helpful if the clause contained a clearer definition of “profit share” and “equity participation”. That is where the confusion will arise and cause the greatest difficulty. Profit share is relatively clear, straightforward, simple and very motivating. I wholly agree with the noble Baroness who talked about that earlier. That is fine, but profit share does not carry with it any of the risks that go with equity. I disagree with the noble Lord; you do not just buy your shares today and sell them. If you are a locked-in minority, especially in a quoted vehicle, you are stuck, you have no way out, and you never will have.

Further, and worse, I have seen this work to the total detriment of the shareholders. I had a company that had a number of ships—we were opening the North Sea oilfields—that were bought and each put into a separate company. It looked like a good, straightforward, long-term profit opportunity, so we had a lot of participation by Scandinavian banks, which would buy a ship and put it into a purpose-built company. The captain might be offered the opportunity of 20% of the equity in that company, meaning 20% of the ship he was going to sail. If that company did not get the contract work, did not make the money and could not service the debts of that bank, the banks in Scandinavia came at those shareholders and took their homes as a condition of their putting in the extra money.

These hazards are not anticipated in what we have here. There are some fearful risks in inviting people to become locked-in minorities, especially in SMEs where you have nowhere to go if there is a problem. Profit sharing does not have any of those problems, so we should be going down the profit-share path, not the equity-participation route, especially where it is given free into unquoted vehicles.

[Lord Adonis]

My Lords, first, I congratulate the noble Lord, Lord Flight, on being the first speaker in more than 50 on the Bill so far to defend this shares-for-rights proposal. His reward will no doubt be substantial hereafter.

I also welcome the noble Viscount the Minister to our debates on the Bill. The noble Baroness, Lady Hanham, is looking mightily relieved that she has an afternoon off. Her time will return only too soon. The noble Viscount has the thankless job of defending the indefensible—another practice that, if I may extend the analogy used by the noble Lord, Lord Pannick, goes back to the Book of Genesis, where Adam had to explain why he had misbehaved in the Garden of Eden. We are rather hoping to expel the entire Clause 27 from the Garden of Eden, but we are first debating some mitigating measures and inviting the noble Viscount to respond.

We start with the issue of coercion. The noble Lord, Lord Flight, said that the issue of coercion had been dealt with, but I contend that it has not. One of the reasons why Clause 27 is fundamentally wrong and flawed is that, contrary to the Government’s own statements and assurances, it is coercive in that it in effect requires individuals to accept jobs without fundamental employment rights. The coercion involved in these shares-for-rights jobs comes in two ways. First, individuals will in some cases have no option but to accept such jobs. We will come to that issue in respect of benefits claimants in the next group of amendments.

Secondly, these shares-for-rights jobs are in all cases potentially exploitative, because there is no requirement for independent advice before an individual signs up. It is therefore likely that individuals, particularly the more vulnerable and low paid, will not be properly aware, or even aware at all as they will not be as informed as the noble Lord, Lord Flight, of the rights they are forgoing in return for shares worth as little as £2,000 at the time they are issued. As the noble Baroness, Lady Brinton, said, these shares could be worth even less or nothing at all if the employees want to sell them at a later stage.

A whole succession of noble Lords, starting with the noble Lord, Lord Pannick, have made a compelling case for there to be protections, including independent advice before shares-for-rights contracts are entered into. The amendment in my name and that of the noble Lord, Lord Pannick, proposes that there should be legal advice on the rights forgone and financial advice on the valuation and prospects of the shares it is proposed to offer in lieu of employment rights. Without such advice, the scope for exploitation is considerable. Such advice should be paid for by the employer, and there should be an explicit agreement between employer—

[Lord James of Blackheath]

Will the noble Lord draw a distinction between the legal advice to be given in the potential sale of a listed company, where the majority shareholders have a separate set of interests and the minority shareholders—the working shareholders possibly have a very different set of interests? Are we to have two separate and parallel sets of lawyers to avoid a conflict of interest between those types of shareholders? That would seem necessary. How is it to be funded?

[Lord Adonis]

My Lords, we are talking about individual employees who are seeking to take jobs, which is a different situation from the one that the noble Lord has described. We are not talking about the takeover of companies, which is the issue he raised. However, the noble Lord is right to point out that two different sets of interests are involved. As the noble Lord, Lord Pannick, said, we have these rights purely because of an imbalance of power in the relationship between employers and potential employees. If the noble Lord is saying that we need two lots of lawyers on the job, I understand the point he is making but it makes the proposal even less workable and even more unaffordable.

[Lord James of Blackheath]

The noble Lord is correct; that is what I am saying—you need two sets of lawyers in any case.

[Lord Adonis]

The noble Lord therefore proposes a system that is even more complex and onerous than is envisaged. Such advice should be paid for by the employer, and there should be an explicit agreement between employer and employee stipulating the employment rights that are being foregone and the value of the shares being allotted.

When similar amendments were debated in the Commons, the Minister, Michael Fallon, said that they would impose,

“an unnecessary cost and burden to the employer”.—[Official Report, Commons, Growth and Infrastructure Bill Committee, 6/12/12; col. 484.]

However, this is not a new principle. As the noble Lord, Lord Pannick, said, it is, in fact, a principle accepted by previous Conservative Governments. The great noble Lord, Lord Tebbit, was Secretary of State when this principle was enshrined in law. Under the legislation of the previous Conservative Government, there are minimum independent legal advice requirements on the surrender of unfair dismissal rights in what are now called compromise agreements—a key element of which is a written agreement upon which the employee has received advice from an insured independent legal adviser or other specified and qualified person.

The noble Lord, Lord Pannick, also quoted the advice and recommendations of the Equality and Human Rights Commission, which could not be clearer. Let me read the recommendations to the Committee. They state that,

“the mere fact of a choice having to be made on which type of employment status to accept could indirectly discriminate against those less likely to be able to make a properly informed or truly ‘voluntary’ decision. This may include those whose first language is not English, those with learning disabilities, or young workers”.

The commission’s recommendations continue:

“In order for objective justification to be established, it is likely to be necessary for the individual to have a right to receive appropriate advice and for the employer to be required to draw this to his or her attention”.

We agree entirely with the Equality and Human Rights Commission’s recommendation. It is now up to the noble Viscount to say why it is wrong.

--- Later in debate ---

[Viscount Younger of Leckie]

As promised, I will revert to the noble Lord, Lord Adonis, as quickly as possible to confirm what I said.

[Lord James of Blackheath]

Will the noble Viscount please also assure the Committee that there will be an absolute bar on companies lending individuals the money to pay that tax? They will be in enough trouble already.

[Viscount Younger of Leckie]

I would like to think that I could say yes to that. However, it is up to the company to decide, and it is something that I cannot stipulate or guarantee.

I should like to address the question raised by the noble Lord, Lord Adonis. I can confirm that the shares are taxable, but the Chancellor is considering making the first £2,000 tax-free.

--- Later in debate ---

[Viscount Younger of Leckie]

First, it depends on whether the employee shareholders are 40% taxpayers, but I can confirm that tax is payable on the shares that are given.

My noble friend Lady Brinton expressed concern surrounding the share dilution, particularly when small businesses have additional investment. Additional investment shows that a company has potential and this should benefit the shareholders in the long run. We envisage that it will. Minority shareholders already have some protection under company law, and employee shareholders would be able to make appropriate representations under these rules.

I now turn to a question raised by the noble Baroness, Lady Turner, concerning TUPE. She asked whether TUPE will be affected by employee shareholders. Exactly how TUPE would apply would depend on the precise details of the transfer, but there is nothing in the employee shareholder clause as it stands that would require an interpretation incompatible with TUPE. It is important to realise that any employee transferred under TUPE cannot be forced by the transferee into becoming an employee shareholder. The employee will still have a right not to be unfairly dismissed or suffer a detriment as a result of refusing an employee shareholder contract. There is nothing to stop business arrangements being made in such a way as to provide that a person who is an employee shareholder in one company becomes an employee shareholder in another company. It is also possible to agree that the employee shareholder would no longer have employee shareholder status and become a full employee. I also want to clarify that if an employee has bought shares privately in a company, and he has transferred to that company under TUPE, he is not deemed then to have become an employee shareholder of the company by virtue of holding shares in that company. That is because the shares were not given to him as part of the employee agreement to become an employee shareholder.

The noble Baroness, Lady Turner, also raised the issue of Beecroft. I think she said that this was Beecroft by the back door. I reiterate that it is certainly not. The new employee shareholder status is different from the no-fault dismissal proposal because individuals become shareholders of the company at the start of the employee relationship. That is an important benefit conferred by the employee shareholder status. Unlike no-fault dismissal, the employee shareholder status will be freely agreed between employers and individuals in contractual negotiations. Employers will also be free to offer improved contractual terms, such as contractual redundancy payments, as raised earlier, in an employee shareholder contract. After reviewing the evidence, the Government found no compelling reasons to implement the no-fault dismissal proposal.

My noble friend Lord James of Blackheath was concerned that shareholders might be locked in and subsequently would have to pay the debts of the company. The shares must be fully paid up by the company. No financial liabilities are attached to the shares. No personal guarantee can be demanded from an employee shareholder as a condition of the particular status.

[Lord James of Blackheath]

Can the noble Viscount please explain what would happen in the event of a rescue rights issue?

[Viscount Younger of Leckie]

I will certainly have to come back to my noble friend with a full answer to that question.

I shall conclude by agreeing in part with the noble Lord, Lord Pannick, on a particular point. There is indeed a large number of sources of quality legal and financial advice available. The Government do not need to stipulate where people should seek advice, nor would it be appropriate to oblige people to seek such advice when they may not need or want it. The best approach is to provide guidance, which we will do, to ensure that people enter into contracts with their eyes open. That is the approach that we are taking. With those reassurances I hope that the noble Lord will withdraw his amendment.