My Lords, I am grateful to the noble Lord, Lord Pannick, for so eloquently outlining the case against the proposals in Clause 27 and I was happy to add my name to the amendment, which your Lordships' House has discussed at considerable length in earlier stages of the Bill’s passage.
I remain bemused with the basic philosophy behind the clause. We are told that the scheme is aimed at small businesses that want to grow fast and motivate their workforces. We have heard that employees will take a significant reduction in their employment rights and face tax and NI demands on the free shares that they have been given over £2,000 as they receive them.
I assume that the minimum of £2,000 is for ordinary shares, but given the interchange on the previous amendment I am not convinced that they would necessarily be ordinary shares. In a number of years, possibly with a following wind, they might increase in value, although the House should note that the majority of micro- and small companies do not make large returns for their shareholders in the early years. That
rarely takes less than eight years or a decade. Worse than that, while the employee currently in a firm can choose not to take part, the applicant on jobseeker's allowance would have no such luxury—a point clarified in the letter from the Minister on 13 March. Either a scheme is voluntary or it is not. It is clearly not for those on jobseeker's allowance. This provision is supposed to encourage growth. We need to go back a step to the coalition agreement’s commitment to growth. With such a key strategy in mind to help SMEs, we should do all that is within our power to assist them. Clause 27 would do the opposite. If an employee has the choice between a company that offers the usual employee benefits and another that exchanges these rights for shares in the company, the evidence suggests that employees would rather maintain their benefits, especially in the current recessionary climate. That was corroborated by my own experience speaking with employees working for high-tech SMEs who are bemused that they would want to demotivate their staff during the very difficult early days of a company when it is developing products and just beginning to enter the marketplace and unlikely to be making a profit, let alone anything that they could distribute to shareholders.
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Directors have told me that this does not set the relationship off on the right footing. Morale is important because while the shares in an SME are unlikely to yield high returns in the first few years, if any at all—most do not become the superstars implied by the capital gains tax mentioned in the Bill—after a company is founded, especially during this period of low consumption and investment, it has to find ways of motivating employees to help get the business off the ground. It might offer flexible working hours and shares without links to a cut in employment rights. The founders of such firms have been offering shares without any removal of rights for years, and it works. Why would they take up a proposal that destabilises the employee and the company?
Additionally, should the question of unfair dismissal arise, the cost to a company could overwhelm it. Both the Law Society and the Solicitors’ Journal have expressed concerns about this. Clause 27 eliminates the use of unfair dismissal tribunals which help SMEs by placing a cap on the costs of discrimination claims. Without the benefit of these tribunals, the courts could become clogged with costly discrimination suits that may drain the funds of the very businesses we are trying to support. The clause is then doubly debilitating. It removes employment rights that protect the employee from discrimination and at the same time it leaves SMEs vulnerable to very expensive discrimination claims, should an employee feel the sting of the loss of basic rights like statutory redundancy pay and rights to training and flexible working. The example given by the noble Lord, Lord Forsyth, in the previous amendment of an employee being sent up the blind alley of having to accept terms that mean that they would be forced into redundancy, but the contract saying that the shares would be lost if the employee was made redundant, absolutely exemplifies the point. I believe that a court would want to hear this argument and I do not believe that it is what the Bill intends.
For many British workers, this lingering economic downturn has given them little choice when accepting jobs. There simply are not enough jobs out there for JSA claimants to have the luxury of choosing among several opportunities. With this clause, JSA claimants will be forced into taking jobs that sap their benefits in return for shares in the company. For those who may already have faced not just one but multiple redundancies through no fault of their own, that will not be attractive. I am grateful to the Minister for his letter which sets out the exact terms here, but I fear that it has in fact been unhelpful in that Jobcentre Plus decision managers will now not be able to accept an applicant’s reasonable and real fears about reductions in employee rights when considering a continuation of JSA if the applicant has turned a job down. Although this clause might intend to give employers a choice, it does so at a significant cost to employees. We must avoid creating a coercive environment for jobseekers, many of whom rely on these benefits to enhance their skills and improve their quality of life, lest we discourage job seeking, something the Government are trying to do the opposite of, and encourage reliance on welfare.
While it is important for an employee to feel that he or she has a real stake in the success of a company, this employee shareholder scheme will do little to benefit the average worker. The guidance provided by the Minister fails to invite employees to take legal advice or even employers to encourage them to do so. It only says, “Read about the shares and what they are and talk to the company about the type of shares”. A company trying to offer shares is not exactly going to say, “This is dangerous and you may well lose money”. Most employees will not be able to afford to pay the upfront costs of income tax and national insurance, and may not benefit at all from the capital gains tax exemption, given the current annual individual exemption limit of £10,600. This means that only the most senior employee shareholders on high salaries will benefit from this new scheme, not average workers. I thought that they were the ones who we were trying to attract into the scheme. Robin Williamson, technical director at the Low Incomes Tax Reform Group, put this more bluntly when he stated that employees will lose universally available employment rights for a tax relief from which they might never benefit.
The Government have taken many steps forward to help SMEs, but this is a step in the wrong direction. It asks the average British employee to give up his or her rights in the workplace in exchange for shares in a company that are likely to yield very little other than an income tax charge at the front and a possible blue skies capital gains tax many years in the future. It coerces claimants into accepting these terms as they have no options and hurts small companies by eliminating motivational tools that encourage long-term loyalty to the company and leaves them vulnerable to costly discrimination lawsuits.
The best the Minister has been able to say is that this scheme is not for very many companies, but I think that the figure of 6,000 is something of a finger in the wind. It may well be that no companies take it up at all, and I ask your Lordships’ House if this is a sensible way to proceed. This clause needs to be removed now, and faith and trust built up between employers
and employees, with them sharing the risks and benefits of growth and success. Clause 27 is not the way to do it.