Examination of Witnesses

Growth and Infrastructure Bill – in a Public Bill Committee am 2:00 pm ar 20 Tachwedd 2012.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Paul Callaghan, Sarah Jackson OBE, Sarah Veale and Mike Emmott gave evidence.

Q 269269

Photo of Philip Davies Philip Davies Ceidwadwyr, Shipley

Good afternoon. We will now hear oral evidence from Taylor Wessing, Working Families, the Trades Union Congress and the Chartered Institute of Personnel and Development. Before I ask the first member of the Committee to ask a question, I remind all hon. Members that questions should be limited to matters within the scope of the Bill, and that they must stick strictly to the timings agreed under the programme order that the Committee has agreed, which means that this sitting will end on the dot, no later than 3 pm. I ask the witnesses to introduce themselves quickly to the Committee.

Sarah Veale: I am head of equality and employment rights at the Trades Union Congress.

Sarah Jackson: I am chief executive of Working Families.

Paul Callaghan: I am an employment law partner at the City law firm, Taylor Wessing.

Mike Emmott: I am an advisor at the Chartered Institute of Personnel and Development.

Q 270

Photo of Ian Murray Ian Murray Shadow Minister (Business, Innovation and Skills)

Good afternoon, panel. Can you tell the Committee how much consultation there was on this particular proposal before the Bill was published?

Sarah Veale: Shall I start? We are not aware of there being very much consultation at all. Of particular concern to the TUC was the lack of any impact assessment, or even a quick assessment of the impact through less formal procedures. We only had three weeks’ consultation time, and we found it very difficult working out what the impact would be without the normal help from the Government Department responsible in setting out its calculation of the impact on employees and employers, and so on.

Sarah Jackson: I would add that we have 100 employer members. We work with both employers and employees. It would have been good, with this kind of proposal, for  us to have been able to do a good consultation with our members to see what they thought. We have not had time to do that, unfortunately.

Paul Callaghan: From the perspective of a lawyer who acts primarily for companies, there does not seem to have been any thought put into how it is going to work practically, from the company’s perspective. It is all very well saying that shares of a certain value will be given to these owner-employees, but how are those shares going to be valued? What is the practical way of doing that? How is the company going to pay for those shares as a matter of corporate law? None of that appears to have been thought through.

Mike Emmott: When the Chancellor announced the proposal, it came completely out of the blue to us; we knew nothing about it.

Q 271

Photo of Ian Murray Ian Murray Shadow Minister (Business, Innovation and Skills)

May I ask each panel member what you think the risks are, not just to the employee, but to businesses, if they take up the employee ownership schemes?

Sarah Veale: I think that the risk to business would be largely reputational. If a business wants to engage its employees, which I am sure all good businesses do, they would no doubt be very wise to look at employee share ownership, as the Nuttall review recently identified, as a way of enhancing the relationship and ensuring that employees feel that they have some real stake in the company. What we find really objectionable is the idea that you can have this only if you are willing to trade important employment rights; we can come on to that in a minute. We regard it as possibly illegal to expect people to contract out of their statutory rights. From the point of view of the company’s reputation, I would not touch this with a bargepole.

I also think that there would be high risks for small businesses that might not understand how all this is going to work. They might inappropriately give shares away and not understand what the implications could be. It is difficult to know all this, because there is no impact assessment. It could be, for example, that the employee, on being dismissed, would be the possessor of some shares in the company. They might want to turn up at the annual general meeting afterwards and might cause all sorts of trouble. All these are unknowns, because none of that appears to have been thought through properly.

Sarah Jackson: At Working Families, we benchmark good employment practice, and we have done extensive research into the benefits of flexible working. We can show that there is a positive correlation between flexible working and performance. We can also show, from the experience of our members, that offering a good maternity leave package improves retention rates among women in the work force. Both of those are under threat under the proposal.

There is also a real risk to employers to do with additional complexity. If you have a work force where some people have one set of rights and others have other rights, it will be easy to trip up and get things wrong. Overall, I think there are probably more risks than benefits to employers, and I would not advise our members to introduce this kind of proposal.

Paul Callaghan: I would say that there will be more costs for business. Valuing shares in order to give them away costs money. Commissioning a valuation report  can often be an expensive process, particularly for emerging growth companies, which are typically what my client base is. I suspect that it will not be particularly attractive to many companies.

As has been said, you have to deal with what happens to the shares when employees leave. A company cannot just buy back shares, as a matter of corporate law, unless it has distributable profits, which is very unlikely in the sort of small, emerging growth company that this is envisaged to appeal to; from capital, it is particularly complex.

My fear is that if this took off, you would see the labour market becoming less flexible, because employers might find it more off-putting to terminate someone’s employment—they would then potentially have to find money to buy back the shares—than simply to follow normal unfair dismissal rules, which do not kick in anyway now until an employee has had more than two years’ service.

Mike Emmott: I think that employers would be disappointed if they thought that simply by offering shares they were buying an increment to motivation and engagement on the back of the John Lewis model, which is often quoted in support of wider employee share ownership. The point about John Lewis is simply that it does a lot of things right; it depends, critically, on the way the place is managed—on good line management and leadership. Anyone who bought this package in the belief that it would be a short cut to a highly engaged work force would be missing the point.

Sarah Veale: Some significant employer groups have come out opposing this. Justin King, the chief executive of Sainsbury’s, said that he thought it would do his company a lot of reputational damage, and that he did not want anything to do with the idea of removing people’s employment rights in return for a stake in the company. He would give them a stake in the company of his own volition, but he would have no truck with this. I think that is a very important message from an extremely senior business.

Q 272

Photo of Ian Murray Ian Murray Shadow Minister (Business, Innovation and Skills)

I have one last question. Will the employee-owner contracts be completely voluntary? Will they encourage employers to hire more staff?

Sarah Veale: I think “voluntary”, in quotes, because the reality of an employment relationship is that the employer has more power than the employee, and our fear is that people will be under duress to accept the job because they are desperate. If they are not given proper advice, they may walk into this without realising what they are sacrificing. For people who are already employed, there are very serious issues about suddenly changing the terms of their contract, which could be done through bullying or all sorts of threats about what will happen if they do not go along with it. I think those are very real issues.

We would argue that people are putting themselves at risk of losing rights that, interestingly, the Government have been espousing this week as being very important. Sarah has talked about flexible working and so on, but a contrary message is coming across here all the time, and I am sure it is confusing employers, too. On the one hand, we want to encourage flexible working and shared parental leave, but on the other hand, those rights are so unimportant that they can be traded away for a rather dubious-looking share option.

Sarah Jackson: Although I am pleased to see the Business Minister, Michael Fallon, emphasise that the arrangements between an employer and an employee should be voluntary, I am very concerned that jobseekers might be expected to apply for a job that comes in an employee-owner format. With the best will in the world, our experience with Jobcentre Plus advisers—looking at how they are supporting or not supporting lone parents back into work—is that there is a lot of pressure for people to take jobs that do not fit with their child care responsibilities, for example. I would not be confident that Jobcentre Plus advisers will necessarily be able fully to advise and support low-income or unemployed people who are on jobseeker’s allowance, and I think that is a real risk area.

Paul Callaghan: This proposal is clearly only optional one way. If a job can be made conditional on accepting an owner-employee contract, that is only optional to the extent that eating and drinking are optional. If you need a job, you have to take whatever terms are offered. It is a fallacy to suggest that that is optional.

When employees are gaining unfair dismissal rights only when they reach two years’ service, you have the possibility that employees who are coming to two years’ service will find their employment contract terminated, with re-engagement being offered only if they accept the owner-employee model.

The other thing to bear in mind, of course, is that, in reality, employees effectively have to pay to take such jobs, because receiving the shares is subject to income tax, if the shares happen to be in a public company and are therefore readily convertible assets, and national insurance. Either in their first pay packet or when they fill in a tax return—the proposal could potentially bring more people within the sphere of having to fill in tax returns, which will be a burden on the Revenue—people will have to pay tax on the value of the shares that they had supposedly been given.

Mike Emmott: In a tough labour market, which we have, and which we foresee for the medium term, this is a tough one. There will be employees or would-be employees who have limited choices of where to work, and for whom these offers will therefore turn out to be Hobson’s choice, or who will at least be under some pressure to take a job on those terms. The problem will be that they may not know very clearly how to assess the risks, in terms of possible redundancy and the impact that that would have with no protection, and the benefits or the value of the shares. There would be considerable uncertainty.

On the question of whether the measure will encourage growth in jobs, I think all the evidence we are aware of from the OECD and elsewhere is that the link between employment regulation and growth is pretty uncertain—it is not a straight line—and it is hard to see how the limited but real loss of employment protection involved in the proposals will produce additional jobs.

Sarah Veale: Can I add one very quick thing? In the recent consultation on no-fault compensated dismissals, only 40% of businesses said that employment legislation was putting them off hiring new staff, and only 1% cited unfair dismissal. I agree with Mike that it is a fallacy that the proposal will make any difference to the propensity of businesses to take people on.

Q 273

Photo of John Glen John Glen Ceidwadwyr, Salisbury

I would like two points of clarification. First, to Sarah Veale, on the stripping away of rights, am I right in thinking that the working time regulations and the current discrimination law would not be affected at all under these proposals, and would still stand? Is that correct?

Sarah Veale: That is quite correct. Those are in EU law, and it is not possible to contract out of them. It is interesting that the areas that have been picked in this proposal are all domestic law. The TUC would argue that it is highly dubious, legally, getting people to contract out of domestic law unless they have had proper legal advice. There was an attempt made a while ago in the fixed-term working regulations to have a position where people could opt out, and the Government were very strongly advised that people would be able to do that only if they got legal advice and knew what they were doing when they sold their rights, as it were.

Q 274

Photo of John Glen John Glen Ceidwadwyr, Salisbury

The second question is to Paul. I worked in the private sector for 10 or 12 years. When you move to different stages of employment—I did not quite get there, but if you become a partner in a professional services firm, for example—your employment conditions change quite significantly, and you perhaps have some inducements with respect to shares and so on. Is it not quite commonplace in many organisations for there to be an evolving set of incentives and pay packages, and varying responsibilities and rights that go with it? It is projected as though the provision is a complete break with everything.

Paul Callaghan: Absolutely, if the benefits that you are going to get are commensurate with the rights that you are giving up. I am a partner, so I do not have unfair dismissal rights. I do have discrimination rights, but I chose to become a partner and, frankly, it is a good economic deal for me.

Q 275

Photo of John Glen John Glen Ceidwadwyr, Salisbury

But this is a choice as well.

Paul Callaghan: Well, as we have said, it is not a choice if you have to take the job and it is potentially just for £2,000-worth of shares, which, in a start-up or an emerging growth company, might be worth absolutely nothing. Where is the bargaining power there? I had bargaining power choosing to be a partner. If I were a relatively junior employee in a small start-up company, I might not have that bargaining power. I am already in a situation in which I get unfair dismissal rights only after two years, anyway.

Q 276

Photo of Mary Glindon Mary Glindon Llafur, North Tyneside

This is a question on the voluntary element of the clause. As this is a growth Bill, my concern that I would like the witnesses to address is about the effect this would have on wider employment issues, outside the people who are subject to this bargaining or voluntary element. As has already been said, the Government are saying that it is completely voluntary. If the clause stood, what would the panel say would enable any safeguards for people? Are there any that can be put in place?

Sarah Veale: One thing that we would say was absolutely crucial was that people should not be able to do this unless they have got independent legal advice. There is an issue there, of course, about whether they can afford  to pay for it, so there is another issue about whether the advice should be publicly funded or provided by the employer. If they really want to do this, they will have to stump up some money for it. On the idea of people signing away their rights without any kind of legal advice, most people will not be aware of what rights they are signing away and what the consequences would be.

I also think, in terms of other businesses, that all this is having a cumulative impact. There is a message that keeps coming across about getting people out of work rather than getting them into work. It seems extraordinary to me, if this is supposed to encourage employee engagement, that it focuses so much on either getting rid of people’s unfair dismissal or redundancy rights, which accrue only when you go, or attacking people on the basis of family-friendly rights, which other bits of the Government are saying are all important to help with other social problems in the economy.

Sarah Jackson: I am very concerned about the mixed messages and the way this proposal appears to reinforce a lot of employer misconceptions, particularly in the SME sector, about employee rights versus employer obligations and power. I notice that an impact assessment talks about how employees would have the protection of the Equality Act 2010, but if you are a low-paid person, the Equality Act is pretty meaningless for you. We take calls almost every day on our legal advice service. We will have somebody who says, “I can see that my employer is discriminating against me. I understand what my rights are. I need this job too much. I cannot possibly challenge.” So on the one hand I would like to challenge this notion of choice—for lower-paid people, there is no choice; it is a job or no job—and on the other hand I would like to really think hard about the messages that we are giving to employers.

Last week, I had a really vivid personal example of the common misconceptions. I was doing ITV news to comment on the Deputy Prime Minister’s announcements about the extension to the right to request flexible working, and I was on with a small business owner. They said, “I am a small business owner and I have no right to discuss with my pregnant employee when she intends to return to work.” That is nonsense, but it is very common.

The best thing the Government could do is a really good campaign to explain to employers, especially small businesses, how employment law works, to get away from the fear, where managers are so frightened of their employees and these enormous rights that they apparently have, when we know that the power really lies with the employer.

Paul Callaghan: I agree with all that, but from the business perspective, the rights that will remain are the most complex and expensive rights for employers to deal with anyway. I do not see any great attraction from the employer’s perspective to this proposal. They will have to give away equity in their company, but employees will still be able to bring unfair dismissal claims for reasons where the dismissal would automatically be unfair, such as for whistleblowing, where you do not need a year’s service, and all the discrimination claims. I imagine that you will see a rise in those sorts of claims, which are more complex and more expensive to defend, from owner-employees.

In the US, where they generally have at-will employment and they just have discrimination rights, the costs of dealing with employment litigation are considerably higher than they are in the UK, even though it is a more deregulated culture. If you have basic rights to unfair dismissal, people do not need to claim these more complex rights. Remember that it was a Conservative Government who brought in unfair dismissal rights in the first place. People have a sense of fairness and feel that if they have been treated badly, they ought to have some sort of remedy for that. If you limit those remedies, you may simply make it more complex to deal with whatever remedy they search for.

On taking away statutory redundancy payments, it is only £430 for every year of service where you are below the age of 41, or one and a half times that for every year of service over the age of 41. That is not a lot of money relative to the hassle and cost of getting a valuation report to try to buy back shares at a reasonable price. Most companies would be a lot better off simply giving the statutory redundancy payment.

As for losing your right to request flexible working, the statutory right to do that came in to codify what was effectively indirect sex discrimination law in the first place. Everybody will still have the right to claim for indirect sex discrimination if they are refused the right to work flexibly, so those requests will still be made, but they will no longer be made in this codified way. Compensation for sex discrimination is uncapped. It is only eight weeks’ pay under the statutory flexible working remedy, so you will potentially see higher value claims brought by these people if they feel disgruntled, so I do not think it will benefit business in the way that it is meant to do.

Sarah Jackson: I will add very quickly to that. When we get people calling the helpline who have had a flexible working request turned down, the employee is far more likely to accept the decision when the employer has gone through the full process than when the employer has simply said no. We are much more likely to get the employee pressing for a tribunal claim if the employer has just said no. Process is really helpful in this situation.

Photo of Philip Davies Philip Davies Ceidwadwyr, Shipley

Before we go any further, I will just let our witnesses know that in the next 10 minutes there may be a vote on a ten-minute rule Bill. If there is, I will have to suspend the sitting for 15 minutes, but the session will still finish at 3 o’clock. You should just bear that in mind.

Mike Emmott: You asked about the wider impact of an employee taken on under these terms. Paul spoke about trust. The legislation as it appears at the moment poses a big challenge for the employer to explain to the potential employee what it is he or she is getting out of it, what the deal is beyond the loss of employment rights and what possible justification the employer has for adopting the provision. The employer’s vested interest is to create a climate where the employee wants to work, wants to give his best, trusts the employer and is offered a reasonable deal. I think there is a lot of work for the employer to do. He has been set a difficult challenge.

Q 277

Photo of Henry Smith Henry Smith Ceidwadwyr, Crawley

Clearly, there is not a lot of enthusiasm from the witnesses for the employee ownership part of the Bill. However, if Parliament  were minded to go ahead with this part of the Bill, what sort of safeguards would you like to see? What safeguards would you think were the most important to preserve?

Sarah Veale: As I have already said, we would absolutely insist, as far as we can insist on these things, that the person should be advised legally before they enter into these kinds of contracts. Otherwise, because of the unfairness of the relationship, they will simply not necessarily know what it is they will not be able to do.

I would also have a very serious look at the tax side. We cannot see anything in there—I am certainly not a tax expert—to stop, for example, a group of people getting together, turning themselves into forming a company, calling themselves employee-owners, making some money, flogging the company off and getting loads of money off selling the shares, without any capital gains tax hitting them whatsoever. I would have enormous worries about the public purse, if this were to take off as a new tax scam. There are enough problems around already with people evading—sorry, avoiding—paying their tax. I would have thought that setting up something else that could open up doors to more of that would be very serious indeed. Those are two absolute prerequisites.

For the record, the TUC would advise very strongly against doing this at all. It should just be forgotten about. It is not sensible.

Sarah Jackson: Our starting point would be to drop the clause. But if you are going to keep it, you should introduce new automatically unfair grounds for dismissal. So if you refuse to do a change to employee-owner status, that should be an unfair dismissal. No jobseeker should be forced to accept employee-owner status. We would like a review period of three to five years just to see how it is going, like all new employment regulations. Finally, this may perhaps not be possible within the terms of the Bill, but why not drop the clause about no rights to request flexible working? Let us attach to the Bill the extension of the right to request flexible working. That is really about growth and prosperity.

Paul Callaghan: I would say take away the income tax charge because that is potentially more of an issue than the capital gains tax exemption. At the moment, you only pay capital gains tax for gains over £10,800 anyway, so if you are at the bottom and have been offered £2,000 worth of shares, the company will have to do pretty well before that exemption means anything to you at all, whereas you are going to have had to pay a charge on getting the shares in the first place.

I agree about making it genuinely optional, so that any jobs offered should be on the basis that you can choose a regular employment contract or an owner-employee contract. Also from the business perspective, you need to put something in place to make it simple and cheap properly to value companies. Another obvious flaw is that start-up companies are often not worth £2,000. The idea that you can give away shares worth £2,000 to a load of employees is just a complete fallacy. Nobody seems to have spoken to corporate lawyers at all when they dreamt up this plan.

Mike Emmott: I endorse Sarah Jackson’s point about making it automatically unfair to offer an employee who is already employed the sort of terms envisaged by the legislation. Beyond that, we find the legislation so unattractive that it is hard to think of an effective protection.

Q 278

Photo of Simon Danczuk Simon Danczuk Llafur, Rochdale

You will be aware that this Bill is called the Growth and Infrastructure Bill. I work on the assumption that this employee-owner issue falls into growth section of that title. Starting with you, Sarah, do you think that this will improve economic growth?

Sarah Veale: I think that that is inconceivable. The CBI itself is on record as saying that this would attract a very small number of niche companies. Unless the tax loopholes suddenly become attractive to people, which is not a way of growing business, but a way of not paying tax, I simply cannot see anything at all in this that will make much difference to economic growth. I completely agree with what Sarah said. There are other measures, particularly those on family friendly rights that have been taken recently, that are far more likely to stimulate growth, get more people back into work, which is what we need, and get them spending money and stimulating the economy in that way.

Sarah Jackson: I think that there will be minimal take-up, but the potential for great damage in terms of reinforcing messages about the burden on business of flexible working and of mothers, in particular.

Q 279

Photo of Simon Danczuk Simon Danczuk Llafur, Rochdale

Damage rather than growth.

Sarah Jackson: Yes.

Paul Callaghan: Most of my clients tend to be US technology corporations that have set up in the UK. None of them is put off coming to the UK because of UK employment law. We already have the third most flexible employment laws in the world, or in the western world, after the US and Canada. They are put off by our complex immigration laws and the time that it takes to get a sponsor licence to be able to bring executives across who would create jobs in the UK. Those are the messages that I hear time and again.

Q 280

Photo of Simon Danczuk Simon Danczuk Llafur, Rochdale

Okay. So there is no evidence to suggest that a provision along those lines would promote jobs or economic growth, and the evidence is the reverse. A Minister said recently:

“By responding to the flexible needs of fast growing companies, it will help them take people on, providing a real incentive for employers and employees.”

Is there any reality in what she said?

Sarah Veale: With respect, I do not think that there is. The Business Department did their own survey of small businesses, and what they identified as being particularly important was the ability to release capital to help them to grow. Employment regulation actually came well down the list in terms of importance, and unfair dismissal came even lower than some of the other employment rights that they are concerned about. I very much echo the point Sarah made earlier: small businesses need quite a lot of help and guidance on how relatively simple it actually is to employ people. They need help with getting finance to grow. That is what they need.

Photo of Simon Danczuk Simon Danczuk Llafur, Rochdale

Any other comments on that, briefly? No.

Q 281

Photo of Bob Blackman Bob Blackman Ceidwadwyr, Harrow East

We have heard evidence from employer organisations saying that the measure is only going to be for a particular part of  the market; it will not be general. I think that witnesses such as Sainsbury’s have already said that it is not for them. Clearly, the question is this: in principle, are you against entrepreneurial firms taking this opportunity to have employees owning the company and therefore having a big stake in it, but exchanging that ownership for some of their other rights? We have already heard that they do not acquire those rights for two years in some cases. What is your principal objection here? I do not see what there is. This will not be for everyone. It is not for the whole country; it will be for particular niche firms. Where is your objection?

Sarah Veale: I think that it is a very dangerous road to start going down, suggesting that people can trade in their employment rights for various offers that may seem attractive to the employer. However long it takes to acquire these rights—the rights that are being talked about have different qualifying periods—you want to keep people on. You do not start saying, “Once you’ve been here a certain amount of time, we’re going to get rid of your rights.” There is a real fear that employers will take people on, and when they get up nearly to the two-year point, they will try to force them into a position where, at that point in their career, they sacrifice their right to be protected were they to be dismissed in the future. That is going to get you into this very difficult territory that others have talked about, where you can be put under duress to take this or get out. That is not a comfortable and productive employment relationship.

Q 282

Photo of Bob Blackman Bob Blackman Ceidwadwyr, Harrow East

But would you have an objection to people being heavily motivated, because they part-own the company, to work well for the company and actually enhance their share and stake in it?

Sarah Veale: We are totally in favour of employee share ownership, absolutely. It is not fair to expect people to trade something off for that, and it is dangerous to get into trading basic rights.

Q 283

Photo of Bob Blackman Bob Blackman Ceidwadwyr, Harrow East

So you want to see more opportunities, but no trading of rights?

Sarah Veale: Without the sword of Damocles hanging over them to get rid of their rights if they sign up for the shares.

Sarah Jackson: I was struck by the Employee Ownership Association saying that there is absolutely no need to dilute the rights of workers in order to grow employee ownership. I think that that is the case. There are already employee ownership schemes that are very successful, and we would fully support them, but as I have already said, I am worried about the damaging messages that are undermining the very strong and welcome messages coming from the Government about the value of flexibility and employment rights in building engaged and high-performance work forces.

I am also worried about the risk to individual employees. I am thinking about somebody who perhaps goes into one of these deals with their eyes open as far as they can be. For example, they have no family responsibilities and think it is a great idea at the age of 26 to get into a new start-up company, but then their mother falls ill, or their partner develops cancer. They become a carer overnight, with no warning. If they then go to their employer and say, “I’m an employee owner here, and I am going to have to talk to you about some flexible  working, please, because I now have a family situation that I could never have envisaged a year ago,” and lose their job on the back of that, that concerns me enormously.

Paul Callaghan: I am all for anything that incentivises employees, but I am not generally convinced that taking away rights like this is going to incentivise them, especially when potentially it is for a very small number of shares, which may ultimately be worthless. Generally, when you become a partner, for example, you might lose your employment rights, but you gain all sorts of voting rights within the partnership. You have a say in the running of the firm and its strategy. That is not necessarily the case if you are a very small shareholder.

Q 284

Photo of Bob Blackman Bob Blackman Ceidwadwyr, Harrow East

Sorry, can I pick you up on that point? That is not necessarily going to be the case. At the moment, we have not seen the design of schemes. Surely, that would be one of those areas where employees would expect to see an opportunity to have a say in how the company is run.

Paul Callaghan: That would make it less attractive to companies. Companies are not particularly going to want to have this whole class of employee-owners who are going to be able to interfere in their decision making abilities. That is a completely separate area to how much flexibility companies should have about the rights they give to their shares. If you want this to be attractive to companies, they will want to be able to determine whether these shares have or do not have full voting rights. Will they be allowed to have good-leaver and bad-leaver provisions in relation to these shares, so if somebody commits gross misconduct, they do not get the value of their shares? Do they have to pay up for the shares immediately when somebody leaves, whether they have distributable profits or not? All those things have to be looked at from the company’s perspective as well, and they do not appear to have been.

Mike Emmott: If I was working for an entrepreneurial, fast-growing company and they offered me shares, I might well find that worth considering. I would hope that my judgment about its continued fast growth was sound, because there is a risk if you invest both your savings and your salary in the same company. That is the slight downside to having shares in your own company. The point that I want to make is that I do not see any evidence that it is fast-growing companies that are most worried about employment regulation. Fast-growing companies are effective and well managed. That is why they are growing. I cannot see why they are going to be worried about coping with what the vast majority of UK employers cope with in terms of employment regulation.

Q 285

Photo of Bob Blackman Bob Blackman Ceidwadwyr, Harrow East

Ms Jackson, am I right in saying that the position on flexible working and the rights to flexible working applies only to companies over a certain size?

Sarah Jackson: No. It applies to everybody.

Q 286

Photo of Nick Raynsford Nick Raynsford Llafur, Greenwich and Woolwich

I am interested in the origins of the clause. You have all said that you were not consulted about the proposal. Indeed, if you had been consulted, from the evidence you have given us, you would have advised  strongly against it. We have not seen much evidence produced to justify it. Would you give your views as to the origins of the proposal, which does not come from experts in the sector and does not appear to be based on objective evidence. Where did this idea come from?

Sarah Veale: Our view at the TUC is that this is version 3 of the attempt to get the Beecroft proposals through. It is yet another variation on the theme of making it easier to get rid of employees, particularly for small companies. Apparently, the perception—perception is an important word here—is that it is impossible to get rid of anyone once you have taken them on. I suspect that the thought that has gone into this has not really been motivated by the interests of employees, in terms of giving them shares, otherwise you would do what the Nuttall review suggested and work on good ways of encouraging employee share ownership. I think this is just a back door way of trying to ease into a situation where people start trading off their rights. I fear that if it goes through the principle will be accepted, it will be on the statute book and we will find Bills in the future that will similarly offer trade-offs for various rights in return for rather spurious goods, whether bonuses or something else that is not really worth having.

Sarah Jackson: It felt to me as though it were a bright idea for a conference speech. That is fair enough, but what leaves me disturbed is the fact that we have had a three-week consultation, and the legislation is being pulled together very quickly indeed. I compare that with the length of time that it has taken us to work on flexible working, for which it has now taken us 10 years to assemble all the evidence. We are now in a position where the coalition Government are saying that they are going to legislate to bring in something that was in the coalition agreement. The contrast between something that employers, campaign groups, family charities and policy makers have worked together carefully on for 10 years, assembling evidence to bring into law something that we all agree will benefit business and help recovery, and this incredibly hurried and surprising proposal just makes me think.

Paul Callaghan: I can only speculate where it came from. I suppose it was a combination of wanting to increase employee share ownership, which I think is a good thing, while thinking that some business dislikes employment regulations, so let us see if we can combine the two. It has not been thought through. I suspect that if it does end up on the statute books, it will not be used very often, because it will be too complicated and impractical to put into practice.

Mike Emmott: I agree with what has been said. It feels like policy by numbers. It ticks a number of the right boxes. It does not appear to have been thought through in terms of how those boxes relate to each other. It only makes sense as a toe in the door for employment at will, as the thin end of the wedge. That is the only way in which it is possible to interpret it.

Q 287

Photo of Nicholas Boles Nicholas Boles The Parliamentary Under-Secretary of State for Communities and Local Government

Ms Veale, I want to explore the consistency of what all members of the panel have said. You said that the Trades Union Congress opposes on principle any idea of trading a share in a business for employment rights.  Are you therefore on record as being against all partnerships, which, as your colleague, Mr Callaghan, has explained, do exactly that?

Sarah Veale: Some partnerships have a perfectly legitimate status, certainly partnerships that run law firms. I do not have any particular problems with those. What we object to—

Q 288

Photo of Nicholas Boles Nicholas Boles The Parliamentary Under-Secretary of State for Communities and Local Government

But is it not the case now that they remove certain of the same employment rights in exchange for a share in the business?

Sarah Veale: It is not quite that simple.

Q 289

Sarah Veale: There are different types of employment status in the UK, some of which have some rights attached to them, and some do not. There are casual workers out there who do not have most of the rights in here.

Q 290

Photo of Nicholas Boles Nicholas Boles The Parliamentary Under-Secretary of State for Communities and Local Government

But did not Mr Callaghan just explain that he does not have certain rights under employment law? I thought you had said earlier that you would oppose in principle trading away in exchange for a share of the business?

Sarah Veale: They are not—[Interruption.]

Q 291

Photo of Nicholas Boles Nicholas Boles The Parliamentary Under-Secretary of State for Communities and Local Government

I am asking Ms Veale a question at the moment. Did he not say that, and did you not say that you opposed it in principle?

Sarah Veale: These people are not employees. I am opposed to employees—the legal term—people who are employed by—

Q 292

Photo of Nicholas Boles Nicholas Boles The Parliamentary Under-Secretary of State for Communities and Local Government

But they are not employees, because they traded away some of their employment rights in favour of a participation in the upside of the firm.

Sarah Veale: They are professionals who choose to become part of running a company. That is a very different proposition compared with someone who cleans the floor down here, who has to work for a living.

Q 293

Photo of Nicholas Boles Nicholas Boles The Parliamentary Under-Secretary of State for Communities and Local Government

So the TUC is happy for certain people who work for big companies to trade away their rights of employment in exchange for a participation in the upside of that organisation. Is that right?

Sarah Veale: We have just gone through all this. They are not trading in a legitimate way. They are in a position where they are being forced to trade something away in order to work or in order to stay in a job.

Q 294

Photo of Nicholas Boles Nicholas Boles The Parliamentary Under-Secretary of State for Communities and Local Government

People are offered a partnership. The partnership has very clear conditions attached. You either accept it or not.

Mr Callaghan, you said that people take on a partnership because it gives them a real meaningful say in the direction of the business. Do you know how many partners PwC has?

Paul Callaghan: I don’t, no.

Q 295

Paul Callaghan: I don’t.

Q 296

Photo of Nicholas Boles Nicholas Boles The Parliamentary Under-Secretary of State for Communities and Local Government

It is roughly the same figure. Do you think that individual junior partners like you, who take up the offer of a participation in exchange for giving up their employment rights, are really having much effect on the future direction of PwC?

Paul Callaghan: I think they are pretty well remunerated compared with the average person.

Q 297

Photo of Nicholas Boles Nicholas Boles The Parliamentary Under-Secretary of State for Communities and Local Government

What you have just explained in your evidence is that you expect that this would prove quite expensive for employers to do—which I agree with, by the way—and therefore presumably the logical conclusion is that you would do it only for relatively senior employees who work in a fairly serious role and therefore have a serious stake in the business.

Paul Callaghan: I think that you are right. The only people that this is going to appeal to are senior executives, potentially in private equity or venture capital-backed companies—

Q 298

Photo of Nicholas Boles Nicholas Boles The Parliamentary Under-Secretary of State for Communities and Local Government

Is it therefore not the case—[ Interruption. ] Excuse me, can I ask a question?

Photo of Philip Davies Philip Davies Ceidwadwyr, Shipley

Let them answer the question.

Photo of Nicholas Boles Nicholas Boles The Parliamentary Under-Secretary of State for Communities and Local Government

He has answered my question. I want to ask him another question.

Photo of Philip Davies Philip Davies Ceidwadwyr, Shipley

They are here as witnesses.

Paul Callaghan: I think this will be used by senior executives who would have been given equity anyway, and now get a way of getting that equity with a capital gains tax exemption, so I think it will be popular .

Q 299

Photo of Nicholas Boles Nicholas Boles The Parliamentary Under-Secretary of State for Communities and Local Government

Given that that is the case, is it not strange that you said you thought that some employees would be offered a choice that was not really a meaningful choice, such as a choice between having food and not having food? These are relatively senior people who presumably have a track record of employment, who have alternative employment histories. These are not cleaners who are going to be offered a choice between a job with these conditions or no job at all.

Paul Callaghan: The way that this has been presented by the Government is that this is going to be primarily for emerging growth and starter companies, not for the senior executives and private equity-backed companies that I think will be quite happy.

Q 300

Photo of Nicholas Boles Nicholas Boles The Parliamentary Under-Secretary of State for Communities and Local Government

I put it to you, sir, as somebody who has actually run and set up two such businesses, that the very first people you employ—if you have an emerging start-up business—are people who will be very senior but if, by definition, your first employees are people who will grow into building that business, as that business grows, they rarely are very low-skilled employees. You normally do not have the luxury of that when you  are setting up a new internet business. You hire your sales director; you hire your personnel director; you hire your finance director. They are relatively high-flying people.

Paul Callaghan: If you want to limit this to a certain class of executive, we might be talking about something different. But that is not what the law does.

Photo of Philip Davies Philip Davies Ceidwadwyr, Shipley

I have other people to get in.

Q 301

Photo of Nicholas Boles Nicholas Boles The Parliamentary Under-Secretary of State for Communities and Local Government

Do you need to limit it, given that this is an opportunity that has been created in law that people can take advantage of or not, as they like? Other members of the Committee have already said that this is a niche opportunity for niche businesses. Those niche businesses happen to include among them some of the fastest-growing businesses in the economy. Is it not reasonable to create this opportunity, which only certain businesses for certain employees might take up?

Paul Callaghan: Not if it can be exploited potentially by others and affect people who do not have the same sort of bargaining power. That is the problem. There are no safeguards. It still remains only optional on the employer side.

Q 302

Q 303

Photo of Paul Blomfield Paul Blomfield Llafur, Sheffield Central

Thank you, Mr Davies. I understand why the Minister feels so rattled in the face of overwhelming evidence against his proposal.

I will give you the opportunity to answer the questions. Following on from that theme, if indeed this was a proposal about a very small category of niche employees in niche companies, would you be so worried on the basis that that is not the understanding of the legislation before us?

Paul Callaghan: Possibly less so, if there were more equality of bargaining power. I still think the message would be given particularly to women, when you are removing the right to flexible working even though, as I say, I do not think that it actually has any effect legally because of the sex discrimination laws. The message that you are sending to women is quite detrimental in terms of trying to create a family-friendly work force. If you have something closer to genuine equality of bargaining power, I would be less concerned.

Sarah Jackson: Even if this were only a niche product, I am still concerned because of the messages that it sends both to women in terms of welcoming them into the work force and in terms of the messages that it is sending to employers, particularly SMEs, about maternity, paternity, flexibility or being potentially a burden on them rather than something that will help them build their businesses.

Q 304

Photo of Paul Blomfield Paul Blomfield Llafur, Sheffield Central

May I move to a different aspect of the issue—one that the Minister in his questioning to promote employee ownership will no doubt take account of? The head of the US National Center for Employee Ownership, which I understand is one of the  leading groups in the world promoting share ownership, talks about the American terrain, and says that there is clearly a lot of employee ownership in our country, but not one of these employers or plans asks employees to give up any employment rights. Are you aware of anywhere else in the world where there is this trade of rights for shares? If not, why do you think that is?

Sarah Veale: I am not aware of any.

Q 305

Photo of Paul Blomfield Paul Blomfield Llafur, Sheffield Central

Why do you think that would be?

Sarah Jackson: It is unnecessary.

Sarah Veale: It is dangerous. The point that we keep pushing across is that, if you get something on the statute book like this, it is the thin end of the wedge. It would be really relatively easy to open it up much further and start seriously stripping rights away from people who should be completely and utterly protected.

Q 306

Photo of John Howell John Howell Ceidwadwyr, Henley

I want to pick up where Nick Boles left off. When I became a partner in Ernst and Young, I did not take any legal advice. It was not the done thing to take legal advice. I did not need to take legal advice. I did not review the rights that I would get. I knew that I would be gaining a certain amount of additional income, although that was something that you could not tell in advance. The remuneration was placed at about the same level as that of the senior manager that I had been before, with an adjustment at the end if there were a profit for the year.

You keep making the contrast between that situation and the company situation, and I think that you have got this completely out of perspective. You keep saying that if you join a small company—a start-up company—the shares may have no value. Well, if you join a small partnership, the partnership will have no value. It will need some time—at least a year—in order to get that work under way. These are not the decisions that you make when you take these things into account.

Sarah Veale: There is a huge difference between someone who is very qualified and highly skilled who can make an intelligent and well-informed decision and somebody who is working in a tiny or new fast food store or something like that—there are all sorts of different types of businesses and they take on unskilled workers very quickly—who will not be able to compare the value of their employment rights with the potential for being a share owner. I am sorry, but they just will not be able to. They need to have some assistance and some guidance.

Q 307

Photo of John Howell John Howell Ceidwadwyr, Henley

I am equally sorry that I simply do not accept that. I do not accept that the man in the street does not know what rights he is giving up. That is inconceivable.

Sarah Veale: Well, you should come and listen to our helpline sometime. The ignorance people have about their employment rights is absolutely phenomenal.

Q 308

Photo of John Howell John Howell Ceidwadwyr, Henley

We can argue about this for ever, I suspect, and we will no doubt argue about it more in Committee. It is not just for people with exceptional skills or exceptional interests in an area to take this forward. It would have been extremely useful to be able  to offer anyone who was part of the company this incentive when I started up my own two small companies before I came into Parliament.

Sarah Jackson: I think that I would like to reflect on the evidence that was given by the British Chambers of Commerce, which said that it could see that this kind of employment contract could restrict small businesses’ ability to recruit, and I can understand why. If I think of the kind of people who ring our helpline—like Sarah, if you want to come in and listen to the kinds of things that people ring us up about, just let me know, because you would be very welcome—the average person is on a family income of £28,000 or less, so we are not talking about high-paid people; we are talking about the kind of people who probably have responsible jobs. We are not talking about cleaners; we are talking about people who are working for small and medium-sized organisations. They are responsible and middle ranking.

I can easily see a situation where someone might call us and say, “My potential employer is a new start-up and they want to recruit a dozen people. I am quite interested in that and they are offering me £25,000 a year. What do you think?” Our advisers would have to say, “You need to think about this really carefully. You have got a mortgage, you have got kids and you could have care responsibilities. Understand what you are signing away.” They do need advice at that point.

I am also thinking about the maternity leave provision and the fact that a woman who goes on maternity leave would have to give 16 weeks’ notice of an early return rather than eight. In my experience, women do not very often choose to come back earlier than they had originally said from maternity leave. That situation means that something has drastically gone wrong at home. It may well mean that the partner—the father of the child—has lost his job, for example. If you then have a situation where she cannot get back to her paid work for almost four months, you are looking at a family who may be facing poverty wages and going to the benefits system. We all keep saying that this has not been well thought through and the impact on maternity leave is evidence of that.

Photo of Philip Davies Philip Davies Ceidwadwyr, Shipley

I am sorry, but we will have to move on. We have three other people who want to get in, and we have only six or seven minutes left.

Q 309

Photo of Roberta Blackman-Woods Roberta Blackman-Woods Shadow Minister (Communities and Local Government)

I will try to be quick.

I want to deal with some of the possible complexities of this. If I am this niche worker in this niche go-ahead company and somehow it fails or I decide that it is not suitable and I want to get out and sell the shares, I will not know their value. Will we have a whole set of difficulties with people who want to leave and might want to sell their shares? That is my first question. Will there be additional costs for the company?

Paul Callaghan: Exactly. It is not clear at the moment who will have to pay for the valuation of shares when an employee leaves. Will it be the employer or the employee? What if there is a dispute? Will there be court action as  to whether a reasonable value has been paid? Will there be employment tribunal claims in which people dispute whether they were genuine owner employees in the first place and challenge whether the shares were of the value that they were stated to be? It is very complicated.

Q 310

Photo of Roberta Blackman-Woods Roberta Blackman-Woods Shadow Minister (Communities and Local Government)

I would like to explore that further, but we do not have time. Maybe we can get some written evidence from you. The second point I want to raise is about the equality impact assessment. I have been quite struck this afternoon by what all of you have said about the implications for women in particular. We do not yet have the equality impact assessment, although I understand that one is being done at the moment. Clearly, that is something that you think should be taken into consideration before we make a decision on this clause.

Sarah Veale: I think that there is an equality impact assessment, but not a generic impact assessment of this particular clause, as I understand it. We thought that the equality impact assessment was extraordinary, because it claimed that there was no gender impact, and yet, by definition, if you are trading in your right to request flexible working and your notice period on return from maternity leave, it would be extraordinary to say that that did not have a particular gender impact. As far as I am aware, it is women who get pregnant and come back from maternity leave, not men.

Sarah Jackson: Yes, I agree, and there was a very strange use of the work-life balance survey as well. They seem to have looked only at full-time workers, whereas the work-life balance survey shows very clearly that more women than men take up flexible working options. We have real problems with the impact assessment.

Q 311

Photo of Therese Coffey Therese Coffey Ceidwadwyr, Suffolk Coastal

It feels a little bit like doomsday scenarios are being painted here. Given that certain rights will continue to be guaranteed, such as those covered by anti-discrimination laws, it feels like a somewhat excessive reaction. Mr Callaghan, I understand that your firm is active in Tech City. Multiple tech business owners and founders have publically welcomed these proposals—I am thinking about people such as Mike Lynch from Autonomy—saying that this is potentially very exciting. What will you be advising your current and future clients in Tech City?

Paul Callaghan: I will be delighted if we can put forward a package that would make this workable, but a lot of the points I have made have been about why I do not think it is particularly workable at the moment, and why, if it is going to be on the statute book, it needs to be practical for companies. It is as much from the companies’ perspective that I have objections as from acting for senior executives, which I also do.

Q 312

Photo of Therese Coffey Therese Coffey Ceidwadwyr, Suffolk Coastal

But you do accept that there are people who think this could work, including company founders, and that they are quite excited by the prospect of trying to make it work.

Paul Callaghan: Well, all I can say is that nobody I have spoken to is excited about it. I am delighted if people are—if that is another product for us to sell, that is absolutely fine by me. My business is about going to  Tech City and the US to sell the UK to technology companies. I want to do that. If this was something that I thought would genuinely do that, I would be thrilled.

Sarah Veale: If there was an impact assessment, we might be able to answer this more sensibly. We do not know, because there is no one telling us whether a huge number of people out there, having been consulted, are saying, “This is a fantastic idea and we’re going to go with it.” There might be, but I have not seen any.

Q 313

Photo of Therese Coffey Therese Coffey Ceidwadwyr, Suffolk Coastal

I understand that the outcome of the consultation is due soon, although I do not know. I suppose I am just concerned because this is an innovative proposal. I appreciate why people are concerned, but why step in and be a barrier when people are willing participants? That is what I am trying to understand.

Paul Callaghan: I have been pointing out what appear to be the flaws in the plan. If you can remedy those flaws, my firm will certainly be looking to try to sell this product and promote it. I just cannot see how that is going to be done very easily, and certainly not by April next year, when it is due to come into force.

Q 314

Photo of Ian Murray Ian Murray Shadow Minister (Business, Innovation and Skills)

I think that it is becoming quite clear that this could be the first Bill in history that comes into law before the impact assessment or the consultation has been published. I have one very quick question for Mr Callaghan. When you made the decision to become a partner of the firm that you were employed by, was it a voluntary decision?

Paul Callaghan: Absolutely voluntary.

Q 315

Photo of Nicholas Dakin Nicholas Dakin Opposition Whip (Commons)

If this scheme does come into play, are there any safeguards for employers or employees that you think can be put in place to make it work?

Sarah Veale: As we were saying, there is the automatic unfair dismissal protection for people who are pushed into this unwillingly. Also, as I said earlier, we absolutely insist that people should be given legal advice before they decide to trade in their statutory employment rights for something as uncertain as this. That would be essential for us. But we regard this clause as an absolute disaster, and we suggest that the Government need to go away and think more carefully about employee share ownership, which the TUC thoroughly approves of. The Government should not see it as something you can marry with getting rid of employment rights. Many employers are on record as saying that such rights are important to have—they are good for the reputation of the company, apart from anything else.

Paul Callaghan: I would say, as I act primarily for companies, that you have to look at company law and work out how companies can lawfully give these shares away and work out a way of properly valuing shares both on entry and exit. If an emerging growth company is going to take on a lot of employees, does that mean that it needs to go through an evaluation exercise every time it hires or loses an employee? It just is not practical. How are those practical issues going to be dealt with?

Photo of Philip Davies Philip Davies Ceidwadwyr, Shipley

Order. I am afraid that brings us to the end of the time allocated for the Committee to ask questions of these witnesses. On behalf of the Committee I thank all the witnesses for joining us today.