Response to Call for Evidence on Raising Awareness of Employee Ownership from Field Fisher Waterhouse LLP
This response has been compiled by the Employment and Pensions Group at Field Fisher Waterhouse LLP. The comments/input provided below are separate to those set out in the Nuttall Review, based on our experience as specialist employment lawyers and, in particular, our understanding of how similar rights to request operate in the workplace.
A. Is a statutory approach best to encourage discussion between employees and their employers, or are there other mechanisms?
Our experience is that the statutory right to request flexible working works well in providing a framework for discussion and debate, and ensuring that requests are approached carefully by both parties. Although there is nothing, at present, preventing employees from making a request for employee ownership, based on our experience, and the findings of the Nuttall Review, the concept of employee ownership is not widely understood or discussed. A statutory approach, combined with other steps to raise awareness, may therefore provide the requisite "nudge" and encourage both employees and employers to consider this model. However, the particular benefit of a statutory right over and above other steps to raise awareness is that it requires employers and their advisers to engage with the concept of employee ownership where otherwise they would not. In circumstances where Government recognises and actively wishes to promote the benefits of employee ownership (then as with flexible working) such a requirement appears appropriate.
However, there is some tension between the need to make a statutory right meaningful whilst at the same time not making it too burdensome on employers. Assuming that owners will not be forced to create an employee ownership model, there is little benefit in creating a structure which is too onerous. It may discourage employees from pursuing their right to request employee ownership and deter employers/owners from considering the model.
It has been suggested that there should be a minimal level of consultation or a meeting between the employer (representing the owner) and the employees to discuss the model but that the employer should ultimately be given a broad discretion to reject employee ownership. This seems right but whether a small fine should be imposed (similar to the fine imposed in relation to flexible working) where this minimum requirement is not met requires careful consideration. A legitimate view is that the mere fact of a statutory obligation may provide sufficient incentive to the vast majority of employers without there being any need for an actual enforcement mechanism, particularly taking into account the potential employee relations consequences should they fail to comply.
Other options which could also be considered, rather than fining employers for failing to consider a statutory right to request employee ownership, could include incentivising employers to consider this model through tax/regulatory breaks, and/or specifying that compliance could is something which the public sector takes into account when awarding contracts.
It is helpful to consider the (in some ways) comparable right to request flexible working and how this has evolved within the workplace. The right to request flexible working was established in 2003 in relation to limited categories of employees and extended to additional categories of employees in 2009.
The Department for Trade and Industry commissioned a number of surveys after the right to work flexibly was introduced. The First Flexible Working Employee Survey (carried out 6 – 11 months after the introduction of the right to request flexible working) showed that prior to the statutory right, 77% of requests were accepted. Afterwards, this rose to 86%. The Second Flexible Working Employee Survey (carried out in January 2005) showed that the acceptance rate had fallen to 81%. The Third Work-Life Balance Employee Survey (conducted in early 2006) showed that the rate of approval was at approximately 83%. However, the key finding from these surveys as summarised in the executive summary to the most recent is that there is significantly "increased provision by employers of flexible working arrangements and a fall in unmet employee demand", and that this was the case both formally (i.e. through following the statutory procedure) and informally. On this basis, which accords with our view, the statutory right to request flexible working has accelerated the introduction of such arrangements and their benefits into mainstream working life.
What evidence is there of companies ignoring requests from employees to consider employee ownership?
We are not aware of any evidence of companies ignoring employees' requests to consider employee ownership in the private sector, although we have dealt with a case involving significant reluctance to engage in the public sector. We have much experience of employers refusing to engage with general employee business proposals where those differ from those of existing management. Such proposals may often be perceived by employers as critical and/or counter-hierarchal, and discarded on that basis without their merits being examined, particularly when they arise in the context of business difficulties or tensions within the workplace. It appears likely that many employee ownership proposals might also arise in such circumstances.
Would a statutory 'right' embolden more employees to make requests they wouldn't otherwise?
As stated above, we consider that a statutory right would lead to more active consideration of the possibility of making a request and to more such requests from employees. In particular, we consider that a legal right to make a request would embolden employees to submit requests in the difficult business circumstances described above, where they might otherwise fear their employer's reaction. However, the extent of any legal protections against detrimental action by employers in response to such requests may also be of crucial importance in such scenarios.
We note that the law of unfair dismissal already provides considerable protection requiring employers to have a fair reason for dismissing someone. This is highly unlikely (possibly a SOSR in very limited circumstances) to include dismissal for requesting employee ownership.
Would improved guidance facilitate more discussion?
Yes. Both employers and employees need to understand the benefits of employee ownership, and the framework governing the statutory right to request, to be able to consider whether employee ownership is appropriate. Given both employers' and employees' current limited understanding of the employee ownership model, further guidance and information will assist with the promotion of employee ownership.
What information and guidance would support employers make decisions on employee ownership for their company?
A range of information/guidance could help such as:
- More information on benefits and challenges of employee ownership so that employers are fully informed to make a decision;
- Case studies on employee ownership; and
- Ambassadors –putting people considering employee ownership in touch with ambassadors who run employee owned businesses.
However, a crucial first step is creating awareness of the concept of employee ownership to drive people to seek out relevant information and guidance. Anything that can be done to drive awareness of the employee ownership "business case" would therefore be helpful (such as the suggestion in the Report of 2013 being a 'year of employee ownership'). In particular, it would be helpful if it could be promoted in relevant sector groups, such as Chamber of Commerce and the Federation of Small Businesses.
B. Who can receive a request and what should the request cover?
We do not see how the right to request could work other than as suggested in the Nuttall Review (i.e. it should extend only to companies limited by shares, and focused on a holding company alone in group company structures). We would suggest that requests should be addressed to and considered in the first instance by the relevant board of directors (as the directors are appointed to act in the best interests of and to report to the shareholders).
We consider that given the myriad range of company structures, businesses and potential proposals for employee ownership that the form and content of the request should not be prescribed. However, it would be sensible, as part of the available guidance, to set out the appropriate procedure and provide a suggested framework/template which employees could use for their proposal. This would have the dual function of assisting employees with formulating a viable proposal and assisting employers by ensuring the employees provide appropriate/relevant information.
How should a Right to Request be distinguished from the Right to Provide for public service mutuals?
They would be quite distinct and specific separate rights (albeit linked conceptually). The right to provide results in a form of employee ownership in the public sector; however, the right to provide only applies to a limited range of public services. The right to request would be opening up employee ownership to the private sector generally and would therefore be a much wider right applicable to a greater range of employees.
How could groups of employees develop an employee ownership proposal to put to their employers? What would be the most effective way of organising this process?
There would have to be sufficient interest from employees to put forward an employee ownership proposal, so there would be a need for meetings/written communication between them to determine the level of employee buy in to any proposal or the potential to develop a proposal. We envisage this part of the process would be informally led and handled entirely by those employees who have the interest and/or initiative to spearhead the first stages of a proposal. Often these individuals may be officially recognised employee representatives who may already have an interest in employee relations and workplace issues beyond that of other employees. However, we do not believe that there need to be any special rights, guidance or assignment of status to such individuals.
It would not be wise to put employees to the time and expense of preparing a full business plan from the outset. The right to provide process starts with an expression of interest, which is a high level document detailing the proposal. Although under any right to request the information provided would have to be quite different, it remains the most logical and effective approach to start with a high level proposal. Employees would usually need guidance on preparing such a proposal. This could be in the form of Government guidance and/or assistance from the proposed Institute.
We do not consider that it would be helpful or necessary to set out an extremely prescriptive process or requirements to satisfy an employer that a required number or percentage of employees support a proposal (such as exist in relation to strike action ballots). This could lead to unnecessary burdens and legal dispute where the focus is on supporting a potentially collaborative process. Given that the only proposed legal requirement upon an employer is simply to consider any such request, we suggest that employees / employee representatives seeking to submit a request need only provide reasonable evidence that the request is supported by the required proportion of employees (we envisage signatures or otherwise written confirmation of individual employees' support).
We support the proposal set out in the Nuttall Review that the required level of employee support might match that used to recognise a "valid request" under the Information and Consultation of Employees Regulations 2004 (i.e. 10%). In general, it is our view that the requirement should be set at a level which ensures that it represents and has the support of a meaningful proportion of a workforce, but that it should otherwise be relatively low and not amount to an artificial barrier which would deter or otherwise avoid consideration of meritorious proposals. The introduction of a right to request with a requirement for majority or even higher levels of employee support might in fact have a cooling effect on the position even as it stands (as employers may consider it appropriate to ignore requests unless they meet the statutory requirements).
We also note that the fact a request is "accepted" at the first stage of consideration will generally only mean that it is given further exploration and a programme for its wider consideration may be drawn up, which will require consultation and likely significant consent from the whole workforce in order to advance.
To what extent do employees already have opportunity to put employee ownership proposals to their employers?
There is no prohibition on employees putting employee ownership proposals to their employers. However, as highlighted in the Nuttall Review, there is a general lack of awareness about the model. Employees may be deterred from putting forward such proposals not only by the complexity/lack of awareness/lack of a statutory right, but also fear of how their employers will respond and whether they will suffer professionally for making a proposal. Making a request could easily be interpreted as a criticism of the way that a company is being run (see above also).
Should the request be limited to those that give all employees an opportunity to participate?
Yes. Excluding employees may have a negative impact on morale/motivation, which is one of the reasons employee ownership is considered advantageous. All employees should be given a right to participate; maximum benefits from employee ownership structures are generally derived from widening ownership and management to the workforce as a whole.
C. What is the employer required to do?
As set out above, we consider that the formal request made by employees should be presented to the board of directors. As well as the board having an obligation to consider and respond to it, we consider there would be merit in providing for an employee representative or representatives to have the option to present the proposal during a board meeting (as a means of encouraging engagement and discussion).
There could then be a requirement that the directors vote on the merits of the proposal, and if it is approved it should be circulated to shareholders for further consideration. This is likely to work better with smaller companies than large companies and where the directors and the shareholders are the same people.
Finally, we would suggest that the board is then required to communicate its decision to the representatives with an explanation of its reason(s) (even if this is as broad as "the directors did not agree that the proposal was in the interests of the company's shareholders"). We are less convinced of the need for a meeting to confirm the decision.
We note that the board may approve the circulation of the proposal to shareholders or take other steps to examine the options for its implementation. We would not propose that there are any formal requirements upon the company other than to confirm the initial decision to explore the proposal further. Although it is conceivable that some companies might utilise the option of "consulting with advisers" or "seeking shareholder views" simply to bury a proposal, we consider that where proposals have merit, the introduction of the right to put those proposals before companies and compel their consideration is all that should be necessary (and appropriate) to ensure actual / legitimate interest is generated. There is then no case for further regulation or restrictions upon the manner in which the proposals are taken forward.
In terms of setting the level of any employer engagement which is required, the Government should measure any arguments concerning the onerous nature of new obligations against the limits which it will also set on how often a right to request can be made (whether that is no more than once every 12 months or every 3 years as suggested in the Nuttall Review). It may also wish to consider barring the making or raising of requests during specific times when its invocation might cause an employer extra delay or cost (for example during collective consultation or as part of a TUPE transfer, unless the employer consents). As against that, it may be in fact precisely during those times that the incentives and opportunities for employee ownership models to be considered are at their greatest.
What might constitute ‘reasonable consideration’ on behalf of an employer?
In terms of process this might involve as a minimum one meeting with employee representatives to discuss and consider the proposal, with a specified time frame before an initial decision by the company as to whether the proposal will be refused outright or explored further.
As already recommended, it is our view that the proposal would have to be considered by someone or a group of people with sufficient authority to seek to carry a proposal forward if accepted, such as the board of directors, in order to have any meaning. We also consider that requiring a formal vote of the board would help ensure that a request is given appropriate consideration.
We do not believe it is desirable to define an appropriate minimum level or scope of consideration or enquiry in a private company setting in the way that might be possible when dealing with public body decision making that is susceptible to judicial review. However, requiring that a company offers reasons for a decision to refuse a request (without constraining what that reason might be) may act as an incentive for companies to approach the exercise with diligence.
Should there be a different approach depending on the size of company and should companies below a particular size be exempt?
Given that according to the Nuttall Review productivity benefits and increased profit can depend on the size of the employee owned company and be higher for smaller companies (section 2.10), it does not appear to make sense to restrict the right. It brings the most benefits to small businesses. In addition, the complexity of organising employee ownership would be a lot less in smaller businesses. We also consider that the concept of different rules for different companies would itself introduce complexity and uncertainty, when a simple model may be workable for all.
What are the most effective means for employers and employees to discuss and share information on employee ownership solutions for the company they work in?
It is unlikely that any one mean of communication is likely to be preferable in all circumstances; this will depend on the business. However, the process should, ideally, at some stage involve a meeting between employee representatives and board representatives for there to be actual meaningful engagement and discussion of the benefits and risks.
What are the pitfalls that could make this a confrontational process and how can that be avoided?
As noted above, there is risk that any request for employee ownership (whether or not the statutory right is in place) will be seen as confrontational as it may reflect employees' views on the way a company is run.
One way of minimising the confrontational nature of the process is to provide a framework for the way the proposal should be drafted, presented and considered (i.e. through guidance on the appropriate template documents that should be used and perhaps a timetable/structure for meetings and responses). An established framework will provide a structure for communications and, to some extent, may avoid the process becoming confrontational.
Once there is greater awareness of employee ownership and its benefits, the process should be become less confrontational as a successful proposal should be seen as a potential "win-win" for both the workforce and the company's existing owners. Guidance for employees and employers, and the statutory framework itself may wish to build in the options for parties to seek advice from and/or the involvement of agencies or ambassadors for employee ownership who can help the process advance constructively.
Some protections for employees from detrimental treatment as a result of their involvement in a request for employee ownership may also be appropriate, in supporting employees' entitlement to make such a request. In our view these would need to be limited in a similar way as those which apply to the makers of protected disclosures under whistle blowing legislation: that is, they do not apply where the proposal is not genuine but is put forward for an ulterior motive or is in some way malicious. For example, a proposal to buy a company for £1 accompanied by recommendations on matters which may be a matter of industrial dispute might rightly be seen as an inappropriate use of a right to request.
As suggested above, we suggest that any potential penalties for employers for failing to comply with the right to request process should be limited. Excessive penalties might in themselves lead to employers taking an overly process driven and liability focused approach, rather than concentrating on the potential merits of any proposal which is made.
D. What would be the grounds for turning down a request?
Would a prescribed list of eligible reasons to turn down a request provide employers more certainty as to how they could comply?
We do not necessarily consider a prescribed list of eligible reasons should be set as part of the process, but there should be an onus on the employer to provide a reason, on the basis that this helps demonstrate that they have considered the proposal.
The danger with a defined list of reasons is twofold. First, some employers may struggle to fit their particular reason within the list even if it is widely defined, and second, the process may more easily be treated as a box ticking exercise where employers are simply paying lip service to the idea of employee ownership. It seems to us preferable that employers respond independently. If employers have given reasonable consideration to the employee ownership proposal, it should not be particularly difficult for them to provide their reasons for refusal.
Relevant non-statutory guidance should provide appropriate lists of considerations and potential grounds which employers could rely upon where relevant in dealing with any request, and confirm that compliance does not require employers to provide justification for their reasoning. We do not consider there should be any legal right to challenge the reason given.
How would Government avoid a Right to Request becoming something that is paid lip service to and no more?
When introducing a statutory right for employees, there is always a risk that employers will not give it full consideration. Lack of awareness about employee ownership certainly raises the risk that the right is ignored or simply paid lip service and we consider the recommendations in the Nuttall Review relating to increasing awareness about employee ownership are therefore central to the success of a right to request.
A requirement to meet with employee representatives and then also to provide a reason for a decision to refuse the request without further exploration should also inhibit its devolution into a mere box ticking exercise.
Given that the purpose of the statutory right is to facilitate and promote consideration of employee ownership, rather than to compel forcible property transfer or to lead to disputes between employers and employees over the technical requirements relating to a right to request process, we consider that any enforcement mechanism should be narrowly confined and impose limited, if any, penalties. That may increase the risk some employers refuse to engage in the process, but we believe that if business perceives significant costs and risks attached to the introduction of a new statutory right, the impact on their attitude to employee ownership may be more negative and process driven.
E. Who should be eligible to make a request?
While allowing all employees to participate in and put forward proposals would help ensure that good ideas are heard, whoever may come up with them, this may also mean that employers could end up having to consider bad ideas from new employees with little knowledge/experience of the way the company works. We consider the requirement of, for example, of a minimum 26 weeks' continuous employment as proposed in the Nuttall Review would be acceptable. If new employees have a good idea, then they can always put it forward to employers outside the right to request framework or discuss it with employees who can support a statutory request.
We believe that the position of agency workers, contractors and casual staff is inherently different to that of employees, on the basis they are not integrated into the relevant business undertaking in the same way. We therefore consider that the right should not be extended to these categories of individuals.
What minimum requirements would ensure frivolous requests are minimised and that they have broad support amongst the staff?
As discussed above, we are not in favour of particularly prescriptive obligations or processes which might have a cooling effect on the ability of staff to put forward good proposals. The key requirement should simply be that a certain minimum proportion or numbers of the workforce demonstrate approval for the proposal. That minimum level should be sufficient to show a proposal has meaningful or representative support likely to reflect that of the wider workforce. We emphasise our view that the "approval" of a request will in reality mean the commencement of a process which (as the available guidance will emphasise) ultimately should necessarily involve consultation with the whole workforce before any new structure is put in place.
F. How should a Right to Request be introduced?
It would seem logical and advantageous to consider a phased implementation - as can be seen with pension auto enrolment. This allows the initial path finding to be handled by larger employers with more resources.
What resources would companies need to comply with a Right to Request?
As noted above, guidance and information about employee ownership will be the key resources for employers. Financial/legal advisers also need to have access to such resources to provide appropriate support to companies considering a right to request.
Would making the Right to Request applicable only at specific points in the business lifecycle (for example, when change of ownership is envisaged), (a) make it more meaningful and reduce compliance costs and (b) provide sufficient opportunities to encourage discussion of employee ownership in a company?
We do not believe it is desirable to limit the business circumstances in which a right to request might be exercised (although we note that consideration could be given to restricting its application during very sensitive times such as collective consultations, as mentioned above).
As stated, it appears sensible to restrict how often a right to request can be made. The Nuttall Review suggests limiting a request to once every three years but with a new right arising where there is a change of business - this type of approach seems sensible in that it limits the costs to business which might otherwise arise from numerous or repeated unmeritorious requests while also ensuring potentially "ripe" opportunities are not missed.
However, it seems restrictive to allow the right to request to apply only in set points in the business lifecycle and not otherwise. There may be many times where the circumstances are right to consider employee ownership, and indeed the conclusions of the Nuttall Review and Government policy support employee ownership and its benefits being considered whenever that might be appropriate and possible. We also note that some points in the business lifecycle, such as a change of ownership, are unlikely to ever apply to some businesses.