This defeat came on the same day as the Government announced in the Budget that the first £2,000 of share value that anyone receives under the new status will be free from income tax and national insurance contributions. The announcement also confirmed a delay in the originally intended start date for the new status from 6 April 2013 to 1 September 2013.
'Employee shareholder' status has been proposed as a third form of employment status, alongside 'employee' and 'worker', taking effect as a new form of equity-linked employment contract. In exchange for giving up certain employment rights, employees will become owners of a stake in the business they work for by being given shares in the employer company worth between £2,000 and £50,000.
Any profit not exceeding £50,000 on those shares will be exempt from capital gains tax (CGT) when the shares are sold. Existing employees cannot be forced to take up employee shareholder status – however employers may choose to offer only the employee shareholder status to new joiners.
In the House of Lords debate on the Growth and Infrastructure Bill, peers were critical of the fact that employees were being encouraged to give up their employment rights. Lord O'Donnell said "In the old days the price of slavery was 20 or 30 pieces of silver - is it now £2,000?"
"To allow these basic employment rights to become a commodity that can be traded by agreement frustrates the very purposes of these entitlements as essential protection of the employee who lacks effective bargaining power." said Lord Pannick.
Defending the proposal Viscount Younger of Leckie said "We want to give individuals more chances to share in the growth agenda and to own shares in their employer."
Matthew Findley, a share plans expert at Pinsent Masons, the law firm behind Out-law said, “The vote is perhaps not surprising, even if the timing is a little unfortunate for the Government. It would appear, however, that the Government is brushing off the loss as it has said that the measures will be implemented by the House of Commons in any event. What will be interesting is whether the Opposition, or the more rebellious elements of the Coalition, mount a serious challenge to the legislation given that it is widely known to be a personal project of the Chancellor.”
The Growth and Infrastructure Bill was being considered in the House of Lords in the report stage of the bill. The proposals relating to employee shareholders were defeated in the House of Lords by a majority of 54 with 232 peers voting against and 178 in favour. Ten Conservative peers voted against the proposals, including, former Chancellor Lord Lawson, Lord King, Baroness Wheatcroft, Lord Deben and Lord Denham.
The Bill will return to the House of Commons for consideration of the amendments made by the House of Lords. The House of Commons can overturn any changes made by the House of Lords.