Will weaker employment rights lead to more and better jobs?

In the latest move to weaken protections for workers in the UK, businesses will be allowed to offer employees shares on condition that they give up key employment rights

Jason Heyes

Last week the UK House of Commons voted in favour of a scheme that will enable businesses to offer prospective employees shares on the condition that they forego key employment rights.  Inspired by the ideas of venture capitalist Adrian Beecroft and first proposed during the 2012 Conservative Party Conference by George Osborne, the Chancellor of the Exchequer, Clause 27 of the coalition government’s Growth and Infrastructure Bill will allow employers to provide new recruits with between £2,000 and £50,000 worth of tax-exempt shares in their business.  In return, employees will have to agree to waive their rights in respect of unfair dismissal, redundancy and the right to request flexible working and time-off for training.

How much demand is there for this scheme? The answer is – very little.

John Cridland, Director General of the Confederation of British Industry (CBI), has described it as a ‘niche idea’, while John Longworth, Director General of the British Chambers of Commerce (BCC), has claimed that the measure is ‘unlikely to be a game-changer’.  For its part, the Chartered Institute for Personnel and Development (CIPD), the leading professional body for people managers, has voiced unambiguous opposition to the measure. Its employment relations advisor, Mike Emmott, has argued that ‘employees have little to gain by substituting their fundamental rights for uncertain financial gain and employers have little to gain by creating a two tier labour market’.  Opposition to the scheme was also strong in the House of Lords, which twice voted against the proposal.

The government chose to plough on regardless, making only minor concessions, such as the addition of requirements that workers be provided with free independent legal advice before accepting a ‘rights for shares’ job offer and be given up to seven days to make up their minds. The government also emphasised that the scheme will be voluntary, although it is conceivable that many unemployed workers will find the offer preferable to continued joblessness.  They will then have no legal protection against unfair dismissal and no right to redundancy compensation.  Redundancy of course generally arises in the context of a struggling (or insolvent) business, in which case the value of their shares is likely to be negatively affected.

The measure is at heart an attack on the principle that workers should be provided with legally enforceable employment protections.  It is but the latest in a series of measures introduced in the UK that are intended to increase employers’ freedom to dismiss employees.

The attack on employment protections commenced in April 2012 when the minimum period of employment service for unfair dismissal claims was increased from one to two years (and here it is worth noting that prior to the 1979 general election the minimum period of employment service required for unfair dismissal claims was just six months). The coalition government has also announced a substantial reduction in the consultation period for large-scale redundancies, a new cap for unfair dismissal compensation, new charges for workers wishing to have a case heard by an employment tribunal and the abolition of the Agricultural Wages Board.

Viewed as a package, these changes amount to a dramatic rolling back of individual employment rights.

Yet, even before they were introduced, the UK had some of the weakest employment protections of any developed economy.  This is usefully measured by the OECD’s employment protection legislation (EPL) index.  Since the mid-1980s (the earliest period for which OECD data are available), the UK has had one of the lowest overall employment protection legislation scores in this index of any OECD member-state (the USA being the only country that has consistently been awarded a lower score) and has the particular distinction of having the lowest score of any OECD member within the European Union.

Every employment relationship involves a power imbalance, but workers who have been stripped of their statutory rights are less likely to feel able to challenge unreasonable demands or voice honest opinions. A further problem is that weaker employment protections may undermine the trust, cooperation and worker participation required for the successful introduction of new processes and products. To that extent, the erosion of employment protections will serve to undermine, rather than stimulate, innovation and investment.

The coalition government hopes that weaker employment protections will lead to lower unemployment, but the empirical evidence concerning the relationship between EPL and unemployment is far from clear-cut. Some international comparisons have suggested a positive relationship between the strength of EPL and unemployment (particularly long-term unemployment), but others have found that two are unrelated.  Estimates are sensitive to the measures, time periods and methods used in their calculation.  In addition, there is a risk of overlooking the potential value of robust employment protections in preserving jobs during economic downturns.

My own research with Paul Lewis of the University of Birmingham has suggested that EU countries with relatively strong employment protections tended to experience less severe job losses than those with weaker protections during the early stages of the crisis, although it should also be said that EPL did not prevent subsequent employment rate reductions, particularly in countries experiencing financial distress and austerity.

The UK is not alone in eroding employment protections.  Several other European economies have weakened restrictions on dismissals and the use of temporary contracts, and others are planning to do so.  However, it seems highly unlikely that employers will embark on a hiring spree while economic conditions remain turbulent. What is beyond doubt is that increasing employers’ freedom to dismiss workers falls far short of a viable strategy for creating sustainable jobs.