In October last year, chancellor George Osborne announced a 'shares for rights' deal, whereby workers forfeit certain employment terms in exchange for a stake in their company.
As part of the scheme, employees would not pay income tax or national insurance contributions on the first £2,000 of shares received, and would not pay capital gains tax on the first £50,000.
However, in a decision that will be a blow to the chancellor, The House of Lords voted to remove the policy from the Government's Growth & Infrastructure Bill by an overwhelming 232 votes to 178.
The House of Laws said the clause of the new Bill would have permitted employers to bribe their employees with shares worth as little as £2,000 to sign away many of their legal employment rights, from redundancy pay and unfair dismissal rights to the right to request training and flexible working.
It said the clause would have a "damaging effect" on employment relationships, on industrial harmony and through the power it will confer on bad employers.
Ifs ProShare welcomed the news, saying the Government sought to justify the policy by suggesting the benefits that flow from traditional forms of employee share ownership will inevitably follow, despite there being no evidence to justify the assertion.
It stated the two are not the same and there is certainly no need for employment rights to be sacrificed.
Independent Peer Lord Pannick, who fought to stop the plans going ahead, said of the minister behind the idea: "I am sure it was not in his bathtub that this foolish idea was dreamt up.
"I am very sorry the Government has not listened in particular to the noble Lords, Lord King of Bridgwater, Lord Forsyth of Drumlean and Lord Vinson, and to the noble Baroness, Lady Wheatcroft. Between them they have years of experience as employment Ministers and in business."
Phil Hall, special adviser to ifs ProShare, said:, "We have repeatedly made clear that the Government's proposals for this new form of employment contract will undermine both the employee ownership and employee share plan sectors because of the widespread negativity that surrounds their proposals and the fact this new type of employment contract will be widely confused with traditional forms of employee share ownership."
Hall added: "We are grateful to the majority of peers who voted against this wholly unacceptable policy and very much hope that when the legislation returns to the House of Commons MPs will not seek to reintroduce this ill conceived idea."
Matthew Findley, partner at international law firm Pinsent Masons, added:
"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 proposal will now go back to The House of Commons where the Government will decide whether to introduce it back or to effectively scrap the plan.
