In a firm, articulate op-ed piece in the Financial Times, “Protect workers from the private equiteers,” Jack Dromey, an officer of the trade union Unite, says, “Workers deserve better in private equity deals.”
I’ve gotten so used to writers that are afraid to take on the orthodoxy of free markets that it’s refreshing to see an unabashedly partisan article that lands some well aimed blows and makes sensible proposals. Of course, one reason that the author can write with such confidence is that he knows both the law and public opinion in the UK still give employees’ rights some weight. The article has the effect of revealing how different attitudes are here.
From the Financial Times:
Workers deserve better in private equity deals. As the trade union currently dealing with 660 job cuts at private equity-owned Burton’s Foods, we understand the real-world effects on our members. Representing, as we did, the Gate Gourmet workers who were summarily sacked in a car park or canteen by a private equity-owned company, we are no strangers to controversy. This is why we believe the time has come for specific new legal protections for workers in private equity deals and an extension of information and consultation rights for the workforce before deals are completed.
Our members’ experience of private equity is all too often job uncertainty, poorer pay, pensions put at risk and even unemployment as factories and plants are closed. Their experience is supported by independent reports commissioned by Unite. These have dissected private equity’s claims on job creation, describing them as “worthless”; and on investment returns, saying investors do “worse than if they invested in the stock market”. We have seen what the private equiteers did to workers at Birds Eye and the AA and what they are doing at Burton’s Foods.
Much has been made of the tax regime that private equiteers exploit through debt and taper relief. We agree with some key private equity figures that the time has come for change. We concur with calls for openness and accountability and have suggested a Competition Commission investigation into private equity fees.
However, if the many reports and commentaries have overlooked the effects of private equity on workers’ rights, which they have, Unite has not. Workers’ rights are the missing link in the current debate.
There are three key points.
First, private equity deals are share transfers that should be covered by the Transfer of Undertakings (Protection of Employment) regulations. This would mean workers taken over by private equity automatically become employees of the new venture with their terms and conditions and continuity of employment safeguarded. These are hard-won rights to protection on transfer that date back more than 25 years.
Second, the right to information and consultation before a private equity deal is completed should be extended to workers and their trade unions. Private equiteers should not be able to exploit the loophole in share transfers, operating in secrecy and keeping workers in the dark. Workers should know what the plans for their future are, be fully informed and consulted on them and be able to apply for a blocking injunction if private equity fails to come clean. Third, substantial changes in companies’ debt should be considered a change in employees’ terms and conditions that should entitle them to compensation as a key stakeholder.
By loading debt on to the companies they take over, private equity increases the risks for those with important stakes in those businesses. From a normal ratio of 30 per cent debt to 70 per cent equity, private equity reverses this or, in extreme cases, the debt rises to 80 or sometimes 90 per cent.
Cutting through the financial jargon, which is used to complicate the debate, it must be clear that debt needs to be repaid or serviced and this represents an extra cost to the business. That is why banks, other lenders and pension funds ask for compensation or charge for it by way of increased interest rates or fees and by imposing covenants. Pension funds are able to ask for up-front cash payments to compensate for additional risk, as we are seeing at the moment in the takeover of Alliance Boots by private equity. Yet it is the workers, whose pay is squeezed and jobs put into jeopardy, who can do nothing. That is wrong.
Standard & Poor’s, US credit rating agency, commenting on the effects of private equity last November, made clear how levering companies up transferred the business’s risks to workers. “The greater the quantity of debt a company held on its balance sheet, the greater the chance of redundancy, erosion of staff benefits . . . as the business struggled to repay its interest burden,” it said. “Even if the company doesn’t default, the staff have less job security and are looking over their shoulders a lot more, worrying what will happen if the company misses the projections its debt is based on and struggles to make its repayments.”
Private equity apologists are in denial about this. We are not. The new government, whose leader has successfully married social justice with economic stability, should act to right the wrongs being done to workers.