George Osborne's flagship plans to offer workers shares in return for abandoning their employment rights are in serious trouble after they were rejected for a second time by peers, with senior Liberal Democrats joining the rebellion. His proposals were rejected outright by 260 to 191, a majority of 69.

With Osborne under severe political pressure over the broader state of the economy, it would be a further blow if his flagship plan to create a shareholding workforce had to be dropped.

The government was considering, on Monday, what concessions to table in the Commons on Tuesday as they scramble to get the plan on the statute book before parliament prorogues this week.

Government sources said the business minister Michael Fallon will try to rescue the measure by amending the bill in the Commons to put a legal requirement on employers to set out in writing the conditions on which the shares are being offered.

The "written particulars" are expected to include an explanation of what should happen to shares if the company is wound up, any restrictions on selling shares and other details on statutory rights.

But the scale of the rebellion was growing in the Lords putting pressure on Osborne to show he can force his highly prized plans through parliament.

For the first time on Monday senior Liberal Demorats including two former party leaders Lord Steel and Lord Ashdown joined the rebellion.

There were also claims made in the Lords that the business secretary Vince Cable had never supported Osborne's proposals, but had only agreed to remain silent over them in return for Osborne backing Cable's plan for a business bank.

Lord Adonis, the shadow business secretary pressed the government front bench to explain what deal had been struck by Osborne and Cable.

Adonis also said the OBR had estimated the plan could cost up to £1bn in lost revenue to the Treasury and warned that "diluting" employment rights would help neither growth nor the recovery.

Tory former cabinet minister John Gummer, who sits in the Lords as Lord Deben, warned the scheme would not work because no one would take it up.

Cobra beer founder and crossbencher Lord Bilimoria joined the chorus of criticism saying the scheme was "fundamentally wrong in principle" and a "dog's breakfast" dreamed up by someone who had never run a company.

The Thatcherite peer Lord Forsyth also rejected the plans, leaving Osborne short of friends in both business and politics.

But Ministers are struggling to get three bills through both Lords and Commons before prorogation, placing pressure on their ranks to make concessions.

The government was also defeated by 210 to 180 yesterday over its plan to remove the general equality duty from the Equality and Human Rights Commission. Independent crossbencher Baroness Campbell of Surbiton, who has led the opposition to the Government on the issue, told peers that the general duty was a "fundamental principle." She sometimes spoke with the help of an aide to warn the general duty to have a "holistic direction to the Commission based on principles of dignity, respect and fairness."

She said part of the Commission's job was to prevent the sort of discrimination that led to the racist murder 20 years ago today of black teenager Stephen Lawrence.

Lord Cormack, normally loyal to government, said he could not understand why the government was making the change.

Ministers also tried to produce a compromise to avert plans to introduce legislation to outlaw caste discrimination in the UK.

Baroness Stowell for the government proposed to hold a consultation over the issue though the year prior to possible secondary legislatiion.

Ministers said they needed time to consult with the affected communities before moving to legislation. But the Shadow equalities minister Baroness Thornton said there was a lacunae in Britain's anti-discrimination legislation over caste, and the proposals needed to be passed now, but then give the government one or two years before implementing the proposal following consultation.

Earlier, peers accepted a watered-down version of controversial planning reforms which relax the rules on housing extensions.

The government was defeated in the Lords last month on the plan to double the size of extensions that could be put up without gaining planning permission.