Companies with 250 or more employees will be expected to create ownership fund, John McDonnell to say

Employee ownership schemes in large companies could result in almost 11 million workers being given up to £500 a year each, in plans to be expanded upon by the shadow chancellor on Monday.

Under the scheme, every company with 250 or more employees will be expected to create an “inclusive ownership fund” (IOF) under a future Labour government, John McDonnell will say.

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Additional income would be capped at £500, according to the plan to make employees part-owners of their companies. Any further dividends would go to a national fund to pay for public services and welfare, in an effective new levy on private business worth an estimated £2.1bn a year.

A broad outline of the plan was disclosed at the TUC congress in Manchester earlier this month, but this is the first time that McDonnell’s team has divulged the full details and statistics behind the idea. The plan has been criticised by the CBI business lobby group as anti-enterprise and another form of taxation.

In his headline speech to Labour’s conference in Liverpool on Monday, McDonnell will promise that workers would also receive dividend payments directly from the fund.

Under Labour’s plans, legislation would require private sector companies with 250 or more employees to transfer at least 1% of their ownership into an IOF each year, up to a maximum of 10%. Smaller companies would be able to set up an IOF on a voluntary basis.

Labour calculates that 10.7 million people – or 40% of the private sector workforce – would initially be covered by the scheme. Dividend payouts would be made at a flat rate to all employees. The funds would be held and managed collectively and their shares cannot be sold or traded. Workers’ fund representatives would have voting rights in companies’ decision-making processes in the same way as other shareholders.

The director general of the Confederation of British Industry, Carolyn Fairbairn, said the plan would cause investment to “flee” the country.

She told BBC Radio 4’s Today programme on Monday: “Take steps like this and we will set the clock back, investment will flee our country and, whatever Labour say about this, the outcome will be one that reduces pay in people’s pockets.”

McDonnell dismissed the criticism. He told BBC1’s Breakfast: “If you look at other economies, like Germany, where there’s been much more worker involvement, it’s been the reverse. You get more investment, you get longer-term decision making, and you have a growing economy.

“This is nothing unusual. This happens in other countries, and it’s proved to be successful. I think it’s an idea that’s been argued for for years.”

Aides to the shadow chancellor said the creation of the funds would go some way to redressing growing inequalities after a decade when average pay has not increased in real terms.

The social dividend fund would ensure that public sector workers and employees of smaller firms also benefit from what Labour terms a “broadening of ownership in our economy”, said party sources.

McDonnell will tell the party conference: “Workers, who create the wealth of a company, should share in its ownership and, yes, in the returns that it makes. The evidence shows that employee ownership increases a company’s productivity and encourages long-term thinking.”

Spelling out the theory behind the social dividend, he will say: “It’s not just the workers of a company that create the profits it generates. It’s the collective investment that we as a society make that enables entrepreneurs to build and grow their businesses, maintaining the roads and investing in the infrastructure we rely upon, educating the workforce, caring for them when they’re sick and investing in the research and development that enables technological innovation.

“So we believe it’s right that we all share in the benefits that investment produces.

Liz Truss, the chief secretary to the Treasury, said: “This proposal is yet another tax rise from a party that already wants to hike taxes to their highest level in peacetime history.”

However, the Institute for Public Policy Research welcomed the proposals. Tom Kibasi, the thinktank’s director, said: “We welcome this new initiative to give workers a greater stake in firms. It has the potential to boost productivity as well as improve household incomes after a decade of wage stagnation.”