The House of Lords has blocked an initiative that would have allowed employees to surrender certain employment rights in return for company shares.

The scheme would have allowed business owners to give shares worth between £2000 and £5000 to employees. In return the employee would have to give up certain employment rights, including redundancy and requests for flexible working.

Peers from all parties criticised the idea, which was put forward by Chancellor George Osborne at the 2012 Conservative conference. The plan was defeated by 232 votes to 178, a majority of 54.

Independent peer Lord Pannick was particularly critical and told peers: "Employment rights were created and have been protected by all governments – Conservative and Labour – precisely because of the inequality of bargaining power between employer and employee.”

"To allow these basic employment rights to become a commodity that can be traded by agreement frustrates the very purposes of these entitlements as essential protection of the employee who lacks effective bargaining power."

Former editor and business journalist Baroness Wheatcroft, a Tory peer, said she was concerned the plan would "bring out the worst in business and not the best.”

Frances O’Grady, general secretary of the TUC, labelled the defeat ‘humiliating,’ and said it reflected the “near universal thumbs-down it has received from business and unions.”

Employee ownership undoubtedly has a positive effect on engagement as it further links reward to performance. Companies do not, of course, need employees to give up certain rights in order to hand out shares. They can form a valuable part of any benefits package and should be considered when looking for long-term engagement and talent retention.