Lords reject George Osborne's plan for employees to sign away their legal rights in return for receiving shares in their companies

George Osborne suffered an embarrassing rebuff last night after peers threw out his plan for employees to sign away their legal rights in return for receiving shares in their companies worth as little as £2,000.

The scheme - announced at the last Conservative conference - was rejected by the House of Lords by 232 to 178 votes amid widespread criticism.

Lord O'Donnell, the former head of the Civil Service, said: “In the old days, the price of slavery was 20 or 30 pieces of silver. Is it now £2,000?”

Under the Chancellor's proposal, companies will from April be able to offer staff between £2,000 and £50,000 in tax-free shares if they surrender their rights to claim unfair dismissal, to redundancy pay, to request flexible working and time off for training.

The former Cabinet minister Lord Forsyth of Drumlean, one of several senior Conservatives to criticise the plans, described the idea as “ill-thought through, confused and muddled”.

He said: “I am astonished the Coalition would even think of bringing forward such a measure.”

The Government will now have to decide whether to overturn the defeat in the Commons.