Theresa May has backed down on one of her key leadership pledges
May made the pledge in July, weeks before she took over as Prime Minister, saying: "Big business needs to change. If I'm prime minister, we're going to have not just consumers represented on company boards but employees as well."
Business groups including the Confederation of British Industry (CBI) raised concerns that the proposals would undermine corporate effectiveness, and the Treasury supported the objections.
Companies will now be "encouraged" to involve workers more, which could involve issuing them more company shares, but the government will not be "prescriptive" when it launches a consultation in a few weeks.
The guidance is now likely to be issued in the form of a "green paper," which means the policy will be issued as guidance rather than as a legal mandate.
The Times reports that May was influenced by a statement from retail giant John Lewis, which said that a system of workers on boards would not create a "strong system of corporate governance."
The statement said: "The partnership's approach to corporate governance is effective due to the wider system of accountability which results from the business's ownership structure."
Business secretary Greg Clark also intends to crack down on abusive working practices, such as those uncovered at Mike Ashley's Sports Direct warehouse in Derbyshire.