FAQs About Employee Ownership

What is an Employee-Owned Company?

All employees (management, clerical, and shop floor) together own a majority of the company stock.

If a Company is Employee-Owned, do the Employees control it?

Not necessarily. Employee owners need at least two things to ensure democratic control of a company: 1) voting rights – the Board of Directors is elected by the employees, and 2) participation – all employees receive basic information about company progress, and have the opportunity to participate in day-to-day operations.

Employees should help develop the corporate structure. Otherwise, the Employee-Owned Company may end up being controlled by banks or by top management. If employees want a democratically controlled company, there are two types of legal structures: worker cooperatives or democratic Employee Stock Ownership Plans (ESOPs). Whether employees choose to be organized as a worker cooperative or a democratic ESOP usually depends on the tax or financial situation of their particular company.

What about Management in a democratic Employee-Owned Company?

The general manager is selected by the Board of Directors. The general manager is responsible for implementing policies established by the Board and coordinating day-to-day operations, just as in a traditional corporation.

Managers in an Employee-Owned Company usually develop a participatory style, encouraging input and ideas from all people in the company.

How do Employee-Owned Companies get started?

There are at least three ways such companies get established: starting as a new business, conversions, or when plants close. In a start-up, a group of people decide to start a business together. A conversion occurs when the owner of a business wants to sell the business and employees decide to buy it.

An Employee-Owned Company may result from a plant closing if employees determine they can operate the company profitably.Community organizations, unions, and public agencies often play a role in starting Employee-Owned Companies. In addition, nearly two dozen non-profit groups around the country assist Employee-Owned Companies.

Where do Employee-Owned Companies get Financing?

Loans – Employee-Owned Companies can obtain loans from commercial banks, public lending institutions, or lenders who specialize in Employee-Owned Companies.Equity – Employees will usually have to invest equity in order to obtain loans to start or buy the business. As new workers join the firm they also make an equity investment. Payments are sometimes made through payroll deductions.

In some situations, the Local Enterprise Assistance Fund (LEAF), ICA’s sister organization or a local credit union can provide financing for employees’ equity investments.

Reinvestment of Profit – Each year the company must decide what to do with its profit. Given the need for capital, particularly in the early years of a business, the majority of the profit probably will be reinvested in the company rather than distributed to owners. A portion of the reinvested profit is allocated to accounts for each employee/owner and eventually paid out to the employee/owner.

If the Employee-Owned Company fails, are the Employees personally liable?

No. Employees would lose, at most, their equity investment and any profit accumulated in their accounts. But they are not personally responsible for any debts.

What is the role of the Union in an Employee-Owned Company?

Union leadership often plays a critical role in setting up an Employee-Owned Company, ensuring that the new employee/owners control the company. In firms with Unions, the Union represents employees in negotiating collective bargaining agreements, provides stewards for the grievance procedure, guarantees basic membership rights, ensures open channels of communication, and monitors the actions of management and the Board. Ordinarily, the union/management relationship in a democratic Employee-Owned Company will be less adversarial than it might be in a traditional company.

How many Employee-Owned Companies are there in the United States?

There are approximately 10,000 ESOPs covering approximately 10% of the American workforce. Employees own a majority of the shares in approximately 1,500 of these ESOPs. However, employees only have democratic control in a handful of these companies. There are approximately 500 worker cooperatives in a wide variety of industries all around the country.