Frequently Asked Questions about Employee Ownership

What is a Worker Cooperative?

A worker cooperative is a firm where the employees own all or at least a majority of the company. Workers are entitled to own only one voting share and when owners vote on issues, they do so on a one person, one vote basis. Membership in a worker co-op also entitles you to a share of the profits in proportion to the labor contribution each member made.

What is an ESOP (Employee Stock Ownership Plan)?

An ESOP is a specialized stock bonus plan that is allowed to invest primarily in employer stock. ESOPs are governed by both the Internal Revenue Service and the Employment Retirement Income Security Act (ERISA). In an ESOP, workers do not own the stock of the company directly, but rather through a trust.

What is the Difference Between a Co-op & an ESOP?

The key distinction between co-ops and ESOPs is how the ownership is held. In a co-op, workers control the shares directly, while in an ESOP the shares are held in trust for the employees. The practical distinction between the two are are the regulatory burden each carry and the requirement that workers have a real role in the governance of a co-op. ESOPs are regulated as part of ERISA, and as such, they are ‘qualified’ retirement plans that require engaging a trustee, and annually completing an audit, an independent valuation, and other filings with the Department of Labor. For more on these differences click here (https://ica-group.org.previewdns.com/2897-2/).

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 to choose from: 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?

There are as many ways to manage a company as their are companies and managers. The key distinction between a traditional corporation and a democratically managed firm, is that in a democratically managed firm, the workers have control over the culture that is created. Generally, however, 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.

What is the role of the Membership, the Board of Directors, and Management in a democratic business?

The Membership is the ultimate authority for co-op policies and decisions. In a democratic firm, the by-laws typically provide that each member has one vote in electing members of the board of directors. Generally speaking, however, the membership should be directly involved in any decision that may affect the survival or the basic character of the organization.

The Board of Directors acts on behalf of the membership in making policy decisions that affect the firm, and in negotiating legal or financial matters that commit significant organizational resources. Firms often elect people to their boards who are not members of the organization, but who have special expertise that the firm needs (such as an industry expert, a banker, or a representative of the community in which the firm is located).

Managers are delegated authority by the Board of Directors for managing the day-to-day operations of the business. In general, management has authority over all non-policy issue. These are issues that have extensive impact on the organization and should not be delegated to operating managers.

Click here for more on governance systems for democratic firms.

How do Employee-Owned Companies get started?

There are at two main ways employee owned companies get established. Either as a startup where a group of people decide to start a business together, or a converting to employee ownership when the owner of a business wants to sell the business to the employees.

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?

There are three main ways Employee Owned Company’s can 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) has made equity investments in the past.

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.