A growing number of business owners are making the decision to turn over ownership to their employees.
Posted by:
Bianca Wythe
This past summer, in a sea-side town in Maine, the state’s largest worker cooperative was created. As a retirement gift, small business owners Vernon and Sandra Seile turned over ownership of their retail businesses to their 40 employees. Ashley Weed, a dutiful worker of the Seiles for 11 years, stated, “I am happy they actually sold it to us, so we don’t have to start at the bottom again.”
As the growth of economic inequality continues to create tremendous wealth disparity, public interest in alternative profit-sharing models has surged. Released last month by the Democracy At Work Institute, a new report, “Becoming Employee-Owned,” highlights three business models that companies can adopt to establish a model conducive to broad based profit-sharing.
The models discussed in the report include worker cooperatives, employee stock-ownership plans, or ESOPs, and management buy-outs. The report advises, the specific profit-sharing model that suits a company best depends on a variety of factors including: its overarching goals, the type of business and the overall mission and values of the company.
Currently, ESOPs are the most popular form of broad-based employee ownership in the United States. According to the report, there are close to 7,000 ESOPs covering approximately 14.7 million employees. ESOPs are operating successfully in almost every sector; thanks in part to the significant tax benefits available to companies who offer the plan.
However, there’s more to offering employees ownership options than just the economic benefits—there are moral ones as well. In 2012, New Belgium Brewing, based in Fort Collins, Colorado, became an ESOP after its chief executive and co-founder, Kim Jordan, sold the company to its 400-plus employees through an employee stock-ownership plan. Jordan stated, “There are few times in life where you get to make choices that will have multigenerational impact,” she said. “This is one of those times.”
While ESOPs have proven to be a viable option for many businesses, worker cooperatives are an equally exciting way to transition to employee ownership, especially for small businesses. The U.S. Federation of Worker Cooperatives (USFWC), a national organization established in 2004, estimates that there are 300-400 worker-owned cooperatives and democratic workplaces in the U.S. currently employing 2,500 to 3,500 worker-owners. Although 71% of worker cooperatives employ less than 15 employees, the total business assets of these entities are believed to be $130 million.
Worker cooperatives have long been regarded by advocates as the most equitable, profit-sharing model. For worker members, benefits include better paying jobs, wealth and skill building, and enhanced control over their work lives. For businesses, benefits include reduced employee turnover and increased profitability and longevity. For society in general, worker cooperatives expand access to business ownership, and train people in democratic practice.
One of the most successful worker cooperatives is Cooperative Home Care Associates. Located in the Bronx, N.Y., CHCA is the largest worker-owned coop in the U.S., employing 2,300 workers, 1,100 of which are owners and 90% of whom are women of color.
Established in 1985, CHCA was founded on the premise that if workers owned their own company they could maximize their wages and benefits, and if workers were better trained and better treated, they’d offer better care to their clients. To better address the needs of home care clients, in 2000 they created Independence Care System (ICS), a multibillion-dollar managed-care company, which contracts with the city to work with chronically sick and disabled adults. CHCA pays its workers an average of $25/hr and has an estimated turnover rate of %15 in an industry that averages 60%. CHCA worker Zaida Ramos stated, “I’m not rich, but I’m financially independent. I belong to a union, and I have a chance to make a difference.”
In her report for the Democracy Collaborative, ”Worker Cooperatives: Pathways to Scale,” Hilary Abell, former executive director of WAGES (now Prospera), states that in order to encourage greater rates of business conversion to worker cooperatives, “a more supportive policy infrastructure will be important for the field of cooperative development and the worker co-op sector as they grow.” Abell also adds that a robust policy infrastructure would include public funding for high-quality technical assistance to enable worker co-ops to take advantage of existing policy supports, such as the 1042 rollover, which has been used successfully for ESOP conversions.
Unexpectedly, the greatest impact of worker cooperative conversion may come from an unlikely source- baby boomer retirement. This is the subject of an op-ed written by Democracy Collaborative founder, Gar Alperovitz. According to Alperovitz, every year 150,000 to 300,000 businesses owned at least in part by boomers become candidates for employee takeovers as their owners hit retirement age. At this rate, the next 15 years retiring boomers could help create two to four million new worker-owned businesses nationwide.
These models are far from new, radical ideas. Surprisingly, the Reagan administration implemented the first ESOP tax benefits in the U.S. As a result, an estimated 14.7 million workers currently participate in an ESOP, according to the National Center for Worker Ownership.
Recently, the Center for American Progress published the “Report of the Commission on Inclusive Prosperity,” a result of a commission co-chaired by Lawrence Summers, a veteran of the Obama administration and Ed Balls, a leader of the British Labour Party. The intention of the commission was to develop potential, robust policies that would support and broaden models of “inclusive-capitalism.”
In its conclusion, the commission presented policy recommendations such as a “estate tax relief” for founders or owners of companies who transfer some of their ownership to employee stock plans. As well as allowing companies to deduct the cost of incentive-based pay, as long as the plans are offered to the majority of employees. Lastly, to promote the idea of shared capitalism, Summers and Balls propose a new Office of Inclusive Capitalism in the U.S. Department of Commerce.
The broad-based benefits of profit-sharing models are proving to be an exciting way to engage in equitable development in an inequitable economy. As more success stories are published about ESOPs and worker cooperatives, this could generate policy initiatives to support development and increase scalability.