Seeking a More Worker-Friendly Economy, Some States Push Employee Ownership

This article originally appeared on Stateline.

AURORA, Colo. — Cassie Larimer is the assistant director of Happy Ladybug Early Learning, a child care center and preschool tucked into a one-story brick building in this city east of Denver. But her new business cards, emblazoned with a cheery ladybug logo, just say “owner.”

Larimer isn’t technically an owner — yet. The new business cards reflect the ambitions of the center’s cofounders, Elvan Goksu and Umit Kaya, who hope to turn Happy Ladybug into a worker-owned cooperative — meaning that the center’s 13 staff members would hold shares in the business and help manage it.

Goksu and Kaya hope the new business model would increase teacher pay, reduce staff turnover and lift some of the burden of running the business day-to-day from Goksu’s shoulders.

“Teacher burnout is a big thing, and teacher turnover rates are very high,” Goksu said one recent morning, sitting in the office she and Larimer share while small voices babbled away in the classrooms nearby. “At this age group, we believe it’s very important for kids to have continuity of care.”

Colorado Gov. Jared Polis and like-minded policy leaders in other states want more businessowners to follow Goksu’s example. Polis and others who back employee-ownership — a term that can mean everything from cooperatives to stock options — say that sharing ownership can improve pay and working conditions, reduce wealth inequality and give retiring entrepreneurs another way to pass on their companies.

“We think it is a best practice in capitalism that leads to better long-term economic growth,” Polis, a Democrat, told Stateline last month.

Employee ownership has a history of bipartisan support. President Ronald Reagan championed the idea in the 1980s as “a path that befits a free people,” and in 2016 the GOP platform included support for the business model. Republican lawmakers in states such as Iowa and Missouri have in the past decade approved new tax breaks to encourage employee ownership.

But the idea has increasingly been championed by progressive Democrats, such as presidential candidates and U.S. Sens. Bernie Sanders of Vermont and Elizabeth Warren of Massachusetts, who want to boost the fortunes of working people at a time when more and more wealth is concentrated in the hands of the ultra-rich.

“Real wages are flat, defined benefit pension plans have been killed off, most companies don’t contribute to your 401(k) — it’s basically your savings,” said Joseph Blasi, director of the Institute for the Study of Employee Ownership and Profit Sharing at Rutgers University. “People are looking for a different form of capitalism.” 

Several state and local governments are trying to help businessowners sell shares to their workers.

Polis last year established a Commission on Employee Ownership to promote the concept and identify barriers to forming employee-owned businesses. The state’s economic development agency will this month launch a $100,000 loan fund to help businesses cover the costs of changing their ownership structure.

Massachusetts lawmakers last year relaunched a state office, which had lost funding during the Great Recession, that helps businesses make the transition. In recent years, cities such as New York; Berkeley, California; and Madison, Wisconsin, also have funded programs that help businesses convert to employee ownership.

But businesses that are either owned or majority-owned by workers are rare in the U.S. economy. And experts say converting to employee ownership is a time-consuming, expensive process that requires businesses to be in good financial shape.

Happy Ladybug has been trying to form a cooperative for three years. “I don’t know if [the challenge] was unexpected,” Goksu said, “but it’s been definitely frustrating.”

Some labor relations experts also doubt that employee ownership will be the key to a more worker-friendly economy, as some union leaders hoped back in the 1980s.

“That’s fairly marginal to the overall direction of the economy, and who’s got the control, and who’s got the power,” said Mike Slott, a former union activist and part-time lecturer in the Department of Labor Studies and Employment Relations at Rutgers.

Saving Capitalism

Defined broadly, employee ownership can encompass a wide sweep of American companies, from law firms run by a team of partners to startups that compensate workers with equity.

Blasi, however, defines employee-owned businesses as those that are at least 25% owned by workers. He focuses on two business models: worker-owned cooperatives and Employee Stock Ownership Plans (ESOPs). 

While worker cooperatives can be organized in all kinds of ways, ESOPs are federally regulated trusts with a defined structure. In an ESOP, employees participate in a trust, the trust owns shares in a business, and workers can cash out their shares when they quit or retire. Congress decades ago created significant tax advantages for businesses that create an ESOP.

Worker cooperatives typically have around 10 employees, but companies part-owned by ESOPs — such as the Publix supermarket chain — can have thousands.

There are about 400 worker cooperatives and about 6,300 ESOPs in the United States, Blasi said. That’s a tiny share of firms nationally: There are about 6 million firms in the United States, according to the U.S. Census Bureau, including about 2 million with four employees or more.

About 90 new worker cooperatives were formed across 15 states over the past five years, according to estimates from the U.S. Federation of Worker Cooperatives, a national membership group, and the Democracy at Work Institute, its think tank affiliate. But the number of ESOPs fell by 14% between 2001 and 2016, according to an analysis of U.S. Labor Department data by Blasi and his colleagues.

There’s no single explanation for why the business models aren’t more common, said Peter Molk, an associate professor at the University of Florida Levin College of Law who studies theories of firm ownership.

Employee ownership may not be the best structure for certain businesses, such as companies that want to raise capital quickly, he said. Worker-owned businesses may also be harder to manage, because employees get more of a say in business decisions. “Different employees can want different types of things, so trying to get consensus on issues can be more difficult,” Molk said.

Supporters point to research from Blasi and other experts that shows employee ownership can reduce turnover, diminish the likelihood of layoffs and make workers wealthier. 

“In the United States, homeownership is the first and biggest way that families create wealth for themselves and business ownership is the second,” said Alison Lingane, co-founder of Project Equity, a San Francisco Bay Area-based nonprofit that advises companies and cities on employee ownership.

Supporters also say communities benefit when retiring owners sell to their workers. 

“There’s thousands of businesses that close each year because an owner retires,” said David Hammer, executive director of the ICA Group, a Northampton, Massachusetts-based nonprofit that promotes employee ownership. “If we can do things to prevent that, then that’s a benefit to those workers, that owner, and the community in which they operate.” 

But detractors argue that some forms of employee ownership don’t make sense, particularly ESOPs, which are treated under federal law as a type of retirement plan. “They’re just atrociously bad as retirement plans,” Sean Anderson, teaching associate professor of law at the University of Illinois College of Law, said of ESOPs. “They’re inherently undiversified investments.”

Last year, Massachusetts lawmakers approved $150,000 to relaunch a state office that advises businesses on employee ownership. The services will be provided by the ICA group and Working Wealth, another Massachusetts nonprofit.

Massachusetts state Rep. Paul Mark, a Democrat who pushed for the funding, hopes this year to convince lawmakers to create a capital gains tax break on shares sold to ESOPs or worker cooperatives. 

Cities in California, Florida and Washington have hired Project Equity to count the number of small businesses with retiring owners and to promote employee ownership, and other cities such as New York and Madison fund services that help businesses make the switch.

Universities, nonprofits and philanthropists also have established seven state-level centers that support employee-owned businesses, including in Colorado.

Since last fall, the Massachusetts office has advised 12 companies on employee ownership, with one likely to convert, Hammer said. Project Equity in 2018 started working with four Berkeley businesses considering employee ownership, Lingane said.

Colorado Trailblazer

In Colorado, the issue has been particularly high-profile thanks to Polis, who was a serial entrepreneur before he became a politician and has advocated for employee ownership for years.

“My business experience is in the tech sector, where employee ownership is the norm, usually through stock options,” he told Stateline. His companies used stock option incentives from the mailroom to the boardroom, he said. “For me, that was just a given value.”

Polis’ employee ownership commission has been holding roundtables with banking and legal groups to spread information about the services employee-owned companies need.

Colorado’s economic development agency will also manage a loan fund, approved by state lawmakers in 2017, that will lend businesses up to $10,000 to help them cover the legal, accounting and advisory costs associated with changing their business model.

There are about 50 or 60 worker-owned cooperatives in Colorado and about 135 businesses with an ESOP, said Amy Beres, executive director of the Rocky Mountain Ownership Center, a Denver-based nonprofit that advocates for and advises employee-owned businesses.

Interest in the model seems to be increasing, Beres said. “In the last six months of 2019 we had the same amount of calls from businessowners asking about employee ownership as we had the entire year before,” she said. 

Colorado officials point to success stories such as Namasté Solar, a solar panel design and installation company headquartered in Boulder that’s been worker-owned since its founding in 2005 and is currently organized as a worker cooperative. The company also has some private investors.

“There’s no doubt that our success is because of our company model,” said co-founder Blake Jones. Namasté Solar employs about 200 people, including 110 employee-owners. 

Employees need to invest $5,000 to buy a share in the company. (A loan program can help.) Before they can become co-owners, they’re paired with a mentor and taught management skills, such as how to read financial statements.

Worker ownership has led to thoughtful growth and a committed workforce, Jones said, a strategy that helped Namasté Solar survive the Great Recession and outlast many of its competitors. “They care more,” Jones said of his team. “That translates to better customer service, and better-quality work.”

The company culture of asking for feedback and building consensus can be frustrating at times, said Teri Lema, a human resources specialist at Namasté Solar who has been a co-owner since 2006. She said it took long, sometimes exhausting discussions to create the internal policies that guide the company today.

But she prefers the back-and-forth to working at a company where major business decisions are made by a small team of managers focused on profits. For instance, a few years ago the co-owners voted to renew the leases on the company’s Boulder and Denver offices even though moving to a third location would have cut costs. “We value having our work located near where we live,” Lema said.

Growing Pains

Converting to employee ownership can be challenging, however.

Since most workers can’t afford to buy out their boss, becoming employee-owned typically means crafting a leveraged buyout, Hammer of the ICA group said. For that to work, the company must be financially stable and, ideally, easy to value. 

It’s more complicated than selling to a competitor or a private equity firm. Hammer said that in the past year or so, his organization has worked with three child care companies that were initially interested in employee ownership, but then sold to a buyer who made a cash offer.

At Happy Ladybug, teachers have struggled to find time to discuss the future cooperative, including its bylaws. And some employees were initially skeptical. “There were a few teachers who gave us a lot of pushback,” Larimer said, either because they had no interest in ownership or worried it would mean more work.

The new business model won’t affect day-to-day management of Happy Ladybug, because Goksu will remain the director and teachers already plan their curriculums and co-create workplace policies, Goksu and Larimer said.

Teachers will, however, get a share in the profits. “We’re not big enough to offer a great dental plan, or a 401(k),” Larimer said. “My bonus that I will get, for whatever the profit is, could be the 401(k) contribution.”

Creating an ESOP is even more complicated and costly, because the federal government strictly regulates the trusts.

Odell Brewing Company, a Fort Collins, Colorado-based craft brewer, transitioned from family ownership to a mix of family, management and ESOP ownership in 2015. While the new structure will preserve the company culture and help the founders transition into retirement, co-founder and Board Chairwoman Wynne Odell has mixed feelings.

Not only was the process expensive, but at a certain point, new hires will have to wait for a shareholder to retire or leave before they can join the trust, she said. “There are so many ways that you can compensate your employees in more immediate ways,” she said, such as by offering a more generous 401(k) contribution. 

Employee ownership isn’t necessarily permanent. New Belgium Brewery, the largest craft brewery in Colorado and an employee-owned company, was recently sold to an international company in a sale approved by its ESOP participants.

But for Polis, the deal was illustrative. “Rather than just the investors making money, the workers also see a benefit from this transaction,” he said.

Overall, $190 million is being disbursed to past and current employee-owners, Leah Pilcer, New Belgium’s director of communications and public relations, said in an email. More than 300 people will receive more than $100,000.

Despite the challenges, Goksu said she plans to keep pushing to turn her company into a cooperative. She thinks it’ll be good for business, and perhaps more importantly, she wants to support her team.

“It may not be something that you can count, but it makes you feel good about trying to do the right thing.”