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

By Sophie Quinton Stateline.org

WWR Article Summary (tl;dr) As Sophie Quinton reports, supporters of "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."

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."

Still, many policymakers encourage employee ownership and hope to use the coming wave of baby boomer retirements as a catalyst for converting more businesses to the model.

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