How can employers build the business case for employee ownership?

Need to know:

The experience of the pandemic is encouraging more organisations to take stock and think about how best to be structured in the future, including employee ownership.
Employee ownership can bring tax breaks with it, but can also make an organisation more resilient, collaborative and better able to weather a challenging economic climate.
There needs to be careful, ongoing communication and education, especially to employees, around how the model works day to day and what it means for them.

As we begin to look beyond lockdown and prepare for the gradual reopening of the economy, the question many employers will be asking is "what’s next"? The aftermath of the pandemic will, for many, be a time to be taking stock and thinking long and hard about what the future will hold, and needs to hold.

One conversation becoming more commonplace within this is the merits or not of making the transition to employee ownership. Employee-owned organisations are not, of course, immune to wider economic headwinds, as seen in the warning in March by department store chain John Lewis, perhaps the UK’s most famous employee-owned brand, of its first ever annual loss and more “painful” store closures to come.

Nevertheless, as the Employee Ownership Association (EOA) makes clear, 66% of employee-owned firms have no debt and employee ownership can mean organisations are better placed to pull together or change direction quickly. This, in turn, may mean they have an edge when it comes to navigating the challenging post-pandemic economic landscape.

This potential for enhanced resilience is an important selling point for employee ownership in its own right but, as Matt Stephens, founder of engagement consultancy Inpulse, argues, the experience of the past year is also encouraging many leaders and founders to be opening these conversations. Indeed, the consultancy itself decided to form an employee ownership trust (EOT) at the end of last year for its 10-strong employee team, transferring 75% of its company shares to its employees.

“The world of work has changed. People are wanting to be more human and less robotic; they’re wanting things to be longer term. We’ve found from our engagement surveys that people are looking for a ‘home’ when it comes to the workplace, somewhere where they can actually go ‘I want to stay in this company and I want it to be a good company, I want to have a stake so that if we win, we all win’,” he points out.

Ownership options

However, making the business case for employee ownership – explaining and communicating the pros and cons and different options both to senior leaders and employees – is not straightforward.

EOTs, where shares are held in a trust on behalf of the employees, are the most common model for employee ownership, highlights Tamsin Nicholds, senior associate in tax and structuring at law firm Fieldfisher. They can be relatively simple to set up and, under the UK Finance Act 2014, there is a complete exemption from capital gains tax on the sale of at least a controlling interest in a company to an EOT.

But there are other options. These can include direct, or individual, share ownership where each employee becomes a shareholder, personally holding a specified number of shares, with the process often managed through a trust or nominee arrangement.

Another model is what is known as ‘hybrid’ ownership. This is where ownership of a block of shares, often held within a trust, is combined with some level of individual share ownership, perhaps using one or more of the various government-backed share plans available, which also attract tax reliefs for employer and employee, advises Nicholds.

Yet tax advantages are just part of the business case. “The bigger advantage is the types of companies that have moved to employee ownership tend to be the collegiate, collaborative type; they have got a different culture,” explains Nicholds. “They will look to involve their employees far more in broader business decisions. They will typically look to develop more of a ‘take responsibility’ culture.”

Employee involvement

To that end, it is important to involve employees closely both in the transition to employee ownership and in ongoing communication and education once the model has been established. This will need to include explaining how it will function day to day, the fact employees may not necessarily be holding shares directly, how and when shares can be bought or sold, and what this may mean in terms of payouts or dividends.

For example, and potentially another selling point, organisations owned by EOTs can pay cash bonuses of up to £3,600 per year, per employee, on a tax-free basis, although this is subject to national insurance contributions (NIC). If an employee-owned business is sold, then employees, as beneficiaries, could be in line for a windfall. It is also imperative to be clear what happens to employees, again as beneficiaries, when they leave the business.

“We did a whole presentation and took the team through it and explained all the evidence,” explains Stephens of how it worked at Inpulse. “We were fortunate in that it landed when we were allowed to meet up for a not-Christmas party in a pub. So we were able to announce it face to face, which made a real difference.”

“When we advise any [organisation] about moving to an employee-ownership model, we explain in detail how the new ownership and governance structures operate, what it means for the selling shareholders, the management team and most importantly the employees,” agrees Matthew Emms, share plans and incentives partner at BDO. “In order to get the most out of the transaction, it’s important that the employees feel empowered, motivated and engaged, which unlocks all of the great benefits associated with employee ownership.”

Getting professional legal advice is a must to work out which is the best option for the organsiation but, also, it can be useful to tap into the expertise of others in the sector who have already gone down this route, with the EOA often able to connect people, he points out.

Bigger picture

Finally, can employee ownership be a way for a business that is struggling to escape going bust? Employee ownership is generally not seen as a way to reduce costs or manage short-term risk, highlights Nicholds, so to that extent the answer is "no".

However, as Tim Lowe, principal at consultancy Buck, argues, some of the wider benefits of employee ownership may yet help. “While there can be no protection against uncontrollable external factors, there is evidence to show employee ownership can improve [business] performance,” he points out.

“Other studies have also shown that employee-owned [organisations] show lower rates of redundancy in periods of recession than traditionally owned businesses. Creating an inclusive environment where employees have input into the [organisation's] management may help improve performance, especially for [those] that are facing administration or bankruptcy,” Lowe adds.

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