I wonder what an employee-owned business is and what their purpose is?

In recent years, there has been notable growth in employee-owned businesses in the United Kingdom. This business structure is unique in comparison to the typical structure of companies, where employees do not have a direct involvement or financial stake in the company itself.

This article will discuss what an employee-owned business is and whether there are any advantages or disadvantages to this business structure.

What is an employee-owned business?

An employee-owned business is a business structure where all employees have a significant or meaningful stake in a company. This means that employees must have both a financial stake in the business (such as by owning shares), and a say in how the business is run (known as employee engagement).

Different ways of engaging employees may include:

• an employees’ council or consultation group;
• a constitution defining the company’s values and its relationship with employees;
• employee directors on the board, with the same responsibilities as other directors; and
• working with trade unions on issues like pay and conditions.

How does employee ownership work?

There is no specific model to follow for employee-ownership businesses, and the structure can be based around the nature of the company itself. However, there are two primary structures that are usually incorporated for employee-owned businesses, which are:

• Employee Ownership Trusts; and
• Employee Stock Ownership Plans.

Employee Ownership Trusts are designed to promote a culture of employee participation. Through this structure, the company sells shares to the Employee Ownership Trust, which are usually funded by company profits. Through this model, employees do not directly own shares but benefit from the trust’s performance, as the Employee Ownership Trust can distribute bonuses or dividends to employees based on the company’s success. Additionally, Employee Ownership Trusts often include provisions for employee representation in decision-making processes, giving employees a voice in the running of the company.

Employee Stock Ownership Plans are less commonly used but are created to hold shares on behalf of employees. Shares are allocated to an individual employee based on criteria such as their length of service or their salary, and employees usually earn shares over time during their employment. In order for an employee to fully own their shares they must meet certain criteria, such as completing a certain length of service with the company. Additionally, upon the termination of the employee’s employment, they can sell their shares back to the company or on the market.

Benefits of employee-owned businesses

One of the main attractions of incorporating an employee-owned business structure is the potential benefits of them. For example, employee-owned businesses may have the following benefits:

• Attract new staff: By incorporating an employee-owned business structure, a company can stand out from other businesses by allowing employees greater control over the running of the company. This may mean that potential candidates are more attracted to work for the company, as there is more opportunity for their voices to be heard.
• Engage and motivate staff: As employees have a stake in the company’s success, they may be more driven to ensure the company succeeds.
• Retain existing staff: Employee-owned businesses may experience lower turnover rates, as employees who have a financial stake in the company may wish to stay long-term.
• Improved company performance: Employee-owned businesses may perform better, as employees may feel more committed and accountable for the success of the business due to having a financial stake.
• Greater job satisfaction: Employees who have the ability to make greater contributions to the running of the company may feel more valued and satisfied in their role.
• Sustainability: Employee-owned businesses may help to reserve company culture and values, which can be useful during ownership transitions.

Drawbacks of employee-owned businesses

While there may be several potential advantages of employee-owned businesses, this business structure may also have drawbacks. For example, the following may be potential drawbacks of employee-owned businesses:

• Complexity: Managing the legal, financial and administrative requirements of an employee-owned business may be challenging and require significant time and resources.
• Decision-making challenges and conflict: If employees make decisions about the company, this may lead to slower decision-making processes. Additionally, where employees will make decisions about the company together, there may be different opinions and views which may lead to potential conflict between staff.
• Costs: The initial set up of an employee-owned business can be expensive, which may prevent smaller business from adopting this business structure.
• Dependence on company performance: As an employee’s financial security becomes directly linked with the company’s success, if the business faces challenges this may lead to financial insecurity for the employee, which may in turn negatively impact their job satisfaction.

Conclusion

As previously discussed, there are several potential advantages and disadvantages of employee-owned businesses. However, the suitability of this business structure will be determined by the nature of a business itself, and it may not be suitable for all types of organisations.

If you have any questions about employee-owned businesses, our Peace of Mind Team can provide specific advice and our Document Audit Team can help draft relevant policies. Contact our employment law team by emailing employment@warnergoodman.co.uk or by calling 023 8071 7717.