In light of the recent news that award winning property management company Creative Space Management, who manage Electric Works, is moving to an Employee Ownership Trust (EOT), I decided to put together some research on EOTs and share my findings with the EW community. The concept can be confusing and daunting, but it may just be worth the headache so consider this article a hefty painkiller.
So, what exactly is an Employee Ownership model and what does that mean for the business?
According to the government website it is "where all employees have a ‘significant and meaningful’ stake in a business. This means employees must have both a financial stake in the business, for example by owning shares - directly or indirectly - and employees must have a say in how it’s run, known as ‘employee engagement’" so the EOT can hold anything from 51-100% of the controlling shares through share schemes. Once a scheme is approved, they may be eligible to pay less tax.
If you are considering a trust model as an option for your business, it is important to look at other businesses that have successful models and to look are why their approach works. Examples of well-known companies who use employee ownership trusts include retail giants John Lewis, engineering consultants Mott McDonald and Arup Group Ltd, who were the top 3 in A List of The UK’s fifty largest employee-owned companies.
What are the perks of an Employee Ownership Trust?
It allows the company and employees to enjoy the significant tax incentives on offer through tax advantaged employee share schemes such as Share Incentive Plan, Save as You Earn, Company Share Option Plan, or Enterprise Management Incentives. Using a Share Incentive Plan companies can gift a certain amount of free shares to employees each year with no tax to pay, provided the shares are held temporarily in trust for a certain period.
The transparent nature of the schemes encourage employees to be more involved in the companies decisions and provide further incite into their perspective of the business. Not only does this give directors a fresh communication avenue but also is likely to increase staffs motivation and performance. “There is a mental change that happens when you own something,” said Deb Oxley, CEO of the Employee Ownership Association. “It drives behaviors that relate to what needs to be done rather than what you want to do. It is this shift that helps to drive success in an employee owned business.”
Although trust schemes are becoming increasingly popular, they are still quite rare which means that job positions are harder to find within a trust, making trusts that are available more desirable to work for to younger people who wish to invest in shares but can't afford to do so otherwise.
“Research from the Cass Business School suggests that companies with an employee ownership structure are likely to be more resilient than other businesses when trading conditions are difficult.” says EOT specialist Matthew Emms. This has been evident over the course of the Covid-19 pandemic, a recent survey found that 73% of employee-owned businesses said they believe their employee ownership model will help them through the coronavirus crisis. EOT expert, Douglas Roberts explained, “The impact of coronavirus has exposed the need for businesses to have greater financial resilience. Employee ownership provides that, meaning it will undoubtedly become even more prevalent as companies stabilise their position and plan growth as part of post-pandemic plans.”
Companies co-owned by EOTs are able to pay tax-free cash bonuses to their employees of up to £3,600 per employee per year. This is a cash bonus, not a dividend, and so it can be paid without the company having to make a profit or have distributable reserves.
Dos and Don'ts of Employee Ownership Trusts
Do make it a top priority to communicate regularly with employee shareholders about the company’s financial performance.
Don't try to hide bad news. Transparency is extremely important in employee ownerships - Employee must be treated as any other share holder and need to notified of declining performance and what is being done to remedy this.
Do review carefully which form of employee ownership – trust, individual or hybrid – will work best in your own company taking into account its own circumstances
Don't make arrangements too complex. Complexity tends to confuse – this will mean that employees may not fully understand the benefits of the scheme, and also increases the risk of unforeseen consequences.
Do think carefully about the scheme’s intended long term purpose. For instance, if a trust is to retain a minimum number of shares, this will have to be written into the trust deed. Equally, if you favour direct individual share ownership but staff are unlikely to have sufficient spare funds to purchase shares at market value, consider gifting shares instead.
Don't let tax considerations dictate the structure of your scheme, except to the extent that they are consistent with your primary aims.