How are employee-owned businesses different from other enterprises?

Insight from Co-operatives UK, Calverts and the Worker Co-op Council

Employee ownership can take different legal forms. Is there any crossover between worker co-ops and employee-owned enterprises?

James Wright, policy officer at Co-operatives UK, says the Hive – a co-op support programme run by Co-operatives UK and funded by Co-operative Bank – offers a specific pathway for conversions to co-operative ownership, including worker and community ownership.

In recent years the Hive has helped a small number of conversions to worker ownership – for example, Harcourt Pre School Bristol. It  has also supported the development of businesses that have been worker-owned from their inception or very early in their evolution, such as Leeds Bread Co-op.

Mr Wright thinks expanding employee and worker ownership in the economy is critical to achieving “genuine inclusive growth and local economic resilience”.

There are two key processes driving the current growth in employee and worker ownership. The first is the conversion of SME and family-owned businesses using the Employee Ownership Trust (EOT) model and/or hybrid with employee shareholding schemes. The second is start-up of businesses that are worker-owned either from the outset or very early in their evolution, using the worker co-operative model.

“Practical experience suggests the EOT model is particularly well-suited to the conversion of SME and family-owned businesses,” says Mr Wright. “It allows for a phased, full or partial, transfer of equity and control which locks in collective employee ownership and stewardship of the business for the long term, whilst protecting local jobs and supply chains.”

He adds: “Crucially, from a co-op perspective, EOTs can be designed to allow for genuine accountability and voice for employees to a degree that meets the ICA Statement on Co-op Identity, though that does not seem to be the default in practice. We want to focus on what we do like about EOTs, while also advocating for more democratic governance to be the default.

James Wright

“By the same token, the worker co-operative model is particularly well-suited to start-ups and early evolutions. It is very simple and flexible in terms of legal and governance arrangements and can evolve easily as the business develops. The co-operative model can also be useful for self-employed workers as well as employees. Co-operatives use a wide variety of democratic governance models that, in different ways, put worker-owners filmy in control of the business.

“The ability of the worker co-op model to meet the needs and aspirations of workers outside of traditional employment in SMEs is going to be of growing importance. Work is changing in ways that make worker co-op models more relevant than ever.”

Mr Wright says Co-operatives UK has started working more strategically with the Employee Ownership Association to make the case for employee and worker ownership, and to try to address the biggest barriers to expansion  – “lack of awareness, practical understanding and good advice on the options for would-be founders and SMEs”.

He adds: “There are sometimes differences in emphasis between the employee ownership sector and co-ops but the common ground so significant, and the world is so complicated and challenging, that we have to try and work together to cut through. We intend to campaign together, with our members, for funding to support an expansion of employee and worker ownership in the coming Westminster Spending Review. Watch this space.”

Siôn Whellens from Calverts, a design and print worker co-op in London, says: “The clue to the difference between worker co-ops and other types of employee owned businesses is (EOs) in the name. They both have the purpose of benefiting workers, but they have different modes of ownership and control. Worker co-ops have broader social purposes. They are a global network, with an internationally agreed code.

Related: Deb Oxley of the Employee Ownership Association on the EO model

“The worker co-op version of ownership is at least partly ‘in common’. Rights of ownership are exercised collectively, directly and democratically. In EOs, employees usually have individual share accounts. Rights of ownership are exercised indirectly – if at all – by the members of the share scheme, who may be a minority of the workers. Ultimate control in an EO company is often vested in a trust for employee benefit, with minority worker representation on the trustee board.”

He adds: “The root of the difference between EOs and worker co-ops is in their origin. In a worker co-op, the main actor is a collective of workers, starting a new enterprise or taking one over in a situation of crisis or abandonment. EOs are usually peaceful conversions of existing businesses, by philanthropic owners.

Designers working on a project at Calverts

“The EO shares model can be an attractive way to reduce a firm’s tax bill, by substituting with dividends for wages to reduce national insurance costs, or by recirculating shares within the firm as they appreciate in value, to avoid capital gains tax. This works well as long as the enterprise is growing and profitable, and can be particularly attractive to high-paid managers. It’s also the reason EOs are more complicated, opaque and expensive to set up than worker co-ops.”

Related: Worker-owners from Leading Lives care co-op on the worker co-op model

Mr Whellens says EOs favour top-down management, while worker co-ops have the goal of collective self-management and minimising hierarchy.

“Where EOs focus on providing employee benefits by giving workers shares and fostering social harmony in the firm, worker co-ops try to maximise wages and practice equality,” he argues. “Worker co-ops develop the capacities of all workers and elect delegates; EOs develop individuals with the potential to be promoted. In other words, worker co-ops have a critical approach to power.

Sion Whellens

“This is why advocates of EO and worker co-operation have different messages, and succeed by addressing different audiences. EO is promoted as a way to ensure durable, efficient businesses with frictionless labour relations, that can help underpin a vibrant, healthy capitalism. Many politicians, policymakers, business owners and professional advisers are responsive to this idea. Worker co-operation is more relevant to workers and community organisers, where people are responding to injustice or collective need.

“Looking at worker co-ops in the UK, you find they have a social, economic or political purpose as well as being concerned with workers’ wellbeing. That could be ‘tech for good’, changing the food system, mitigating environmental harm, ethical manufacturing or providing services of social interest. Their products and values of production are blended. EOs are more likely to trade in conventional business areas, and to express themselves in the language of corporate social responsibility.

“These observations are broad brush. In reality, worker co-ops and EOs overlap. Some EOs are relatively ‘co-opy’, while some businesses set up as worker coops are little more than management scams.”

Mr Whellens says Co-operatives UK’s current strategic focus is on sectors it perceives to have more growth potential than classic worker coops.

“The Worker Co-op Solidarity Fund, created four years ago, has raised more than £110,000 from individual worker co-operators and supporters to enable worker coop education, autonomy and mutual support. Targeted support for worker ownership is available in Scotland and Wales, although the agencies in those countries lean towards EO-type models. Some local authorities are also interested in worker co-operatives, as part of an approach to community wealth building. In London, there are early stage discussions to create a co-op development hub, focusing on work, housing and decent care.

“While there is potential for more worker co-ops in sectors like health, social care and technology, in general the movement needs to connect more effectively with working class social currents and groups. I expect that worker leadership will increasingly be recognised as an ingredient of successful of community and mixed/multi stakeholder co-operation. The same is true of traditional housing and consumer co-ops, where a relatively disengaged membership leaves the enterprise open to management capture – the ‘agent-principal’ problem. Worker and worker-led community co-operatives are leading the way in new techniques of openness and democratic innovation.

“If the movement can communicate effectively and work alongside other solidarity movements , there are limitless possibilities to increase worker co-operation, and grow the network of worker co-ops. At the moment, there isn’t a widely-heard story about worker co-ops’ potential for improving the situation of workers and communities, and boosting workers’ self-confidence. A worker co-op is a type of union, and a workers’ union is a type of co-op.

“Union-co-op collaboration has unrealised potential. We’re more likely to see this from industrial and small fighting unions than from business-style trade unions. In the future, we may see activists in a repurposed union movement starting new worker co-ops, and co-ops embodying new forms of union organisation.”

Related: Unions and co-ops – a new way forward for workers?

Mike Ridge, who also sits on the Worker Co-op Council is planning coordinator at Delta–T, a Cambridge based co-operative specialising in instruments for environmental science. He joined the co-op in 2011, which, he found “revolutionary”. Having taught business studies in the past, he says that standard teaching did not cover co-operative enterprises.

“I had spent all my life in traditional enterprises and to come to a co-op was extremely eye-opening,” he says, adding that in a co-op all employees have all the information a director would have in a company.

Delta-T is registered as a society and regulated by the FCA.

“In terms of policy-making, it would be nice to see a workers’ co-op enterprise is at least legally regulated the same as other business structures. And we’re not,” he added.

The business set up by Edmund Potter in 1971, initially as a partnership. Once the enterprise became large enough to quality, it became a co-op in 1980.

“The structure coincided with Ed’s view of people being equal,” said Mr Ridge.

Delta T produces environmental science equipment

He adds that the co-op faces the same challenges as any other enterprise in terms of customer service or profitability.

“The main challenge we have in a co-op business is that over time the organisation’s ethos of everybody working together can disappear. We’re running a business so we employ people with a specific set of skills and I would say that because we are a high tech company the emphasis has been on getting people to do their job before looking at their suitability for wanting to be a member of the co-op.

“So the challenges are getting people to want to contribute and be part of the co-op – everybody is good at doing their job. Not everybody wants to be a member. They want to do their job and go, being a member of that means more than that,” he said adding that the co-op was exploring having non-members employees.

The co-op includes 34 employee members. It hosts quarterly meetings where the business activity is reviewed. A management committee is in charged of running the business but major decisions go to full co-op meetings.

“Compared to some of the other co-ops, we do not have as many informal meetings. Our meetings are quite formal.

“Unfortunately, major decisions will take longer because you have to have consensus,” he added.

He warned that asking worker co-op members to adopt certain political views or a specific lifestyle can deter some people from becoming members.

“We’ve got to involve as many people as possible. Everybody is equal.”