Employee ownership trust

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An employee ownership trust (EOT) holds a permanent or long-term shareholding in a company on trust for the benefit of all the company's employees. An EOT provides indirect (trust) employee ownership of a company.

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Among the different forms of employee ownership, the trust model may, in particular, be chosen instead of employees owning shares directly because it can be used to organise an employee buy-out, without requiring finance from employees, provides a long-term ownership model and is straightforward to administer. This trust model of employee ownership has been promoted since 2012 by the UK Government and is now the main form of employee ownership in the UK. The EOT ownership model is also recognised in the US (where it may be labelled differently, such as perpetual trust, steward-ownership trust) as an alternative to the ESOP. [1]

The trust model of employee ownership

There are three basic forms of employee ownership: Direct Ownership of shares by all employees as individuals; Indirect Ownership on behalf of all employees by the trustee of an employee trust; and the Hybrid Model which combines both direct and indirect ownership. [2] An EOT is a form of indirect ownership in which the trustee of the EOT holds shares in a permanent or long-term trust on behalf of all employees. The EOT can also be used in a hybrid model, that is, where the EOT has a shareholding, held alongside employees as individual shareholders (and/or possibly other investors). The EOT shareholding must act in conjunction with an organisational structure that ensures employee engagement within the relevant company (or group) for the company to have employee ownership. [3]

Use of EOTs

An employee ownership business model is a way of achieving benefits for a business, its employees, and society. [4] The trust model has the following characteristics in comparison to employee ownership models involving direct employee share ownership: [5]

Research in EOT owned companies showed higher scores in the values of fairness, trust, excellence, humility and courage among employees, with no significant differences between seniority levels. [7] Research into EOT owned companies also shows that employee ownership works well to meet the aspirations of the millennial generation, and reveals that millennials value many characteristics of the employee ownership business model, such as profit sharing and personal development, more than previous generations did. [8]

EOTs in the UK

The EOT was promoted by the UK Government (along with other types of employee ownership) in the years following the 2012 Nuttall Review of Employee Ownership. The EOT was recognised in UK tax law in 2014 when tax exemptions were introduced to encourage its use. The Nuttall Review and the EOT tax exemptions have helped increase the number of UK employee-owned companies. [9]

Nuttall review of employee ownership

The UK has a long history of employee ownership in various forms, including the trust model. In 2012, Graeme Nuttall was appointed as the UK Government's independent adviser on employee ownership to "work with Government to identify the barriers to employee ownership and help find the solutions to knock them down". [10] The resulting Nuttall Review advocated, in particular, the merits of employee ownership through a trust, which provides a long-term structure and one suited to achieving employee engagement and to supporting employee buyouts. The Nuttall Review supported tax changes to raise awareness of employee ownership and contained various recommendations which were broadly supported by the Government. [11] Graeme Nuttall worked with HM Treasury regarding possible new tax incentives.

In Autumn 2012, HM Treasury and HM Revenue and Customs confirmed support for implementing the Government's response to the Nuttall Review and that the Government was considering further incentives to support this objective. [12] The Government recognised that a range of employee ownership models may be legitimately applied, including employee benefit trusts that are not aimed at avoiding tax.

In 2013, the Government announced that following the findings of the Nuttall Review, it had decided to introduce two tax reliefs to encourage, promote and support indirect employee ownership structures. [13] These exemptions would go some way towards supporting existing and newly-created indirect employee ownership structures in the same way that tax advantaged employee share plans already encourage direct employee share ownership. The tax reliefs also promote awareness of the sector and increased the attractiveness of indirect employee ownership structures for businesses which might be considering converting.

Finance Act 2014

The UK Finance Act 2014 created a definition of an EOT for UK tax purposes. This definition limits the discretion of the EOT's trustee. The EOT must not permit:

The Finance Act 2014 also introduced:

There are a number of conditions to be satisfied in order for these exemptions to apply. [15]

Equality requirement

A key requirement for a trust to qualify as a UK EOT is that it meets the "equality requirement". Prior to the Finance Act 2014, an employee trust (even one used for employee ownership purposes) would usually be drafted so as to meet certain less onerous requirements in the Inheritance Act (1984) relating to employee trusts (especially section 86). Under such employee trusts a trustee may make a distribution on bespoke terms to a selected beneficiary, whilst, in contrast, an EOT requires all eligible employees to benefit from any distributions on "same terms". This means EOT beneficiaries must either all receive an equal amount, or their benefit may vary by reference to their remuneration, length of service, or hours worked.

A similar concept applies to income tax free employee bonuses. All individuals employed by the employer or another group company must be eligible to participate and (subject to limited possible exceptions) must all participate on the same terms.

Effect of introducing the EOT in the UK

The Nuttall Review and EOT tax changes have stimulated wider interest in employee ownership. Some existing employee-owned firms have changed their ownership structure to incorporate an EOT. [16] Added together newly created EOTs and deemed EOTs (pre-existing employee trusts that meet certain requirements), now represent more than three quarters of companies in the UK employee ownership sector and over half the total number of employees. [17]

EOTs in the US

There is some use of EOTs in the US.

In 2014, the international design firm Wimberly Allison Tong & Goo (WATG) became the first US company to create employee ownership through an English EOT. [18] WATG decided against a sale to an ESOP. Leadership wanted to avoid the cost and time requirements of creating and maintaining an ESOP, including legal work, administration, and valuation. They also wanted to avoid simply replacing their repurchase obligation from existing buy-sell agreements with an ESOP repurchase obligation. [19]

In 2017, an Ann Arbor company, Arbor Assays, also became owned by an English EOT. [20] This method of employee ownership was adopted to maintain the company perpetually for the benefit of its employees. Financially, the employees will benefit because, in addition to their basic pay, the company will annually allocate revenue not needed for company operations or future investment to participating employees.

In 2022, Clegg Auto, a group of four Utah-based auto repair and body shops, established the first EOT owning multiple subsidiaries, financed by Common Trust. In just a year after transitioning to employee ownership, the businesses announced a doubling in profits. [21]

In 2023, the Texas based messaging company Text-Em-All became the first SaaS company in the US to move to an EOT. [22] The founders specifically wanted to cement the long-term vision of the company so that it could continue to benefit customers, employees, and the community.

Other US companies have also moved to this form of trust ownership using trusts established under domestic trust laws including:

EOTs in Australia

Employee Ownership Australia is working to introduce the EOT model to Australia. [30] [31]

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<span class="mw-page-title-main">Trust (law)</span> Three-party fiduciary relationship

In law, a trust refers to a relationship in which the owner of property gives it to a designated entity, usually described as a trustee. The trustee has a duty to safeguard and use the assets of the trust solely for the benefit of another person or group of persons until distribution, pursuant to the provisions of the trust. In the English common law tradition, the party who entrusts the property is known as the "settlor", the party to whom the property is entrusted is known as the "trustee", the party for whose benefit the property is entrusted is known as the "beneficiary", and the entrusted property itself is known as the "corpus" or "trust property". A testamentary trust is an irrevocable trust that is established and funded pursuant to the terms of a deceased person's will. An inter vivos trust is a revocable trust, created during the settlor's lifetime.

<span class="mw-page-title-main">Nonprofit organization</span> Organization operated for a collective benefit

A nonprofit organization (NPO) or non-profit organization, also known as a non-business entity, or nonprofit institution, and often referred to simply as a non-profit, is a legal entity organized and operated for a collective, public or social benefit, as opposed to an entity that operates as a business aiming to generate a profit for its owners. A nonprofit is subject to the non-distribution constraint: any revenues that exceed expenses must be committed to the organization's purpose, not taken by private parties. An array of organizations are nonprofit, including some political organizations, schools, business associations, churches, social clubs, and consumer cooperatives. Nonprofit entities may seek approval from governments to be tax-exempt, and some may also qualify to receive tax-deductible contributions, but an entity may incorporate as a nonprofit entity without having tax-exempt status.

<span class="mw-page-title-main">Taxation in the United Kingdom</span> United Kingdom tax codes

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<span class="mw-page-title-main">Employee stock ownership</span> System giving employees stake in a companys ownership

Employee stock ownership, or employee share ownership, is where a company's employees own shares in that company. US employees typically acquire shares through a share option plan. In the UK, Employee Share Purchase Plans are common, wherein deductions are made from an employee's salary to purchase shares over time. In Australia it is common to have all employee plans that provide employees with $1,000 worth of shares on a tax free basis. Such plans may be selective or all-employee plans. Selective plans are typically only made available to senior executives. All-employee plans offer participation to all employees.

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An Employee Stock Ownership Plan (ESOP) in the United States is a defined contribution plan, a form of retirement plan as defined by 4975(e)(7)of IRS codes, which became a qualified retirement plan in 1974. It is one of the methods of employee participation in corporate ownership.

The National Center for Employee Ownership (NCEO) is a nonprofit research organization that gathers and disseminates data on employee ownership of the business by which they are employed. The organization was established in 1980 by Corey Rosen, then a staff member in the United States Senate who had become involved in drafting legislation on employee stock ownership plans (ESOPs).

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Employee share schemes are part of the remuneration packages offered to some employees in the United Kingdom.

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References

  1. ↑ "What Is Employee Ownership?". National Center for Employee Ownership (NCEO). National Center for Employee Ownership (NCEO). Retrieved 13 June 2020.
  2. ↑ John, Nelson-Jones; Nuttall, Graeme (1987). Employee ownership : legal and tax aspects. Fourmat Pub. pp. Chapter 8. ISBN   978-1851900336.
  3. ↑ "Glossary" (PDF). Sharing Success: The Nuttall Review of Employee Ownership (July 2012). July 2012. Retrieved 13 June 2020.
  4. ↑ "THE OWNERSHIP DIVIDEND: THE ECONOMIC CASE FOR EMPLOYEE OWNERSHIP" (PDF). Employee Ownership Association. Employee Ownership Association and LID Publishing Ltd 2018. Retrieved 13 June 2020.
  5. ↑ "Moving to Employee Ownership 2013" (PDF). Publishing Service UK Gov. Department for Business, Innovation and Skills. Retrieved 13 June 2020.
  6. ↑ Employee Ownership - How To Get Started (PDF). Employee Ownership Association. 2016. pp. 10, 13.
  7. ↑ Steare, Roger; Stampoulidis, Pavlos. "THE MORAL DNA OF EMPLOYEE-OWNED COMPANIES" (PDF). Chartered Management Institute. Retrieved 13 June 2020.
  8. ↑ Lewis, Peter Neville; Yeoman, Ruth. "Busting The Millennial Myth: The Power Of Purpose" (PDF). Fieldfisher. Fieldfisher. Retrieved 13 June 2020.
  9. ↑ "Is employee ownership the future of business? | Business Leader News". Business Leader. 9 October 2019. Retrieved 13 June 2020.
  10. ↑ "Graeme Nuttall appointed Government adviser on employee ownership - BIS media information for journalists and the press". webarchive.nationalarchives.gov.uk. BIS media information for journalists and the press. Archived from the original on 2012-11-26. Retrieved 13 June 2020.
  11. ↑ "The Nuttall Review of Employee Ownership – One Year On Report" (PDF). Department for Business, Innovation & Skills. Department for Business, Innovation & Skills. Retrieved 13 June 2020.
  12. ↑ "Autumn Statement 2012 Cm 8480" (PDF). HM Treasury . December 2012. page 43 - Employee ownership - Paragraph 1.128. Retrieved 13 June 2020.
  13. ↑ "Supporting the employee ownership sector" (PDF). HM Treasury. HM Treasury July 2013. Retrieved 13 June 2020.
  14. ↑ Martin Lawyer, Jennifer. "New tax exemptions for companies owned by employee ownership trusts". Fieldfisher. Fieldfisher 13 July 2015.
  15. ↑ Nuttall, Graeme (18 September 2014). "Neat: employee ownership trusts as the perfect succession solution" (PDF). Trust and Estates Law & Tax Journal.
  16. ↑ Pendleton, Andrew; Robinson, Andrew. "Employee ownership in Britain" (PDF). White Rose Employee Ownership Centre. Retrieved 13 June 2020.
  17. ↑ Mason, Nigel. "Equity For All: How a simple trust can spread ownership and wealth to millions" (PDF). Ownership at Work. Retrieved 13 June 2020.
  18. ↑ "Fieldfisher advises first US business to adopt UK employee ownership model". Fieldfisher. Fieldfisher 14 April 2016.
  19. ↑ "EMPLOYEE OWNERSHIP REPORT: WATG: Employee-Owned Through a Perpetual Trust" (PDF). National Center for Employee Ownership. NCEO MARCH–APRIL 2016. Retrieved 13 June 2020.
  20. ↑ Bossi, Paolo. "Arbor Assays's transformation in an employee-owned company through the use of a "perpetual trust."". Global Legal Chronicle. Global Legal Chronicle March 13, 2017. Retrieved 13 June 2020.
  21. 1 2 "Clegg Auto Announces Doubled Profits a Year After Its Transition to Employee Ownership". Common Trust. August 2023.
  22. ↑ "Text-Em-All Embarks on a Revolutionary Journey With Its Transition to an Employee Ownership Trust". www.newswire.com. Retrieved 2024-02-13.
  23. ↑ "Equity Atlas - Certified EO". www.certifiedeo.com. Retrieved 13 June 2020.
  24. ↑ "NCEO EMPLOYEE OWNERSHIP REPORT: Employee Ownership through Perpetual Trusts" (PDF). National Center for Employee Ownership. National Center for Employee Ownership . Retrieved 13 June 2020.
  25. ↑ "The British Are Coming — ESOPs and Perpetual Trusts". Employee Owned America. 10 December 2018.
  26. ↑ "As CEO Retires, Paras and Associates Adopts Employee Ownership Trust Model". Slator. 11 October 2019. Retrieved 13 June 2020.
  27. ↑ Jorgensen, Matt. "A Mission-driven Publisher's Succession to Shared Ownership". Purpose Foundation.
  28. ↑ "ShopBot Blog: Press Release: ShopBot Tools Transitions to Employee Ownership Trust". www.shopbottools.com. Retrieved 2021-10-21.
  29. ↑ "CodeWeavers Transitions to Employee Ownership Trust".
  30. ↑ "Employee Ownership Trusts In Australia". Employee Ownership Australia.
  31. ↑ Sharp, Alison (24 June 2021). "Meld Studios: Australia's first company to become Employee-Owned by Trust". Meld Studios. Retrieved 2 August 2021.
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