What do The John Lewis Partnership, Aardman Animations and BrewDog have in common?
Each one is owned either wholly or significantly by its employees.
Today is the 10th annual ‘Employee Ownership Day’ whereby thousands of employee owners, employee owned businesses and supporters of employee ownership join together to raise awareness of employee owned businesses. Today the Employee Ownership Association announced that the number of Employee Owned businesses total over 1,000 for the first time, with the top 50 Employee Owner Businesses recording £21.7 billion in combined sales.
Gareth O’Hara and Christie Nelson from our Corporate team answer common questions on Employee Ownership Trusts.
Are Employee Ownership Trusts (EOT) a recent development?
No. EOT’s were introduced in 2014 following the 2012 Nuttall Review, with the aim of encouraging employee ownership and thereby increasing productivity and innovation in the UK economy. Fast forward to 2022 and there are now around 1030 EOT owned businesses in the UK, a number that has double since 2020. Scotland has recently begun to push companies to move to this structure, with Co-operative Development Scotland now offering business planning, governance and management advice, assistance in securing funding and three days funded support from an experienced adviser to any business looking to move to this structure.
What is employee ownership and how does it work?
Employee ownership does what it says on the tin. It is a company structure through which the shares in a company are held either wholly, or significantly by its employees. A trust is set up, the trustees of which purchase the shares in the company, and hold them for the benefit of the employees as beneficiaries. The trust is known as the Employee Ownership Trust (EOT), and can be the answer for companies looking to grow/expand, start-up enterprises, or most typically, succession planning for owners looking to exit the business.
What does a Trustee company mean?
In most cases, the trustee takes the form of a company whereby the board of directors act as ‘trustee directors’. The trustee directors are duty bound to act in the best interests of the beneficiaries of the trust, being the employees. It is typical for the board of the trustee company to constitute: an independent trustee director, an employee representative trustee director, and a vendor shareholder with experience of running the business.
What are the tax benefits of an EOT?
The trend towards the EOT structure is undoubtedly partly driven by the tax breaks available to both the exiting shareholders and the employees. The vendor shareholders are able to sell their shares to the EOT for fair market value, free from capital gains tax, and once the structure is in place, employees can benefit from tax free bonuses of up to £3,600 per year. Having said this, the advantages go much further, with research after the 2008 credit crunch showing that employee-owned companies outperformed non-EO companies.
What does having an EOT mean day-to-day?
Essentially, the day to day running of the company is unlikely to change. Employees will be working to boost profits in the business so there are enough distributable profits to pay an employee bonus and the trustee directors will be taking decisions for the sole benefit of the employees as beneficiaries. Furthermore, with an employee representative on the EOT board, often backed by an employee council, this creates more accountability amongst employees who are also then more likely to appreciate the role of the upper management team.
Having a structure in place whereby employees indirectly own the shares in the company has been proven to improve productivity, motivation and engagement amongst staff.
What ongoing support is there for EOT businesses?
The Employee Ownership Association (EOA) run courses and forums for trustee directors to discuss and obtain support in their roles. The EOA can make connections with other businesses who have been through a similar experience and provide advice on ‘best practice’. Further, many professional advisers will offer their services as an independent trustee director for impartial, expert advice to the board.
If you are interested in moving towards an EOT structure or would like to know more about the transition or life of the company after implementation of the structure, please get in touch with either Gareth O’Hara or Christie Nelson.