What is an employee ownership trust?

How Do Employee Ownership Trusts Work?

Employee ownership trusts involve a specific process and structure to transfer company ownership to employees. The key steps include:

1. Company founders/owners transfer shares into the trust

To establish an EOT, a company’s founders or shareholders transfer some or all of their shares into a trust. An EOT can start with a minority stake but often a controlling majority is transferred.

2. Independent trustees are appointed

The company founders appoint independent trustees to manage and oversee the shares held in trust. Trustees have a fiduciary duty to make decisions in the employees’ best interests.

3. Employees become beneficiaries

While not direct shareholders, employees gain equitable rights to the assets held in trust and become trust beneficiaries. They have an “indirect” stake in the company through the trust.

4. Employees may get representation

Many EOTs establish an employee body or committee elected by the workforce to engage with trustees on their behalf. This gives employees a voice despite not controlling voting rights.

5. Employees share in profits

The trust funds dividends and profit distributions to employees according to the trust deed rules. This allows employees to share in the company’s success.

Overall the EOT structure aligns employee and employer interests through shared profit and ownership. But it differs from direct employee ownership in the use of a trust mechanism and lack of individual share holdings by employees.

How Do Employee Ownership Trusts Differ from Other Models?

It’s important to understand how employee ownership trusts compare and contrast with other common employee ownership approaches:

Employee Share Ownership Plans (ESOPs)

• ESOPs involve direct employee ownership of shares held within a trust, while EOTs give indirect ownership with shares held in trust directly.
• ESOPs require employees to purchase shares, while EOT beneficiaries receive shares through the trust without having to buy them.
• ESOPs distribute shares into employees’ personal accounts, EOTs hold shares collectively with no individual accounts.

Direct Employee Share Ownership

• Direct ownership involves employees holding personal shares themselves. EOTs hold shares in a trust so employees do not directly own them.
• Employees purchase and manage their own shares with direct ownership. EOT shares are managed via trustees.
• Direct ownership leads to individual wealth based on personal holdings. EOTs give equal collective ownership through the trust.

Worker Cooperatives

• Co-ops involve direct democratic ownership by employees who jointly buy shares in the business. EOTs use a trust structure with trustees managing shares.
• Co-ops allow employee-shareholders voting rights and control over management decisions. EOT beneficiaries do not control voting rights held by trustees.
• Co-ops require employee capital contributions to acquire shares. EOTs do not require employees to purchase shares.

Understanding these distinctions helps clarify what makes the employee ownership trust model unique compared to other employee ownership approaches. The use of an indirect trust mechanism is the key differentiator.

The Benefits and Advantages of Using an EOT Model

There are several compelling benefits that employee ownership trusts can offer, leading to their increased use in the UK:

Alignment of Interests

By giving employees an ownership stake, EOTs help align the interests of employees and the company. Employees are incentivized to contribute to the company’s success through their role as beneficiaries. This drives greater commitment and workplace engagement.

Motivation and Productivity

Research shows that employee ownership boosts motivation, fulfilment, and job satisfaction. By sharing in profits and gains, employees are driven to improve company performance. This makes EOTs a powerful motivational structure.

Corporate Governance

With trustees obligated to make decisions for employees’ benefit, EOTs enable broader worker representation in corporate governance. Employees can gain a meaningful voice in shaping the company’s direction.

Business Succession Planning

EOTs provide an effective mechanism for founders to gradually transfer ownership to employees. This enables business continuity and succession planning as owners approach exit or retirement.

Tax Advantages

The UK offers generous tax benefits to incentivize EOT adoption, including income tax and capital gains tax relief when shares are transferred into an EOT. Ongoing tax reliefs also apply to trustees and beneficiaries.

Shared Prosperity

Rather than accruing to external investors, the value and profits generated by the company stay within the organisation for reinvestment and to enrich employees. This promotes shared prosperity.

For these reasons, EOTs are an appealing model to consider for many organisations and owners seeking an employee ownership transition.

Steps for Setting Up an Employee Ownership Trust

Implementing an employee ownership trust requires careful planning and execution. Here are the key steps:

1. Determine Goals and Readiness

Assess why you want to establish an EOT, whether it aligns to your goals, and if the company is at the right stage to transition to this model. Evaluate readiness for change.

2. Appoint Project Team

Bring together key company directors, leadership, outside legal counsel, accountants, and HR to comprise an EOT implementation steering committee.

3. Agree on Trust Details

Make decisions on the trust rules, rights, structure, and governance based on corporate objectives and employee needs. Develop a draft trust deed.

4. Appoint Trustees

Select and appoint independent trustee(s) with fiduciary duty to administer the trust in employees’ interests. Multiple trustees provide checks and balances.

5. Transfer Shares to Trust

The share transfer process will depend on company structure. Seek legal and tax guidance to properly transfer shares into the trust vehicle.

6. Communicate to Employees

Inform and engage employees through the transition. Provide education on the EOT model, the company’s plans, and how employees will participate and benefit.

7. Establish Employee Involvement Processes

Create channels for employee input such as an employee council to interface with trustees and management. Integrate employee voice into decision-making.

Thorough planning and preparation enables a smooth establishment process and successful long-term EOT operation.

Operating an Existing Employee Ownership Trust

Once established, effective ongoing management and governance is important for an EOT’s success:

Trust Administration

Trustees remain responsible for administrative management of the EOT, including record-keeping, filings, holding AGMs, and issuing annual reports. Oversight ensures compliance.

Employee Representation

Maintain open communication channels between employees and trustees. Keep representative employee bodies like councils involved in information flow and input.

Leadership Alignment

The board and executive team must align leadership strategy with the aims of the trust and employees’ interests. This provides consistent direction.

Profit Allocation

The trust’s rules determine how profits flow to employees – methods include annual profit distributions, dividends, and bonus schemes. Rules should incentivize performance.

Ownership Expansion

Some EOTs gradually increase the percentage of shares held in trust over time to expand employee ownership. This requires ongoing share transfers.

Culture Integration

Integrate the EOT model into company culture through HR policies, training, incentives, and embedding shared ownership in internal messaging and values.

By incorporating these practices, companies can optimize their EOT structure. But potential challenges still need to be recognized.

Key Challenges and Considerations of EOT

While offering advantages, employee ownership trusts also present some complexities to consider:

Ongoing Legal and Administrative Requirements

EOTs involve extensive legal paperwork, filings, and documentation. Trustees must continuously meet administrative and compliance duties. This creates overhead.

Valuation Complexities

The value of shares held in trust must be assessed for transactions and profit allocation. Regular valuation of a private company involves methodology challenges.

Tax Implications

Despite reliefs for establishing an EOT, ongoing tax optimization needs to be managed, as does taxation of dividends paid through the EOT to employees.

Liquidity Issues

There may be no public market for company shares held in trust. Generating liquidity events to distribute value can therefore prove difficult.

Limited Employee Control

As non-direct shareholders, employees have limited voting rights or control. Their influence depends on trustee relationships and representation mechanisms.

No Guaranteed Benefits

Employees may not see financial gain if the business underperforms. Motivational outcomes rely on clearly communicating how employees benefit from company success.

While surmountable, these factors should be addressed upfront to smooth EOT adoption and operation.

Key Takeaways on Employee Ownership Trusts

Some key points to remember:

• EOTs allow employees to hold an equitable ownership stake in their company by transferring shares into a trust. Employees become indirect beneficiaries.
• Trustees manage voting rights associated with the shares. Employees may get representation through councils or committees.
• This differs from direct employee ownership models like ESOPs and cooperatives. The trust mechanism creates a unique structure.
• Benefits include alignment of interests, shared prosperity, motivation, succession planning, and UK tax incentives.
• Realizing these benefits involves careful setup, communication, governance, administration, and cultural integration.
• Legal, valuation, taxation, liquidity, and limited control challenges should be anticipated and managed.

Overall employee ownership trusts allow companies to create a flexible and tax-efficient employee ownership environment by using an indirect trust-based model. When implemented thoughtfully, they can boost engagement, productivity, and shared prosperity between a company and its employees.

Conclusion: A Powerful Employee Ownership Model

EOTs have rapidly gained appeal in the UK as an alternative approach to transitioning business ownership to employees. The use of a trust mechanism to hold shares on employees’ behalf provides a unique middle ground between direct and indirect employee ownership.

By granting employees equitable rights to the assets held by trusts, without the need to directly purchase shares themselves, EOTs allow companies to create motivational employee ownership structures in a relatively straightforward, cost-effective way.

However, their success relies on effective implementation, governance, and administration to ensure employees fully experience the benefits. Companies considering an EOT transition should carefully assess their readiness, develop comprehensive plans, and engage expert advisors.

Done right, EOTs promote productive collaboration between a company’s workforce and leadership. They represent a powerful model to grant employees a meaningful stake and say in an enterprise’s prosperity.