Employee-owned businesses – how do they work?

If you’ve ever shopped at a branch of John Lewis, you may have heard the people working there referred to as ‘partners’. This is because John Lewis is one of the 470 employee-owned businesses in the UK, meaning that each one of their employees has a stake in the business.

Employee ownership is a business structure that allows employees to have a ‘significant and meaningful’ stake in the business, that is:

 a financial stake in the business (eg by owning shares)
 a say in how it’s run, known as ‘employee engagement’

There are three main types of Employee ownership:

Direct employee ownership – employees become individual owners of major shares in their company

Indirect employee ownership – shares are held collectively (usually through a trust) on behalf of

Combined direct and indirect ownership – a combination of individual and collective share

With direct employee ownership, where employees have their own individual shares, the financial gains correlate to how successful the company is, allowing employees to benefit as the company grows. To support direct share ownership, the Government has approved a small number of tax advantaged schemes which provide incentives for such share ownership, known as a Share Incentive Plan, or SIP.

Employees traditionally receive their shares in one of three ways: buying shares, being given shares, or being awarded share options (often through tax-advantaged schemes which allow employees to exercise their options when they have available funds).

When it comes to indirect employee ownership, some or all of the company shares are held in a trust for the employees, known as an Employee Benefit Trust, or EBT. Each EBT will have a group of Trustees that are generally a mix of employees and directors of the business. The Chair is often an external individual.

In the usual scheme for this, indirect employee ownership means that share dividends will not be paid out. It is more usual for money to be used elsewhere in the business (for example, to be used for employee bonuses, or re-invested in the business to support company growth). The hybrid model of combined direct and indirect ownership provides many companies with an ideal structure for ownership. The EBT will hold the majority of the shares, and then an SIP can be used to distribute and manage the remaining shares. In this way there’s an opportunity for people with direct share ownership to make a tax-efficient gain, whilst the EBT allows employees to receive a reward (in the form of a bonus payment), regardless of whether they’ve been able to buy/own individual shares.

Aside from the potential financial advantages, employee ownership gives workers a say in how the business is run – this is known as employee engagement. This can take the form of (for example): an employees’ council, a constitution which defines the company’s relationship with its employees, employee directors on the board, or working with trade unions.

There are many advantages to employee-ownership:

Being able to benefit directly from the company’s success gives you a motivated workforce and increased productivity, meaning an indirect improvement to employee wellbeing. It’s relatively easy to set up and can be adapted to suit the unique needs of a company and has been shown to work across a variety of sectors. It can be applied to a business at any stage of its life, whether the company is a start up or already established.

If you think your business could benefit from employee ownership, get in touch. We’re here to help!