Why an Employee Ownership Trust is a Cost-Saving Option During COVID-19
Employee ownership trusts have become a popular way to structure the ownership of your business, and they could help companies through the coronavirus pandemic, but how?
Employee ownership is a relatively recent idea that is being implemented in more and more companies across the UK. But, what is an employee ownership trust?
In short, it’s a type of employee share scheme where a trust looks after the shares of the employees for them, but we’ll get into this in more detail in the next section.
Today, we’re going to cover what an employee ownership trust is, and what the pros and cons of having one are. We’ll then share with you some insights on how this might benefit companies struggling during the COVID-19 pandemic.
What is an Employee Ownership Trust?
There are various names for employee ownership trusts (EOT), including employee share trusts and employee share ownership trusts. EOTs are one type of employee ownership scheme, which is a broader term for a company policy that distributes shares amongst its employees.
EOTs are a method of share ownership where the company’s employees hold a controlling stake via a trust. An employee ownership trust isn’t too dissimilar from a benefit trust, but it has extra tax advantages.
Because the trust has to ensure the employees own the controlling share of the company, the EOT can hold anything from 51 to 100 percent of the shares, and benefit all the employees equally.
Some of the more high-profile companies who use employee ownership trusts include John Lewis, Mott McDonald and the West Highland Free Press.
What are the Pros and Cons of Setting up an Employee Ownership Trust?
Before we discuss how EOTs might be able to help companies during COVID-19, we’re going to list some employee ownership trust pros and cons. This way, you can get a better idea of their usefulness in and out of a pandemic.
Pros
Let’s start with the advantages of your company setting up an EOT. Some of the main advantages of selling shares in your company to an employee ownership trust include:
Tax Efficient
In a bid to encourage businesses to move towards employee ownership trusts, George Osborne introduced two major tax reforms in 2014. These help companies afford the transition to employee shares, meanwhile incentivising employees to get involved. The reforms mean that:
- If the shareholders of the company sell a controlling number of shares to an EOT, any profit made will be relieved from capital gains tax.
- Trading companies owned by one of these trusts are allowed to pay their employees a bonus of up to £3,600 per annum, completely free from income tax. What’s more, all staff members have been made eligible for the scheme.
Not All Shareholders Need to Sell
A company only needs to sell 51 percent of the company to an employee ownership trust to be a part of the share scheme. This means that members who want to keep their shares are perfectly able to, and important managers can hold larger shares than employees who get theirs through the trust.
Employees Work Harder
Empirical research has shown that, when employees have a controlling share in the company they work for, they work a lot harder than they would if they were just collecting a payslip. This is because employees like to be a part of something larger than the one job role they perform. The employees also make a profit out of the company’s success, so they’ll be more motivated to work hard and increase their share price.
Staff Involvement
Your employees working harder is one thing, but with your employees collectively owning a controlling stake in your company, they will be much more willing and able to share their insights on issues the company is having.
Some businesses have reported an initial difficulty in creating an open forum for staff members, as sharing issues with the company is something employees aren’t necessarily used to. But, once the scheme has been rolling for a while, the employees tend to warm up and share key problems with the business that need to be addressed. This harvests a culture of trust, respect, and honesty, which is paramount for the long-term success of any business.
Reduce Absenteeism
Employees are less likely to call in sick or show up late to work if they know that by not doing their work, they might detrimentally affect their share price.
Retaining Employees and Attracting New Talent
Even though employee ownership trusts are rising in popularity, with over 2 million employees in the UK owning shares in their company through one, they’re still a rare commodity in the wider scale of UK companies. This means that retaining the employees you have, and attracting new talent, is easier as they can’t find other companies who are able to give them shares and tax-free bonuses.
Also, with a lot of young people in debt and unable to take out loans to buy shares in a company, this is their only way to do so. This makes your company more attractive to up-and-coming young talent.
Quick to Set Up
Most companies are under the impression that selling shares to an employee ownership trust takes a long time. In fact, it tends to be quicker than selling to an unrelated third-party purchaser.
Cons
So, those are the benefits of setting up an employee share scheme through a trust. Now that we’ve covered these advantages, we can’t forget about the downsides, so let’s take a look…
Company Valuation
When you’re selling your company’s shares to an EOT, you have to obtain a market value to agree on a sales price. It’s important not to overvalue your company, as the price will be paid by the company itself.
Paid Overtime
Selling shareholders won’t receive the money for the sale immediately as they would in a market sale. Instead, the money is paid to them by the company over time.
Expensive
Employee ownership trusts are quite complex to administer and are, therefore, quite expensive to provide. The short-term costs of creating the trust, plus the long-term costs of managing it, can eat into your funds more than if you just provided your employees with traditional cash bonuses.
Why Employee Ownership Trusts Could Save Struggling Businesses During COVID-19
It’s impossible to provide assurances on what types of business practices will allow companies to make it through COVID-19. But, any little helps, so it’s important to explore every avenue.
With the virus still around, we won’t know the full benefits of employee ownership trusts until we’ve completely recovered from the pandemic. What we can do, however, is make measured predictions on how these share schemes might help companies through this difficult time.
Douglas Roberts, an expert in employee ownership who has advised more than 10 of these deals over the last few years, claims that a greater number of employee-run businesses will emerge in the coming months. In an article published by Scottish Legal, Mr Roberts told the news site:
“The impact of coronavirus has exposed the need for businesses to have greater financial resilience. Employee ownership provides that, meaning it will undoubtedly become even more prevalent as companies stabilise their position and plan growth as part of post-pandemic plans.”
Adding to Roberts’ predictions, a recent survey found that 73 percent of employee-owned businesses said they believe their employee ownership model will help them through the coronavirus crisis, and that the multitude of benefits cannot be ignored.
These benefits include everything we discussed in the above section:
- Employees working harder and having a reason try to keep their company afloat by any means necessary.
- All the issues with the company that could’ve made it susceptible to the pandemic will likely have been brought up in staff forums, bolstering the ship against the tide.
- Staff are less likely to take advantage of the pandemic, and claim illness to get time off work because it will affect their own bottom-line.
- With staff bonuses being free from income tax, paying staff extra money to help the company during the pandemic is more feasible.
- Plus, all the money these tax benefits allow provide extra cash for companies to squirrel away.
Having a team of dedicated employees who all want the best for their company is a valuable commodity in any crisis and one that can be gained by investing in employee share ownership.
What Happens Next?
Here, we’ve managed to cover what employee ownership trusts are, and the primary benefits and drawbacks of them. We have then provided some useful insight into how EOTs might help companies weather the coronavirus storm.
As for what happens next, we’ll have to wait and see if companies who have invested in employee ownership trusts are in a better position than director-owned companies. Regardless of whether a company has adopted an employee share scheme or not, we hope that businesses of all shapes and sizes manage to rally their way through this troubling era unscathed.
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