The EC has never proposed measures using employee financial participation (EFP), as a vehicle to reduce income inequalities. The EC has also never prepared legally binding (compulsory) rules for the implementation of EFP on equal basis (standards) for all member states. Despite some successful cases in the EU, we could easily conclude that in fact, in the EU, we donot have a leveraged buyout trust-like mechanism, like they have in the USA.
Research has confirmed that companies which are partly or entirely owned by employees perform better. Many instruments, such as share ownership or profit sharing, are developed to enhance employee financial participation in companies. The US model of employee stock ownership has proved to be much more successful than numerus EU attempts.
The US Employee Stock Ownership Plan or ESOP is the most interesting form of employee ownership transfer from the existing owner of the company to its employees. While different Employee Share Purchase Plans (ESPPs) in Europe are often called ESOPs, legally most of them are not. The ESOP is a special legal form for a leveraged employee buyout that is legally defined in the USA only. ESOPs have led to a significant change in employee ownership in the USA, unlike ESPPs, which brought no substantial success in the implementation of employee ownership in the EU.
There is no standard legislation in the EU for the leveraged ESOP. The leveraged ESOP is still an unexploited potential in the EU. Obstacles are seen in regulatory and tax differences among the EU member states (Lowitzsch & Hashi, 2014). The evaluation and identification of obstacles and best practices, taking the best solution from the USA (ESOP) experience, is therefore required to harmonize and to remove cross border obstacles.
To be honest, many reports and recommendations on EFP were enacted on the EU level. But the issue of EFP was then more or less left to the good or bad will of the member states and employers. What is argued for in this article, is the necessity to move from a period of swimming (maybe drowning) in the vast sea of recommendations, analyses and reports to a period of enacting a binding and uniform regulation of employee stock ownership legal framework and related tax incentives in the EU.
employee financial participation, employee stock ownership, employee stock ownership plan, ESOP, employee stock purchase plans ESPPs, profit sharing
In this article, I point out the reasons that raise the importance and actuality of employees’ ownership, look at the logic behind better performance of employee owned companies, which is based on higher motivation of employees, less short terminism and successful resolving of the succession problem.
I present current situation and trends in the EU, compared with the USA and try to identify reasons for the EU lagging behind the US in employee stock ownership, show the (dis)advantages of the EU and US concept, and propose measures to overcome the jumping on the spot.
In addition, I aim to identify the causes and develop the proposals to remove the obstacles for poor implementation of ESOPs in the EU, in comparison to the USA.
Furthermore, I also propose best solutions for employee stock ownership (ESO) and employee financial participation (EFP) to be implemented in the national (member states) and supranational (EU) legislation (a uniform EU employee stock ownership model).
Employee financial participation (EFP) includes both individual ESO (employee stock ownership) and collective – ESOPs (employee stock ownership plans) and ESPPs (employee stock purchase plans) on one hand and PS (profit sharing, which is an arrangement in which an employer shares some of its profits with its employees) on the other. The compensation can be in the form of stocks, bonds or cash, and can be immediate or deferred until retirement.
There are some reasons that raise the importance and actuality of workers’ ownership. If the retiring owner is resolving the succession problem by transferring (almost) entire ownership to the company’s employees, then ESOP or ESPP have proved to be the most appropriate forms. In addition, much research has confirmed that companies partly or entirely owned by employees are more profitable, create more jobs, and pay more taxes than their competitors without employee ownership (Kruse et al., 2010).
Therefore, the question is why the EU is lagging behind the USA in developing efficient enhancing mechanisms for employee ownership. Moreover, why then not apply advantages of the US model to create a uniform, binding, not necessarily single EU model?
The issue of increasing employee ownership should be put into consideration in the prospect of increasing income inequalities and human fairness and justice, however, this is not yet the case in the EU documents on employee financial participation. Theory (D. Ellerman, 2017) sets the question even broader, by asking who represents the company in the first place and claiming that the answer should always be the people who work in it – who should thereby jointly and appropriately reap the positive and negative fruits of their labour.
We are not talking about replacing the employment system with the workplace democracy (according to Ellerman, 2017). We are merely reflecting on an employee-friendly ownership transformation from the existing owner to all employees as owners in a traditional limited liability company. Nevertheless, more and more authors are increasingly exposing the problem of income inequalities in relation to employee stock ownership. They argue that the time has come to encourage Employee Stock Ownership Plans. Not only are these corporate forms a powerful tool in the light against inequality, but there is evidence that they provide the incentives for greater effort, more cooperation, more innovation and more sharing – all of which contribute to improvements in workplace performance and company productivity.
A myriad of political papers, but no serious commitment from the EU
Employee financial participation (EFP) has been a feature in the EU for over 50 years, supported in some EU member states through tax incentives and legislation. EU has been systematically following EFP for decades through the so-called PEPPER reports. There is a wide divergence in approaches to be found in different countries. Few member states have extended employee ownership significantly. The UK and France are positive examples, granting incentives to EFP schemes.
In its strategic documents, the European Commission highlights the need for “inclusive growth”, which amongst other things empowers citizens through employment, investing in skills, fighting poverty and modernising labour markets and social protection. The Commission believes that employees’ involvement in the affairs of a company may take the form financial involvement, particularly with employees becoming shareholders. The Commission has committed to identify and investigate potential obstacles and to subsequently take appropriate action to encourage employee share ownership throughout Europe. Employee buyouts are considered also as a possible solution for SME succession problem in the EU countries. Since there are many angles to this issue (for instance taxation, social security and labour law) the Commission found it important to analyse this subject in more detail.
Despite all these excellent orientations and commitments, nothing really happened to materially (financially) support the implementation this strategy. Notwithstanding, several studies show advantages of ESO as a stabilizing factor at stock market, long-term shareholders’ commitment, reducing the impact of short-term focus of managers and shareholders.
The Commission has never proposed practical measures for using EFP as a vehicle to overcome income inequalities. In addition, the EC has never prepared legally binding (compulsory) proposals for the implementation of EFP on an equal basis (standards) for all member states.
Positive EU attitude but no serious measures
The EU strategic documents and several reports bring a lot of positive attitude towards employee financial participation, explaining different reasons why it is so relevant and what it brings, including consistent and competent proposals what states and companies should do.
According to the Report 2013, EFP reduces short-termism, promotes sustainability and long-termism in strategic decision-making by managers and may increase employees’ interest in long-term commitment and in seeking innovative solutions in the production process.
Financial participation schemes encourage investment in training, as they increase the likelihood of companies retaining skilled workers in the long term. Workers’ financial participation in their company’s proceeds and, where appropriate, the associated participation of workers in decision making, can contribute to improvements in employees’ job satisfaction and overall performance and motivation; whereas it can also encourage employees to develop a sense of ownership and a better understanding of their company as well as enhance mutual respect between employers and employees. The establishment of EFPs can help to boost productivity, improve performance, support the alignment of employees’ and shareholders’ interests and attract and retain key personnel (Report 2013).
Encouraging employees to develop a sense of ownership and responsibility increases their feeling of inclusion and the likelihood that their employers will engage with them and understand their concerns, perspectives and ideas. Employee participation in management through voting rights, the right to be present or other forms of governance can improve management and the flow of information and help employees to have a better understanding of the situation when their company faces challenges as well as a greater ability to access rewards when the company is doing well. EFP schemes can play a significant role in additionally involving workers in information, consultation and decision-making processes during restructuring. Employee ownership fosters much‑needed social cohesion and serves as an important addition to sustainable corporate governance (Report 2013).
Financial participation should not be used to avoid compliance with labour law or as a means of reducing acquired social and labour rights or applying pressure to increase labour market flexibility; there is a need to take precautions when promoting ownership schemes so as not to substitute wages with profit-sharing systems. Collective agreements must not be undermined by agreements on EFP schemes. The decision to develop and implement an EFP scheme should therefore be made at company level. Any EFP model should be an addition to a worker’s basic pay and contractual rights, not a substitute for these rights (Report 2013).
All this positive assessments, orientations and recommendations do not help much if they are not supported by real policy measures, including binding legislation. In order to promote financial participation, tax incentives should be given to owners who offer employees share subscriptions. Leaving employees capital acquisitions at the level of non-supported recommendation, has brought no success so far. Therefore, special incentive schemes, leveraged and tax facilitated in a way similar to ESOPs in the US are more than welcome to be imposed by the EU legislation.
It is true that the most appropriate EFP model will often depend on the size and the status of the company. Yet, we deeply disagree with the view that because EFP is affected by national taxation rules, it is not appropriate to develop a comprehensive “one size fits all” model for EFP at the EU level (Report 2013). On the contrary, just for that reason alone such a model is more than needed in order to unify the tax approach (like it is in the USA with the Employee Retirement Income Security Act (the ERISA). The position that EFP may not be suitable for all companies or employees and that very careful consideration should be undertaken before undertaking such a scheme (Report 2013) is a serious obstacle for not achieving substantial results and a justification for doing nothing on the EU level.
Despite lack of incentives, EFP gradually moves on in the EU
According to the Report 2013, EFP schemes in EU countries present several models; participation in EFP varies between different sectors, company sizes, employee demographics, and between member states. The overall participation in EFP schemes is still relatively low, despite impressive increases in the last ten years. However, all schemes have been increasing in recent years (2009-2014), most of them profit sharing.
Report 2013 finds out that – particularly when compared with the USA – Europe lags behind, due to fragmented levels of tax support, a lack of regulatory incentives and clear practical guidance on implementation, which disproportionately affect SMEs. As stated in the Report 2013, fiscal policies and taxation are key to the development and implementation of EFP schemes by companies in each member state, however, questions of subsidiarity and continuing doubt over possible harmonisations of taxation make any substantive legislative action on these areas at EU level unlikely and inappropriate.
Despite the obstacles and lack of incentives, the development of employee share ownership continued in large European companies in 2017. European companies with employee share plans grow continuously in number and in percentage. 389 billion Euro or 3.20% were held by 8.5 million employees in their companies (7.5 million in large companies, 1 million in SMEs).
When compared with approximately 10% of the US employees being involved in some ESOPs, these are not large numbers. According to Blasi, Kruse and Freeman (2017), employee stock ownership of different magnitudes, from 5-25% in stock market companies to 30-100% in small businesses, appears in companies throughout the US. There are large stock market companies like Procter & Gamble, which has had meaningful employee share ownership along with profit-sharing for more than a century, and Southwest Airlines, which has both employees share ownership and an annual cash profit sharing plan that in 2015 paid $620 million in profits to all employees, adding 15% on top of their wages and salaries. Divisions of stock market companies are sometimes spun and sold to workers through ESOPs (Blasi, Kruse and Freeman, 2017).
I can also claim that the EU percentage (3,20%) is a small, if the objective is EFP becoming a significant way of empowering people to overcome income inequalities. However, the achieved 3,2% and close to 400 billion capitalisation is an enormous result if we compare it with the situation 10 years ago (202 billion and 2.4% in 2006).
Moreover, this progress was made without substantial material incentives that could have been based on the EU binding rules. The EU does not play a serious role in this field. Instead of numerous recommendations and reports, the EU should go with a legally binding directive, harmonizing standards and rules and incentives for employers. That would be perfectly in accordance with the Treaty of the EU, Article 3, talking about social market economy and social progress, Article 5 of the Treaty of the EU (subsidiarity and proportionality), and with Article 4 of the Treaty on functioning of the EU (shared competences in the field of social cohesion and social policy (article 4., par. 2., points b) and c)).
It sounds promising that 86.6% of all large companies have some employee share plans (including executives shares); their number has increased from 3 to 4% on average each year since 2006) and 62.8 % of all companies have stock ownership plans, however, the incentives for employers are too weak to be able to generate substantial steps forward.
Some positive attempts in the EU countries
As already pointed out, there is a variety of different approaches in the EU countries referring to EFP. Following are some examples, showing great diversity in approaches and in effectiveness of ESO – employee stock ownership in EU countries.
The UK Companies Act of 2006 (also amended in favour of ESO) and the 2014 tax incentives were imposed for indirect ownership of employee shares (EOT). ESO was introduced in the UK in 1950, while profit sharing appeared as early as at the end of the 19th century. According to the 2010 European Working Conditions Survey, 5% of British employees took part in employee share plans and 12% in profit sharing schemes. There are 4 main tax advantage plans: SIP (share incentive plan, 820 companies) and 3 share option plans, SRSU (service related share option schemes, known as Saye schemes, 420 companies) for all employee and SCOP (company share option plan, 1110 companies) and EMI (Enterprise Management Incentive, 8590 companies) for selected employees (executives). However, the result on the level of the EU is poor. The EU member states do not follow this concept, with some exemptions.
French employee buyout mutual fund (“FCPE de reprise”) is similar to the US ESOP but is not an employee benefit automatically applying to all employees (only one-third need to participate). Both are ownership schemes via trust as intermediary, which can use borrowed funds on a leveraged basis, aiming to create employee ownership. According to the Report 2013, this form is similar to the US ESOP: both act through intermediary, both are leveraged, and both are share ownership schemes for future retiring employee shareholders. Despite that, the implementation of this model in France was extremely poor (surprisingly, only 2 FCPE were reported in 2012). Other EU countries did not follow it either.
Hungarian ESOP are US patterned, based on the Law on ESOPs of 1992, as privatization instruments, amended in 1995. At the start, the implementation was promising, however, afterwards (after 1969) the number of ESOPs decreased from 300 to one fourth of that in the last 20 years.
Austrian Income Tax Law developed Employee Participation Foundation to hold and purchase shares, exercise shareholder’s rights and transfer returns to the employees. In addition to employees, the beneficiaries of leveraged plans that can enjoy tax incentives are also retired employees and employees’ relatives.
The Spanish Sociedad Laborales (Workers Companies) are the only ESO plan in the EU as a specific legal form, implemented in the EU at a large scale in small and smallest companies supported with some fiscal incentives.
Unfortuinately, none of these or other EU member states attempts brought relevant success in the sense of a successful implementation of ESO models at member states level and especially not in the sense of harmonised progress on the level of all EU member states
The trend in the EU is to use intermediary entities
Intermediary entities in the EU are not necessarily in the form of a trust as a vehicle for transferring shares within employee share ownership plans (ESOP schemes). Examples are: French employee buyout mutual fund, Hungarian ESOP, Austrian Income Tax Law developed employee participation foundation, Spanish worker’s companies; however, there are several good reasons for that.
Implementation of such a theoretical concept limits (eliminates) the risk of investment for employee shareholders following the principle of equality and integrity of employee community. On the other hand, allows the implementation of leveraged investment (the loan for buying the shares is serviced by payments of the company (out of profits), not by payments made by individual workers).
Finally, such a a concept ensures the pool of voting rights after the shares are acquired, exercised by employee trust; only the employees are financial beneficiaries, shares are not sold to outsiders, retired employees are entitled to be paid out by the trust.
EU member states’ efforts brought no relevant development of ESO models neither on the level of the EU member states nor in the form of a harmonised progress across the EU. Some of the reasons are related to the fragmented fiscal system in the EU, however, the main reason is the absence of the EU level regulated efficient ESO model to be implemented in all EU countries and in cross border operations. Despite the above-mentioned cases we can easily conclude that we do not have a leveraged buyout trust-like mechanism at all in Continental Europe.
THE STRUCTURE OF THE US ESOPS, A POSSIBLE EU MODEL
ESOP as an employee benefit plan
An ESOP is generally a kind of employee benefit plan, similar in some ways to a profit-sharing plan. It is not considered an employee purchase (buyout) but more as an owner’s contribution to employees. There are numerous employee benefit plans in the countries all over the world (Europe, Asia, India, etc.), however, apart from the similar name, they have nothing in common with the US ESOP, which is very specific because it is related to tax regulation.
According to the IRS, an employee stock ownership plan (ESOP) is defined as a contribution plan that is a stock bonus plan or a stock bonus/ money purchase plan (IRC, section 401(a). An ESOP must be designed to invest primarily in qualifying employer securities (IRC section 4975(e)(8) and meet certain requirements of the Code and regulations.
In the USA, ESOPs are most commonly used to provide a market for the shares of departing owners of successful closely held companies, to motivate and reward employees. A company sets up a trust fund into which it contributes new shares of its own stock or cash to buy existing shares. Alternatively, the ESOP can borrow money to buy new or existing shares, with the company making cash contributions to the plan to enable it to repay the loan.
As we see from the above definition, the US ESOP is a tax-motivated method of selling a company from the owner to its employees. It is based on the law on the ERISA of 1974.
How could this happen in the USA and not in the EU?
In the early 1970s, some sections were added to the ERISA, defining ESOPs (Employee Stock Ownership Plans) and establishing the tax-advantaged status for it. The ESOP was based employee benefit trust that bought the shares for employees with credit, not with employees’ wage contributions or savings.
According to the ERISA, company contributions of cash or shares to an employee benefit trust (similarly as company contributions to retirement plans) and the company payments of the principal and the interest on the loan for buying shares for employees, are tax deductible.
The Tax Reform Act of 1984 made ESOPs with levels of generally 5-20% of employee stock ownership attractive to publicly traded stock market corporations. Banks, investment banks, and insurance companies were permitted to deduct half of the lender’s interest income (corporate taxes) for loans approved to finance ESOPs. The deduction of dividends used to pay back the loans on these shares was also given a tax incentive. Later, the tax incentives encouraging ESOPs in stock market companies were eliminated.
The change of the Section 1042 of the Internal Revenue Code in the 1980s allowed owners of privately held businesses to defer their capital gains taxes when they sold more than 30% of C corporations to employees and managers through ESOPs. Often, retiring entrepreneurs would sell 100% in when they could fully retire if they had no heir to operate the company or the family wished to cash out their stake.
ESOPs in closely held companies mostly take place in situations where the founding owner wants to retire and cash out of the business. The question is more complex in ESOPs in stock market corporations.
To enhance workers’ pay and wealth without creating excessive risk, employee stock ownership and profit sharing should not substitute for standard worker pay or benefits. Employee stock ownership plans where workers have to buy the stock with their savings may not have these effects.
ESOP and ESPP
The rules referring to ESOP differ in many ways from the arrangements for the sale of a company to employees in the legislation of some European countries, including the so-called ESPP (various purchases of company shares purchased and paid at a reduced price, by employees directly out of their salaries or earnings, not necessarily all of them are included).
The basic idea of the kind of ESOP that is partially applied in some EU countries is an employee buy-out model, where an intermediate entity is used to acquire the shares on behalf of the employees. Employees are not exposed to risks; the acquisition is financed by a share of profit, or a loan, which is repaid by share of a profit. Both is additional to employees’ salaries. An intermediate entity can exercise voting rights or other forms of governance on behalf of employees, allowing for collective representation.
Employee ownership addresses company succession problems also in the EU. A company is often closed down or sold off when succession is not possible; this procedure may be helpful particularly for SMEs and micro enterprises in securing the continuation of sustainable commercial operations. These advantages can only be secured in combination with the participation of employees and ESOP is the most convenient way of doing that.
The ESPP is characterized by the fact that it is not a single model, but many different versions of it in different countries; this is the main disadvantage of the EU approach of transferring ownership to employees. In the EU, there is no single effective uniform concept but a variety of different, more or less successful, attempts.
The US ESOP model, on the other hand, is subject to some mandatory components of the model. Since the model has been successful in the US for more than 30 years, it needs to be carefully examined and introduced as a uniform model for companies in the EU countries, at least as one of the tax incentive options.
Compulsory elements of the tax supported US ESOP structure
These compulsory elements of the tax supported ESOP structure are:
1. All full-time employees have to participate in the plan. Allocations are made either on the basis of relative pay or some more equal formula. Senior employees can acquire an increasing right to the shares (vesting). The employees do not risk they their personal property; they neither purchase nor pay the shares directly out of their salaries or earnings: this is done by the trust on their behalf. The employees also do not pledge any personal assets as collateral.
2. The establishment of a trust is essential. Trust is a separate legal entity, established by the company, acting as intermediary between company and employees (Employee Stock Ownership Trust (ESOT) with all employees as beneficiaries. ESOTs is acquiring shares from the owner of the company, holding shares on behalf of employees and purchasing shares from employees upon retirement or other exit from the company.
3. The trust finances the purchase of shares from the owner by company contributions of employee benefits (usually pension contributions) or, as most usual, getting loan from banks; the company guarantees for the loan. The loan is paid off out of dividends or other contributions for the employees, paid to the ESOT.
The company can make tax-deductible cash contributions to the ESOP to buy out the owner’s shares, or it can have the ESOP borrow money to buy the shares. Contributions used to repay a loan the ESOP takes out to buy company shares are tax-deductible. The ESOP can borrow money to buy existing shares, new shares, or treasury shares. Regardless of the use, the contributions are deductible.
4. The shares purchased by ESOT from the owner are held by ESOT on behalf of employees. Shares in the trust are allocated to individual employee accounts. The shares are required to be voting, common shares. Employees are exercising voting rights through the ESOT as trust, gradually acquiring the controlling package and influencing the company performance. The shares are not permitted to be publicly traded.
5. Upon retiring or other way of exiting of employees, the trust is required to purchase the shares back from the employees at the value according to a regular annual valuation of the shares. Upon entering of new employees, those shares are required to be offered to them.
6. Company contributions to the trust are tax-deductible (regardless of how the trust acquires stock). The ESOP borrows cash and the company then makes tax-deductible contributions to the ESOP to repay the loan; both principal and interest are deductible. The 2017 tax bill limits net interest deductions for businesses to 30% of EBITDA (earnings before interest, taxes, depreciation, and amortization) for four years, at which point the limit decreases to 30% of EBIT (not EBITDA). There are other tax benefits:
– In C corporations, once the ESOP owns 30% of all the shares in the company, the seller can reinvest the proceeds of the sale in other securities and defer any tax on the gain.
– In S corporations, the percentage of ownership held by the ESOP is not subject to income tax. That means, for instance, that there is no income tax on 30% of the profits of an S corporation with an ESOP holding 30% of the stock, and no income tax at all on the profits of an S corporation fully owned by its ESOP.
– Reasonable dividends used to repay an ESOP loan, passed through to employees, or reinvested by employees in company stock are tax-deductible.
– Employees pay no tax on the contributions to the ESOP, only the distribution of their accounts, and then at potentially favorable rates.
IDENTIFICATION OF KEY OBSTACLES TO EFP IN THE EU AND RECOMMENDATIONS AND PROPOSALS
It is simply not clear, for there are very different solutions in the EU member states, what can play the role of trust in the EU ESOP model?
Are there employee benefit trusts that can be adapted as is possible in the UK (although the UK ESOT lacks individual share accounts)?
Can a non-profit Employee Benefit Association serve as a trust with tax deductible payments from the company to the association?
Can a worker cooperative serve as the trust?
The French “FCPE de reprise” sounds interesting, but, as stated earlier, there were only two created in 2012, and probably there must be a good reason for that.
What is the legal status of the “trust” a fund, for the purpose of ESO, that could be used in EU countries is the question, that, at the time being, has no answer in the European company law? In the EU member states’ company legislation, including the level of the EU legislation, trust is not legally grounded (with the exception of the UK).
There are different alternatives, or comparable entities, like the German and Austrian “Stiftung”, or different types of financial funds, created for a specific purpose in some legislation like the special type of retirement fund “carved out” in US law so it can hold 100% of its assets in employer stock).
But trust as a respective entity for the purpose of ESO, under the EU member states (except for the UK) and EU company law, does not exist and should be legally created for the specific purpose of managing employee stock ownership. This is another reason why efforts of individual states are not successful. Therefore, this field needs to be harmonized or, even better, regulated on the EU level.
The importance of this issue is even higher since such an entity brings an exemption to the traditional company law (ex lege exercise of voting rights on behalf of employees as beneficiaries) and because it serves as a prerequisite legal infrastructure for the functioning of necessary tax incentives (see the next chapter on US ESOPS) for the well-functioning of ESOPs.
Personally, I thoroughly agree that further transparency is needed in national employee ownership schemes and especially in calculating the effective tax burden across the EU-28 in order to prevent double taxation and discrimination.
However, also with regard to tax issues the wrong position prevails, that the EU framework for employee ownership should not override national taxation rules. On the contrary, member states should provide harmonized and coherent tax incentives, promoting employee ownership schemes. Tax incentives will only increase employee financial ownership; the Commission should present directive on the taxation of EFP. The proposed concept of diversified member states taxation rules has already shown its weaknesses; thus, further reform of this concept is obviously unavoidable.
Companies, or better to say their owners, are offering ownership acquisition schemes to employees in several member states and employees are faced with different social security contributions regimes. There grows a gradual convergence of existing financial participation schemes and the related national legislation to enable employers in future to offer schemes in the same or a similar form in all member states. Still there is a lack of national legislative measures favouring the development of EFP schemes.
The most significant suggestion to further the development of the employee ownership in the EU is to establish a standardized model for the leveraged ESOP, like the one having been successfully implemented for 40 years in the United States. We support the proposals that the EU should provide:
– a framework concept with general guidance on basic principles and best practice to help guide decision making at national and company level on EFP schemes;
– a European model of employee ownership as an alternative, optional instrument for the member states, with the aim of deepening the Single Market, improving the cross-border activities of companies, especially SMEs, and protecting employees of subsidiary companies.
However, the opinion prevails in the EU that a European framework should serve only as a best practice option and be available for use by companies on a voluntary basis. There is the wrong presumption that companies, when acting voluntarily, will develop and offer EFP schemes open to all employees on a non-discriminatory basis, considering the specific situation of SMEs and micro-enterprises, without any incentives.
I disagree with the position that the European framework should serve only as a best practice option for use on a voluntary basis. This is the situation that we have had for decades and the results are not promising. Legal measure relating to the financial participation of employees in company income should not all be based on voluntary principles, but should be binding, thus ensuring equality among employees. Voluntary concept proposed by the EU is also questionable, bearing in mind the lagging behind of results of EFP.
PROPOSAL FOR THE EU MODEL OF EMPLOYEE STOCK OWNERSHIP PLAN
Definition and process of employee stock ownership plan
The proposed EU model, the employee stock ownership plan (herein after the Plan) is the gradual purchase of shares carried out by the employees of the company through an intermediary entity, formed by the company (hereinafter the Fund). Other (individual, not organized) purchase of shares of the company, carried out individually by employees, outside the Fund, are not considered as employee stock ownership acquisition and are subject to the general rules of corporate, take over and tax law.
The process of employee stock ownership acquisition has to be set out by law (who can give the initiative, e.g. the initiative can be given by a group of employees in agreement with the owner or the owner in agreement with employee bodies or trade unions, etc.).
Employees’ right to participate in the Plan
All full-time employees have to participate in the Plan. Allocations are made based on relative pay. The Fund, rather than the employees, purchases and pays the shares from the owner of the company. The employees also do not pledge any personal assets. All employees have the right to participate in the Plan. The minimum time of employment period for the employee has to be determined by internal rules of the company.
Each employee exercises the right to participate in the Plan by signing the contract with the Fund, established by the company for this purpose. The right to participate in the employee stock ownership acquisition is therefore an individual employee right that can only be exercised collectively by all employees, using the Fund as intermediary.
Employees take no financial duties for the shares they get from the Fund, but they may invest in additional shares, which they pay from personal sources. The rules of the Fund determine the ways of additional paying and acquiring the share.
Legal status of the Fund
A Fund is a separate legal entity, established by the company, acting as intermediary between company and employees; all employees are beneficiaries of the Trust. The Fund acquires shares from the owner of the company, holding them on behalf of employees and purchasing them from employees upon retirement or other exit from the company.
There should be some specific rules in the legislation for the US Trust (Fund) since it is not a part of Continental Europe law tradition and should be regulated as Fund, separately from traditional financial or pension funds. General rules on financial funds cannot apply in this case.
In addition to the company which established the Fund, other legal entities can become its investors, subject to the internal rules of the Fund and a contract concluded by the investor and the Fund.
The activities of the Fund
The Fund has to be established by the company, mainly for the sake of managing the Plan, representing employees’ interests in exercising voting rights in the company – and should perform no other business activities.
The only registered activity of the Fund should be the collecting financial assets by getting contributions from the company and loans from the banks with company as collateral and the investing of the collected funds in purchasing the company’s shares on behalf of employees, also including the payment of exits (former employees) from the company. The Fund also exercises voting and other property rights in relation to the company.
The Fund finances the purchase of shares from the owner by company contributions of employee benefits or by getting loans from banks; the company may guarantee for the loan.
Financing of the Plan
The company makes tax-deductible cash contributions to the Trust or guarantees the Fund to borrow money. Contributions are used to repay loans and to buy company shares. The ESOP can borrow money to buy existing shares, new shares, or treasury shares. Regardless of the use, the contributions should be tax deductible.
The revenue of the Fund also comes from the distribution of profit and other contributions of the company and from the management fee for the exercising voting rights and for financial services related to employees’ entries and exits.
Employees may contribute a membership share, in addition to the share that they are entitled to from the trust – but paying the share from personal sources. The rules of the Fund determine the ways of paying and acquiring the share.
Voting rights and the termination
The shares are voting, common shares, priority non-voting shares are not permitted. Employees are exercising voting rights through the Fund, gradually acquiring the controlling package and influencing the company performance. The shares are not permitted to be publicly traded.
The decision on how to vote at the general meeting of the company should be held at the general assembly of the Fund, composed by all employees with the voting rights according to the related shares.
An authorized auditor valorizes the value of a company’s assets and fair value of the share annually.
Termination and transfer
The shares purchased by the Fond from the owner are held by the Fond on behalf of employees. Shares in the Fond are allocated to individual employee accounts.
Upon retiring or other way of exiting of employees, the Fund purchases the shares back from the employees at the value according to a regular annual valuation of the shares. Upon entering of new employees, those shares should be offered to them.
The right of the employee to participate in the Plan ceases when his or her employment (employment relationship) terminates in the company.
Transfer of membership is possible only to an employee of the company.
Tax benefits, related to EU model of employee stock ownership plan
Some of the necessary tax stimulations within the EU employee stock ownership acquisition model are proposed below. The following tax measures should be introduced in order to stimulate ESO in the EU:
1. Company contributions to the Fund are tax-deductible; if the company makes contributions to the Fund in order to repay the loan, or to acquire new stock, such contributions are tax-deductible (both principal and interest are deductible).
2. The ownership of a company held by the Fund is not subject to profit tax; dividends allocated to the Fund and used to repay a Fund loan or reinvested in company stock are not taxed.
A shareholder of a company who sells more than 5% of the company’s share capital to the Fund, using the Plan, does not pay tax on capital gain if the shareholder invests the purchase price within a period of 6 months to a company established in a member state.
3. An employee who buys additional shares from the Fund may deduct that amount from the income tax basis.
The income (proceeds from sale, purchase price) acquired by an employee when selling the shares upon exiting from the Plan (for retirement or other reason) is not taxed.
The EC has never proposed measures using EFP, as a vehicle to overcome income inequalities. The EC has also never prepared legally binding (compulsory) proposals for the implementation of EFP on equal basis (standards) for all member states. Despite some successful cases, we could easily conclude that in fact we do not have a leveraged buyout trust-like mechanism at all in Continental Europe.
ESOP is an excellent way of resolving the succession problem where both the owner and the employees win. The retiring owner sells the enterprise to motivated employees, who retain their employment and continue business activity. The company is not taken over by competition or even wound up. Employees get significant pay by selling the shares back upon their retirement.
In addition to solving the succession issue, the broader society wins as well. Employee owned companies are democratically governed and perform well. This is the way people are empowered and able to reduce income inequalities by themselves, thus making the society fairer and less conflict.
To achieve these goals, the EU should propose measures to standardize a uniform EU ESOP model, by harmonizing member states EFP regulation and related tax legislation.
Bennion, Phil. 2013. Report on Financial Participation of Employees in Companies’ Proceeds. A7-0465/2013 2013/2127(INI). Committee on Employment and Social Affairs, European Parliament. http://www.europarl.europa.eu/sides/getDoc.do?type=REPORT&reference=A7-2013-0465&language=EN
Bernstein, Jared 2016. Employee Ownership, ESOPs, Wealth, And Wages. Washington DC: Employee-Owned S Corporations of America http://esca.us/. http://esca.us/wp-content/uploads/2016/01/ESOP-Study-Final.pdf. Report
Blasi J., Kruse D., Freeman, R. 2017. Having a Stake: Evidence and Implications for Broad-based Employee Stock Ownership and Profit Sharing
Blasi, Joseph R., Richard B. Freeman and Douglas L. Kruse 2013. The Citizens’ Share, Putting ownership back into democracy. New Haven, London: Yale University Press.
Blasi, Joseph R., Douglas L. Kruse, and Aaron Bernstein. 2003. In the Company of Owners: The Truth about Stock Options and Why Every Employee Should Have Them. New York: Basic Books.
Brill, Alex. 2017. Employee Stock Ownership Plans as an Exit Strategy for Private Business Owners. Matrix Global Advisors White Paper. http://getmga.com/wp-content/uploads/2017/04/ESCA_ExitStrategy_Final.pdf.
Ellerman, David (2017) On the Labour Theory of Property: Is the Problem Distribution or Predistribution? Challenge, 60:2, 171-188, DOI: 10.1080/05775132.2017.1279906
Erdal, David 2011. Beyond the Corporation: Humanity Working. London: The Bodley Head
Gordy, Vaughn, Neal Hawkins, Mary Josephs, William Mertin, Rebecca Miller, Scott Rodrick, Corey Rosen, and John Solimine. 2013. Leveraged ESOPs and Employee Buy-Outs (6th Ed.). Oakland CA: National Centre for Employee Ownership.
Kelso, Louis, and Mortimer Adler. 1958. The Capitalist Manifesto. New York: Random House
Kelso, Louis, and Patricia Hetter. 1967. How to Turn Eighty Million Workers Into Capitalists on Borrowed Money. New York: Random House.
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NCEO. 2016. Economic Growth Through Employee Ownership: How States Can Save Jobs and Address the Wealth Inequality Gap through ESOPs. Oakland CA: National Center for Employee Ownership and Employee-Owned S Corporations of America
NCEO 2017. Employee Ownership and Economic Well-Being. Kellogg Foundation Report. https://www.ownershipeconomy.org/wp-content/uploads/2017/05/employee_ownership_and_economic_wellbeing_2017.pdf
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O’Neill, Martin, and Thad Williamson. 2012. Property Owning Democracy: Rawls and Beyond. Hoboken NJ: Wiley-Blackwell.
Rosen, Corey, and Scott Rodrick. 2014. Understanding ESOPs: 2014 Update. Oakland CA: National Center for Employee Ownership.
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Wiefek, Nancy. 2017. Employee Ownership and Economic Well-Being. Oakland CA: National Center for Employee Ownership.
PEPPER I Report, Promotion of employee participation in profits and enterprise results’, March 1991, Commission and the European University Institute
PEPPER II Report. Promotion of participation by employed persons in profits and enterprise results (including equity participation) in Member States (COM(1996)0697), January 1997
PEPPER III Report, Promotion of employee participation in profits and enterprise results in the New Member and Candidate Countries of the European Union, June 2006, Free University of Berlin
PEPPER IV Report, Benchmarking of employee participation in profits and enterprise results in the member and candidate countries of the European Union, October 2009, Free University of Berlin
The Commission Communication of 3 March 2010 entitled ‘Europe 2020: a strategy for smart, sustainable and inclusive growth’ (COM(2010)2020)
The Action Plan European company law and corporate governance – a modern legal framework for more engaged shareholders and sustainable companies /COM/2012/0740 final/
The Commission Communication of 5 July 2002 on a framework for the promotion of employee financial participation (COM(2002)0364)
The European Economic and Social Committee (EESC) report of 21 October 2010 on Employee financial participation in Europe,
The Report of 18 December 2003 of the high-level group of independent experts on transnational obstacles to the growth of employee financial participation in transnational enterprises,
The Commission Communication of 3 October 2012, entitled ‘Single Market Act II– Together for new growth’, (COM(2012)0573),
Commission Communication of 14 March 2006 ‘Implementing the Lisbon Community Programme for Growth and Jobs: Transfer of Businesses – Continuity through a new beginning’ (COM(2006)0117), Resolution of 15 January 2013 on information and consultation of workers, anticipation and management of restructuring,
Fifth European Working Conditions Survey (2010); CRANET SURVEY (2010) on Comparative human resource management. International Executive report (2011); European Company Survey (2013)
Report on financial participation of employees in companies’ proceeds (2013/2127(INI)), 18 December 2013,
The promotion of Employee Ownership and
Participation, Final Report 2014
Annual Economic Survey
of Employee Share Ownership in European Countries 2017, The European
Federation of Employee Share Ownership (EFES), 2018, Marc Mathieu –
 See: National Centre for Employee Ownership: Research on Employee Ownership, Corporate Performance, and Employee Compensation
 The state of employee share purchase plans and other forms of employee financial participation in Europe is given, as of 2014, in Lowitzsch and Hashi, 2014.
 Ellerman, D. 2017. On the Labor Theory of Property: Is the Problem Distribution or Predistribution? Challenge, 60:2, 171-188, DOI: 10.1080/05775132.2017.1279906
 Blasi J., Kruse, D., Freeman, R. 2017. Having a Stake: Evidence and Implications for Broad-based Employee Stock Ownership and Profit Sharing. Available at: https://www.thirdway.org/report/having-a-stake-evidence-and-implications-for-broad-based-employee-stock-ownership-and-profit-sharing
 The first PEPPER I Report entitled “Promotion of employee participation in profits and enterprise results” was published in March 1991 by the Commission and the European University Institute. The second Commission’s PEPPER II Report of was published in January 1997, entitled “Promotion of participation by employed persons in profits and enterprise results (including equity participation) in Member States” (COM(1996)0697). The third PEPPER III Report, entitled “Promotion of employee participation in profits and enterprise results in the New Member and Candidate Countries of the European Union” was published in June 2006 by the Free University of Berlin. The fourth PEPPER IV Report, entitled “Benchmarking of employee participation in profits and enterprise results in the member and candidate countries of the European Union” was published in October 2009 by the Free University of Berlin.
 2010 European Working Conditions Survey, 2010 CRANET, 2013 European Company Survey: All schemes have been increasing in last years (2009-2014), most of them PS; however only 31,7% of all private companies in EU countries offer some form of ESO or PS schemes.
 The Action Plan European company law and corporate governance – a modern legal framework for more engaged shareholders and sustainable companies /COM/2012/0740 final/ states, that the EU Commission (2012)
 Action Plan European company law and corporate governance – a modern legal framework for more engaged shareholders and sustainable companies /* COM/2012/0740 final */: The EU Commission believes that employees« involvement in the affairs of a company may take the form financial involvement, particularly to employees becoming shareholders.
 The EU Commission believes that employees« involvement in the affairs of a company may take the form financial involvement, particularly to employees becoming shareholders.
 Report on financial participation of employees in companies’ proceeds (2013/2127(INI)), 18 December 2013 (Report 2013)
 Annual Economic Survey of Employee Share Ownership in European Countries 2017, The European Federation of Employee Share Ownership (EFES), 2018, Marc Mathieu – Most remarkable European companies in 2017 regarding employee share ownership are the following: AUSTRIA, Amag Austria Metall, Andritz, Flughafen Wien, Oberbank, RHI, Voestalpine, BELGIUM: Colruyt, Elia, EVS, IBA, KBC, SWITZERLAND: Baloise, BC Vaud, Berner Kantonalbank, Crédit Suisse, Geberit, Lonza, Novartis, Syngenta, UBS, Zurich Insurance, DENMARK: Jobindex, Novo Nordisk, SimCorp, William Demant, GERMANY: Allianz, BASF, Bayer, Daimler, E.ON, Fraport, Lufthansa, PSI, RWE, SAP, Siemens, Der Spiegel, Martin Hoppman, SPAIN: Banco Santander, Construciones y Auxiliar de Ferro, Betsaide, Izar, Mondragon, FRANCE: Air France – KLM, Air Liquide, Arkema, Aviation Latécoère, Axa, Bouygues, Crédit Agricole, Eiffage, Engie, Essilor, Nexans, Orange, Safran, Saint-Gobain, Samse, Schneider Electric, Société Générale, Sopra Steria, Spie, STEF, Suez, Thales, Thermador, Total, Ubisoft, Vallourec, Vinci, Vivendi, Acome, Artelia, Auchan, Bourgeois,. Groupe Demain, UTB, ITALY, Prysmian, Telecom Italia, UniCredit, NETHERLANDS: Arcadis, Holland Colours, Nedap, Sligro, Van Lanschot, Witteveen en Bos, NORWAY: ABG Sundal Collier, AF Gruppen, Kongsberg Gruppen, Multiconsult, Veidekke, SWEDEN: Saab, Skanska, Svenska Handelsbanken, UNITED KINGDOM: UK L Barr, Britvic, Clarkson, Henderson, Johnson Matthey, Northgate, Novae, Rathbones, Tesco, Arup Group, John Lewis Partnership, Mott MacDonald, Scott & Fyfe, Scott Bader
 Annual Economic Survey of Employee Share Ownership in European Countries 2017, The European Federation of Employee Share Ownership (EFES), 2018, Marc Mathieu
 According to European Economic Survey, 8,3 % of all UK companies offered some way of employee ownership schemes and 26% of companies offered some form of profit-sharing schemes
 In 2013 there were total of 11,577 Workers Companies with 63,931 jobs in Spain.
 Law on Workers Companies of 1986, amended in 1997
 See: National centre for ESOP https://www.nceo.org/articles/esop-business-continuity
 Internal Revenue Service, USA, https://www.irs.gov/retirement-plans/employee-stock-ownership-plans-esops
 Internal Revenue Code
 National centre for ESOP https://www.nceo.org/articles/esop-business-continuity
 ESOPs are now widespread in the USA; as of the most recent data, 6,669 ESOPs exist, covering 14.4 million people.There is a National Centre for Employee Ownership, and two national and several state ESOP associations.
 National centre for Employee ownership, NCEO
 National centre for Employee ownership, NCEO: In other words, starting in 2022, businesses will subtract depreciation and amortization from their earnings before calculating their maximum deductible interest payments.
 Report 2013
 OPINION of the Committee on Economic and Monetary Affairs (*) (28.11.2013) for the Committee on Employment and Social Affairs on the financial participation of employees in companies’ proceeds