Bills seek to remove barriers to employee ownership
by Karen Kahn
With all of the focus in Washington on voting rights and infrastructure, you might be surprised to hear that other legislation occasionally gets introduced or even gets a hearing. Here we provide a brief overview of legislative proposals to lift some of the barriers to growing employee ownership as part of the U.S. economy.
Capital for Cooperatives Act
In his first term, Senator John Hickenlooper (D-CO) has already positioned himself as a strong advocate for cooperative businesses, including worker-owned cooperatives. In May 2021, Hickenlooper introduced the Capital for Cooperatives Act (S. 1736) as part of package of bills to support small businesses. The bill is designed to lower the barrier to accessing the Small Business Administration’s 7A loan program, which is a common source of small business financing. The program is rarely used to finance cooperative businesses because the borrower is required to put up personal collateral to guarantee the loan. (One owner of a collectively owned business isn’t likely to risk their personal assets for the group.)
The bill is designed to lower the barrier to accessing the Small Business Administration’s 7A loan program.
Under the Hickenlooper bill, SBA would be required to consider the co-op borrower’s ability to repay the loan based on equity, cash flow, and profitability rather than using the personal guarantee. SBA could also establish new lending criteria for coops as long as they are not based personal or entity guarantees from member owners.
Promotion of Private Employee Ownership Act
Senators Benjamin Cardin (D-MD) and Rob Portman (R-OH) have reintroduced the Promotion of Private Employee Ownership Act (S.1300), a bill to:
- Expand financing opportunities for S Corp Employee Stock Ownership Plans (ESOPs);
- Provide technical assistance for companies that may be interested in forming an S Corporation ESOP;
- Provide the same capital gains deferral for the sale of stock from an S Corporation to an ESOP as is now provided for sales of C Corporation stock to an ESOP; and
- Ensure that small businesses adopting ESOPs retain their Small Business Administration 8(a) preference (i.e., designation as a minority- or women-owned business) when competing for government contracts at all levels.
This bill overcomes some of the constraints that have undermined the growth of ESOPs, particularly among S Corporations. The capital gains tax deferral is an incentive for any owner to transition to an ESOP structure, while the contracting provision removes a significant barrier for owners of color and women owners who want to sell to their employees but fear loss of their preferential status in bidding for government contracts.
The ESOP Association is putting its muscle behind S.1300. It recently announced a partnership with Project Equity to educate lawmakers about the “silver tsunami” of retiring business owners and the employee ownership solution. Using state-specific data aggregated by Project Equity into readable infographics, TEA held 220 meetings with Congressional members during the week June 21, coinciding with its annual conference.
Senator Bernie Sanders attempted to bring back the Worker Ownership, Readiness and Knowledge (WORK) Act, which he introduced during previous sessions, but thus far the bill has not found a path to enactment. It was recently removed from the U.S. Innovation and Competition Act (S.1260), according to Corey Rosen, executive director of the National Center on Employee Ownership. Rosen writes,
“The WORK Act . . . would create a $50 million fund to be disbursed over four years for outreach to promote employee ownership through employee ownership centers sponsored or contracted by individual states. An office within the Department of Labor would create an ‘employee ownership and participation’ initiative to coordinate and provide technical assistance for the program. A state, or an organization designated by a state, could receive a maximum grant of $330,000 per year, which would be increased by 5% per year, from 2022 through 2026.”
It is still possible that such an amendment could be added to the House version of the U.S. Innovation and Competition Act. In the meantime, the financing for state centers could come through the State Small Business Credit Initiative, which allocates $10 billion to the states to develop loan and investment programs to support small businesses in the wake of COVID-19. Among the provisions is $500 million for technical assistance to support “socially and economically disadvantaged businesses,” which advocates believe could be allocated to employee ownership education and outreach through state-based centers.
Karen Kahn is a communications consultant and the editor of Employee Ownership News.