Are worker cooperatives the same as ESOPs?

employee_ownershipBoth are forms of employee ownership, but that is just about the extent of their similarity. ESOPs, or Employee Stock Ownership Plans, are fundamentally retirement plans much like 401k plans except they invest only in company stocks. You may have heard of Stock Option Plans, but that is something completely different.

An ESOP is an example of indirect ownership. A worker cooperative is an example of direct ownership. In an ESOP the employees do not directly own their shares. They are held in trust for their benefit by a Trustee appointed by the employer. Therefore, ESOP participants do not usually have any influence on how the company is run. The Trustee votes their shares for them. Only a very small number of 100% employee owned companies have taken the final step towards democratic governance. Most companies with ESOPs have implemented a culture of employee participatory management style, but not actual control.

In a worker cooperative, each employee purchases and directly owns one voting share of the company. Each owner has one vote, so the main difference between worker cooperatives and ESOPs is in the area of control.

Most worker cooperatives pay out profits called surplus annually, but often retain a portion to be owned collectively. The company will pay the taxes on that portion. Another portion may be deposited in the worker’s individual capital account along with their initial buy-in share. When that happens, enough will be paid out in cash to cover the taxes on the worker’s portion of the surplus. In ESOPs, the shares that are held in the employee’s individual account is not taxed until he or she leaves the company and withdraws the funds in the account.

So both have individual capital accounts and both get liquidated and paid out when the participant leaves or retires. It is for this reason ESOPs need to have an annual evaluation to determine the value of their shares. Liquidating the voting share in a worker cooperative prevents control attached to the voting share from leaking out of the company.

Building Co-operative Power: Stories and Strategies from Worker Co-operatives in the Connecticut River Valley

Worker cooperatives can take many forms, but their real power is not revealed until they begin to work together.


Unions and Co-ops

unionIn worker cooperatives workers are both employees and employers at the same time. Why, then, would you need unions? Well, the answer is that you do not, but you may be better off with them. They have a lot to bring to the table. Their role and their way of thinking may have to change somewhat, but their contribution could be of great value.

Union participation used to be around 30%. Now it is around 10% and shrinking even in the public sector. The achievements of unions in worker rights is indisputable. Many of the benefits we take for granted came about because of unions, but what will unions do in a world where their members are also their opponents? Clearly unions must be looking for ways to remain relevant.

Many worker cooperators join cooperatives because they have an entrepreneurial streak. The self-determination feature of worker co-ops is really important to them. They may even regard unions with a measure of suspicion, even hostility. One of the cooperative principles says that cooperatives are, by definition, autonomous and independent. What room does that leave for unions?

Well, let us look at some areas where there is common ground. First, both have an interest in workers’ working conditions and both do that very well. Second, unions have a lot of business expertise, expertise workers often lack. This could become valuable, perhaps not so much for startups, but when converting existing businesses to the co-op model. Unions know a lot about how business owners think.

Cooperatives are made up of people and people often see things differently. As a cooperative grows, the distance between the shop floor and the boardroom tends to grow as well. It begins to feel more like a regular company and conflicts can arise. Unions are experts at coming up with creative solutions where others only see dead ends. Instead of representing workers in negotiations, their new role could be as mediators when disputes arise. As neutral partners, they can help straighten out simple miscommunications that have spiraled out of control.

Old school cooperators may still be leary of union participation, but I think it is worthwhile to at least look at what they have to bring to the table. It may be a process of trial and error to figure out exactly what that role should be. It may even turn out to be different in different situations.

Mindset of a Cooperator

mindsetTraditional companies mostly exist to make money for their owners. Worker cooperatives do that too, but often have several additional goals. Like traditional companies, they have a business plan to ensure that those goals are always in view. Traditional companies typically have an authoritarian leadership style. If you are unhappy, your only option is to leave the company. Worker cooperatives, on the other hand, are democratically governed. The purpose of democracy is for different views to come together for the good of the community. Sometimes, views are strongly held and conflicts arise. Conflicts may be unpleasant, but they are a reality of life in community.

In her book, Creating a Life Together: Practical Tools to Grow Ecovillages and Intentional Communities, Diane Leafe Christian says that the main reason intentional communities, a form of cooperative housing, fail is conflict. The trick is to know how to deal with conflicts. Better yet, know how to prevent them from occurring in the first place.

If, in our increasingly polarized society of today, you were to put a random group of people together and expect them to work together, you will no doubt have conflicts. From day one children are conditioned to compete with each other. They have to walk first, talk first, run faster, have better grades, be captain of the football team or the cheerleaders. The average person is just not prepared to be in community like God created us to be and conflicts will arise. So, the first thing to do is to avoid putting random people together in the first place. Instead, before committing to a new member in your cooperative, have an honest conversation about the person’s values. Is he/she willing to yield for the good of the community as a whole? Does he/she subscribe to the idea that a group can achieve more than the sum of their individual efforts?

Conflicts will occur despite your best effort to avoid them. Key to avoiding conflicts, Diane Christian says, is communication. Have clearly defined goals for your organization. Have clearly defined methods for governing your organization. When you get stuck, have a method for resolving the issues. Get trained in how the participatory democratic process works. Use outside facilitators for discussions. Have frequent, scheduled meetings where everyone participates.

Workplace democracy may seem like a lot of work. It may seem unproductive at times. After all, you cannot sell it. It is, however, of vital importance for the wellbeing of the cooperative so please do not skimp on this. Have weekly work meetings. This is how you develop new ideas for how to work together. This is how you prevent minor conflicts from blowing up and sinking your company in the process.

Free-ride Problem

The other day I interviewed a potential new member.  During the conversation it became clear that his expectation was to be able to take home a paycheck right away.  He wanted me to call him when we were ready to do that.  This is the way employees think.  Entrepreneurs do not.  Entrepreneurs understand that to be able to take something out, somebody must also put something in.

While the goal of worker cooperatives is to be able to send home that weekly paycheck, getting to that is a long and hard struggle.  The burden often falls on a few founders who work for free.  Nobody should have to work for free, not even for themselves.

So, how do you avoid this free-ride problem?

Well, here are some options:

1.  Accept that this is just the way it is and get on with it.

2.  keep track of the time it takes to set it up and have others pay you for your time when they join or have them contribute a similar number of hours without compensation.

Working but Still Poor

The 2nd  annual Long Island Jobs with Justice poverty conference will be held

Friday, March 30, 2012
8:30 AM to 2:30 PM
Touro Law Center
225 Eastview Drive
Central Islip, NY 11722 (631) 761-7000
I’m pretty sure worker owned cooperatives are not on Jobs with Justice’s radar.  Go there and make sure that it is.

Minimum Pay

Apparently, although the amount of the Federal minimum pay has gone up over the years, purchasing power has actually gone down.  Fortunately, many states have had the good sense to set their own minimum limits. Unfortunately, many have not.  One can wonder why increases have not been indexed. Perhaps it is another example of the disfunctional nature of government.

Clearly, workers cannot depend on government to solve this problem.  Apparently, workers have to take matters into their own hands.  As worker owners we have the control to refuse to work for anything but just pay.  When enough of us do that, the exploitation, government sponsored or not, will end.


Every day, as I read job offers, I keep wondering why anybody would put up with the abusive hiring practices and the minuscule pay some are offering.  I can understand that when you’re up against the wall and bill collectors are pounding on your door, you don’t have much choice.

Some employers know how to value their employees.  Clearly, others don’t.  I could never understand why employees put up with being exploited day in and day out when there is an alternative like worker owned cooperatives.  When workers own their own jobs, they have control.  Starting one should be a top priority for anyone who is either abused or can’t find employment in the traditional way.