Out-Law News

Employee ownership trusts help staff ‘feel valued’

Charlotte Nickel tells HRNews about the rise in popularity of the ‘John Lewis style’ employee ownership model

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  • Transcript

    The John Lewis business model of shared ownership is well-known and is growing in popularity. The employees are part-owners of the company, they share of its annual profits, and they have a say in how the company is run. Advocates of the model say it ensures employees are more invested in their work, quite literally, and that heightens both the company’s productivity and its profits. So perhaps your business should consider it? 

    These are Employee Ownership Trusts, EOTs, and their popularity has been flagged by our share plans team in an article for Outlaw. They explain how EOTs have become a popular ownership model for businesses of a variety of sizes and in multiple sectors since their introduction in 2014. Broadly speaking, they are trusts established for the benefit of all employees of a company, and that trust then controls the business more generally. They need to meet certain statutory criteria, the chief one being that the EOT must have a controlling interest in the company in question, which means the EOT must hold more than 50% of the share capital and voting rights of the company and be entitled to more than 50% of the profits available for distribution or assets on a winding up. Through the EOT, each employee effectively becomes a joint owner of a majority of shares in the company. 

    So, in practical terms, how does that translate into a tangible benefit for the employees? To help with that I spoke to one of the lawyers in our share plans team, Charlotte Nickel, who joined me by phone and put that question to her: 

    Charlotte Nickel: “So I would say that the benefits really fall into two separate categories, those benefits for the shareholders looking to sell their shares to an EOT and then also the employees of the company itself. So, looking at the benefits for the employees first, I think that the key benefit for them going forward will be the tax savings they could make if a company decided to grant them bonuses, and EOT-owned business looked to grant them bonuses. The company would be able to pay annual bonuses of up to £3,600 per employee, free of income tax and, obviously, that can be of particular benefit, perhaps, to those employees who may be lower paid, but are crucial to the operation of the successful business, people businesses like the health care sector, childcare sector, that sort of thing, that can be really beneficial to them. Another benefit, I suppose, is the culture the company can have going forward once it is EOT-owned. An employee, without having to pay anything to acquire any shares, will effectively become an indirect part-owner of the business and that means there's going to be, hopefully, encouraging retention and performance which, of course, are crucial, especially retention at the moment. It also means that there may be greater employee engagement and just performance in general may improve. I think another benefit is that a company could still look to award employees through tax-advantaged share plans. There are some provisions under the tax-advantaged plans that would otherwise make an EOT become a disqualifying event for these plans but, fortunately, this was thought about and EOT-owned companies can grant EMI, CSOP, SIPs, SAYE, all those tax-advantaged plans. So you can have that combination of direct share ownership along with the indirect share ownership that EOTs can give you both working side by side.”

    Joe Glavina: “So what’s HR’s role here, Charlotte? Is it the communications piece and, if it’s going to be implemented, ensuring employee engagement? 

    Charlotte Nickel: “I think if a company does become an EOT-owned business then, as you say, that employee engagement is crucial otherwise those key advantage we've just been discussing with employees are going to be lost. So, quite often it's seen appropriate to have an employee committee or an EOT may have an employee on the board, something like that, to provide a direct voice between the kind of employees on the shop floor, so to speak, and that board level and so, I suppose, it's HR kind of helping with that process and getting people involved in passing on their thoughts and opinions about how the company is structured going forward, ongoing performance etcetera. So yes, working through that I think is very important.”

    Joe Glavina: “In your article you talk about how EOTs offer a ‘third way’ which you describe as ‘an alternative way for shareholders to exit,  beyond the more common trade sale or an IPO. Can you explain what you mean by that?”

    Charlotte Nickel: “Yes so one benefit of an EOT is this alternative exit model. So, one option, if shareholders are looking to sell their business, is to find a third party purchaser who's out there, another company or an investor etcetera, who is happy to acquire all those shares up front and obtain ownership, but that market might not be out there. Again, the uncertainties at the moment, trying to find a buyer for the right price might be difficult. The second option is looking for a listing on the London Stock Exchange or the AIM market and, again, that might not be something that shareholders think is appropriate for their business. So EOTs are that third way, if there's a limited market or, if not, it provides that other option and EOTs are often seen, as well, as a kind of friendly purchaser. You might have lower transactional fees, you may have a shorter timeframe, than your traditional third party kind of purchase, M and A model.”

    The article by our share plans team explaining in detail all about Employee Ownership Trusts work, and whether they are a suitable model for your business, is  and is available from the Outlaw website.

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