IV. Summary of State Employee Ownership Legislation

Introduction

The purpose of the following section is provide, primarily, an overview of the types of employee ownership that have been passed at the state level. Where information pertaining to the implementation of the states’ employee ownership legislation is known it is provided. The types of legislation passed by states can be placed within the following categories: Increasing awareness, facilitating employee ownership, technical assistance, financial assistance, and encouraging employee ownership. The following summation will describe the state experience concerning the implementation of employee ownership legislation. The following discussion should provide insight into the advantages and limitations of the various types of employee ownership programs.

Increasing Awareness: State Policies, Education, and Interdepartmental Awareness

One of the first steps to promoting employee ownership is the passage of a state policy declaration concerning employee ownership (see Figure 3). State policy declarations concerning employee ownership has varied from state to state. Some of the policy declarations that have been passed were very broad in scope, while others were quite specific. California and New York are examples that illustrate specific policy declarations. The California policy declaration reads "The legislature finds and declares that the formulation of employee-owned businesses and the participation of employees in the management of businesses in this state will promote the stabilization of local economies, anchor business activity, and increase productivity." New York’s policy declaration, like California’s policy, was also quite specific. It states that "the general welfare is directly dependent on the economy and plant closures are a problem. The purpose of this act is to encourage employees of these plants to continue them as employee-owned enterprises thereby retaining jobs."

Delaware and Maryland are examples of broad state policy declarations. Delaware’s policy declaration states that it is the policy of the state to encourage the broadened ownership of capital through the use of ESOPs. Maryland in a similar vein declared that it was the policy of the state "to encourage the broadened ownership of capital and that ESOPs were an important means of reaching that goal."

Virginia, in 1995, and North Carolina, in 1998, each passed state policies promoting employee ownership. These policies differed from past state declarations. Unlike earlier state policies, these two policy declarations did not necessarily promote a broadening of capital ownership. These policies, on the other hand, promoted employee ownership as a means of privatizing government functions and services. The last state to pass a state policy concerning employee ownership was Maine in 1999. Maine’s policy is quite specific in its attentions. The policy is aimed at saving Maine’s paper companies.

State policies to provide for education concerning employee ownership were often passed along with state declarations and/or would follow in subsequent legislation. Two types of awareness could be promoted depending the type of legislation: employee and business community, interdepartmental, or both. Legislation providing for educational programs for business and employee communities included literature and seminars on various aspects of employee ownership. Public education has been done in a variety of ways.

Some states, such as Hawaii, Montana, and Michigan collected materials on employee ownership and set up resource centers. The number of resources collected varied from state to state. Seminars have also been conducted by state programs or by local ESOP Association chapters. Some states were only able to collect a few materials while others were able to put together more extensive libraries.

Figure 3

State Policy Declarations Concerning Employee Ownership

States, such as Michigan, New York, Ohio, and Maryland have produced pamphlets and brochures with information about employee ownership and the services provided by the state program. New York has put together a packet of useful information for the potential employee owner. The packet includes information on the work of the program, its consultants, and services. It also includes a directory of ESOP companies for the state of New York and a listing of private sector companies that can assist with succession planning. Due to a lack of interdepartmental communication in some states, the available brochures or literature did not always make it into the hands of interested parties. This was the case in Maryland in the mid 1980s.

Interdepartmental education programs required reporting such as annual reports. Actual reporting on employee ownership programs has varied dramatically from no reporting to detailed reports on the activities of the program. Michigan, until 1990, produced quite detailed reports. Most other states have not allocated sufficient resources to adequately perform this function. As is the case of California, in the waste conscious 1990s, mandatory department and agency reporting is no longer required. This could be case in an increasing number of states making concrete information about the impact of employee ownership legislation more difficult to collect.

Other methods of interdepartmental awareness include training programs. When the Michigan and New York programs were started, for example, there were training sessions to educate relevant state employees about the basics of employee ownership. States passing legislation that provided for educational programs and interdepartmental awareness are displayed in Figure 4.

Figure 4

State Policies Promoting Education and Interdepartmental Awareness

Facilitating Employee Ownership

There was also legislation that was aimed at facilitating employee ownership. There were several forms this legislation could take. A listing of the states with legislation enacted to facilitate employee ownership in listed Figure 5. The first was plant closure and notification legislation. Six states had passed notification legislation. Hawaii, Maine, and Wisconsin all require advance notice of plant shutdown. All three states have size class exemptions and Maine requires one week of severance pay per year of service for workers with more than three years tenure. However, the penalties for noncompliance are relatively low in Maine ($500 per establishment) and Wisconsin ($50 per employee). The penalty for noncompliance is higher in Hawaii (three months’ wages

Figure 5

State Policies Facilitating Employee Ownership

Recognition of CooperativesNotification

Michigan (1979) Michigan (1979)

Massachusetts (1982) Maryland (1979)¹

California (1983) New York (1983)

Maine (1983) Wisconsin (1983)

Massachusetts (1983) Hawaii (1983)

Connecticut (1984) Massachusetts (1984)

Hawaii (1985) Missouri (1986)

Missouri (1985)

Vermont (1985)

Wisconsin (1985)

Washington (1987) ESOP Securities Exemptions

Pennsylvania (1988) Minnesota (1974)

Ohio (1988) Maryland (1979)

Minnesota (1989) California (1982)

Texas (1991) Maine (1983)

Delaware (1996) Oregon (1987)

Montana (1989)

Tax Credit Nebraska (1990)

Minnesota (1974)

Maryland (1979)

West Virginia (1983)

California (1988)

¹ This legislation would later be considered unconstitutional by the Maryland State Supreme Court.

and benefits per laid-off worker). Individual notification legislation has been replaced/

superseded/ or operate parallel with the Worker Adjustment and Retraining Notification (WARN) Act. Despite there being federal notification legislation, there is little incentive for owners to give notice.

Tax credits for contributions to ESOPs were another way of facilitating employee ownership. Other financial benefits included that public utility companies would not be required to pass tax savings to consumers or tax credits such as in New Hampshire. ESOPs in several states were also exempted from state securities regulations. Maine established a reduced registration fee. The last form this type of legislation took was legal recognition of employee cooperatives. This has taken place in thirteen states.

In Michigan, Economic Development Account managers meet with over 4,000 business annually. Clients that have interest in employee ownership receive follow-up technical assistance and referral to private sector providers for detailed plan implementation. The Michigan Jobs Commission responds to 25 to 50 requests annually from clients requesting information and assistance on employee ownership. The Workforce Transition Unit provides preliminary feasibility study assistance to any company in crisis that may benefit from an employee buyout option.

Providing Technical Assistance

Legislation may also have provisions providing for technical assistance. Technical assistance can be categorized in the following areas: providing actual assistance, providing help in finding assistance, providing financing for assistance, providing actual funds for assistance. The types of technical assistance that may be provided include feasibility studies, training and advice (financial, marketing, managerial, operational, accounting, and legal), and locating financial assistance. For state legislation providing for technical assistance see Figure 6.

Figure 6

State Policies Providing Technical Assistance

In the case of a number states that no longer have state-sponsored employee ownership programs, technical assistance for preliminary feasibility studies is also available through EDWAA (Economic Dislocation and Worker Adjustment Assistance, Job Training Partnership Act: Title III). Other resources such as job search and retraining are also available through JTPA. These resources are being utilized in varying degree by the states. For example, preliminary feasibility studies have been conducted by 13 of the 50 states.

Providing Financial Assistance

There are a variety of types of financial assistance available. As displayed in Figure 7, these include interest rate subsidies, below market interest rates, loan guarantees, loans. There are also a variety of methods of financing. As shown in Figure 8, these included issuance of revenue bonds, local non-profits, revolving or trust funds, and direct assistance from government agency.

Connecticut has the capacity, if necessary, to provide technical and financial assistance for employee buy-outs, but this program was put "to bed," so to speak, after the buy-out of Estonian Copper & Brass in the early 1990s. California has legislation regarding technical and financial assistance but given the business culture in California, that is not conducive to employee ownership, these resources have been under utilized. As of 1990, 4 groups had been assisted, but it was unknown if any groups had been assisted since that time.

Figure 7

State Policies Providing Financial Assistance, by Type

Interest Rate SubsidiesLoan Guarantees

New Jersey (1983) New Jersey (1983)

Connecticut (1985) West Virginia (1983)

Pennsylvania (1984)

Indiana (1986)

Below Market Interest RatesLoans

Illinois (1982) Wisconsin (1983)

New Jersey (1983) West Virginia (1983)

New York (1983) New Hampshire (1983)

Michigan (1985) Pennsylvania (1984)

Connecticut (1986)

Indiana (1986)

Hawaii (1987)¹

Maine (1997, 1999)

¹ These states’ legislation are no longer in effect.

Maine’s newest legislation authorized the Financial Authority of Maine (FAME) to grant $1 million in loan guarantees for employee buyouts. The legislation was the result of a Maine state legislator attending a seminar on employee ownership. A major community development corporation, Coastal Enterprise, Inc., also provides many of same services that are provided by state programs in other states.

In California, revenue bonds are generally limited to $10 million for any one use and carry somewhat below market interest rates. The issuance of revenue bonds is contingent on two main points. The project first must serve the public interest, Second, be an employee-owned corporation which is (a) an employee cooperative or (b) an ESOP, pursuant to ERISA stock issued in the beginning is fully vested in 5 years, voting rights in accordance with IRC 409A(e). In many cases, as in California, a maximum amount has been placed on the amount of financing available from the state.

Figure 8

Method of Financing

Issuance of Revenue BondsLocal Non-Profits

California (1982) New York (1983)

Michigan (1985) Pennsylvania (1984)

Illinois (1995) Michigan (1985)

Oregon (1985)

Revolving or Trust Funds

New Hampshire (1983)

Massachusetts (1984) Direct assistance from Government Agency

Michigan (1985) New Jersey (1983)

Hawaii for example, according to the legislation, can provide a loan or loan guarantee of $1.5 million. In reality, though, the necessary financial resources for financial assistance were not allocated by the Hawaii state legislature.

Some states, such as Ohio, have no special lending program for employee buyouts, but make copious use of broader state lending for ESOPs. In these cases, the state does not want to allocate funds that must be used for a specific function. To avoid having funds that can not be used for other functions some states have not established specific lending mechanisms for employee buyouts. To avoid this problem, Connecticut, in 1988, consolidated 6 funds, including the Employee Ownership Trust Fund, into the Connecticut Growth Fund.

Encouraging Employee Participation

Employee ownership and employee participation is not synonymous. The level of employee participation varies from firm to firm. It can range from one-person one vote to ESOPs where employees own stock in the plant but do not say in decision-making. Research suggests higher levels of employee participation normally translate into higher productivity. Figure 9 displays state legislation in this category.

There have been several methods for encouraging participation. One way has been recognition of cooperatives. Another has been to make financing contingent on certain participant requirements. A third method has been to define employee ownership.

Figure 9

State Policies Encouraging Employee Participation

Legal Recognition of Cooperative StructureFinancing contingent on Participation Requirements

Massachusetts (1982) California (1982)

Maine (1983) New Jersey (1983)

New Hampshire (1983)

Connecticut (1984)

Missouri (1985)

New York (1985)

Vermont Definition of Employee Ownership Specified

Wisconsin (1985) Michigan (1979)

Washington (1987) Illinois (1982)

Minnesota (1989) New York (1983)

Texas (1991) Pennsylvania (1984)

Delaware (1996) Ohio (1988)

Massachusetts (1990)

Special Requirements on Voting Rights

Massachusetts (1981)

Recognition of cooperatives is one area of employee ownership legislation that has been less effected by the second trend (of retrenchment) discussed in the introduction. From 1982 to 1991, one state passed cooperative legislation nearly every year during this time. Delaware was the most recent state to pass cooperative legislation, doing so in 1996. Examples of financing being contingent on participant requirements, include

California’s 1982 law requiring companies to fit the definition of ESOP as defined in federal legislation. New Jersey’s 1983 legislation requires that companies receiving financial assistance become 100% employee-owned. For the purpose of state assistance, some states have defined employee ownership. Four states have such legislation. Employee ownership is defined, in these cases, as firms that own and control a majority of the company.

Concluding Remarks

There has been a large amount of employee ownership legislation passed over the last twenty-five years. The amount and type of legislation that has been passed has varied greatly from state to state. States in the Northeast and Northwest have passed the greatest amount of employee ownership legislation. It should be evident, however, that the passage of legislation does not guarantee that the legislation will be implemented or used. Employee ownership legislation is merely symbolic unless sufficient resources are allocated for implementation and program operation.

If resources are allocated, it is necessary that there are skilled and committed personnel operating the programs. The type of personnel operating the program can be more important to the success of a program when resources are lacking. Massachusetts is prime example of a program that continued to operate, without state funding, due to the hard work and perseverance of its personnel. States that established state programs were more successful in their implementation of employee ownership legislation. One of the primary functions of state programs has been information dissemination. When potential clients know about specific programs, it is much more likely these programs will be utilized. State programs were also more likely to utilize available federal funds for various program functions, such as feasibility studies. What a successful employee ownership program should look like is the focus of the next section.

Date: 2015-01-11; view: 978