Employee ownership continues to gain momentum across the UK, offering a compelling and sustainable succession solution for business owners—particularly within the SME community.

We were delighted to have Emily Alston’s article featured in February’s edition of The HR Director, exploring the growing impact of Employee Ownership Trusts (EOTs) and the critical role HR leaders play in making employee ownership a success. Here is what Emily had to say…

Employee Ownership Trusts (EOT) were introduced in 2014, although trust ownership of businesses such as John Lewis and Arup pre-dates that by many years.  The introduction of EOTs was intended to make the “John Lewis” model of ownership – where the shares in a company are held in trust for the benefit of all the employees, possible for many more businesses.  The biggest area of take up has been in SME businesses, as SME business owners, looking at succession, are particularly attracted to a model that rewards those who helped them build the business, protects the independence of the business for the long term and preserves the culture and legacy of the business, promoting continuity rather than imposing change. 

• How does it work?

When a business becomes owned by an EOT, there is no change to the trading entity, the only change is in ownership of the shares.  EOTs will usually hold a majority of the shares in the business; however former owners may retain some shares and in some cases there can also be share schemes to allow direct share ownership by employees, for instance an EMI scheme for senior team members.

Employee-owned businesses are still run by their board of directors, who make the day-to-day and long term strategic decisions about how the business is run; although you would expect to see a greater amount of consultation with employees on direction of the business and information sharing with the employees; as the owners of the business.

There is also a board of the EOT with a responsibility to act in the best interests of the employees.  The role of the EOT board is not to run the company; but to ensure that the business is being run well and for the benefit of its employees.  In some cases the EOT board will also have a role to protect the values or legacy of the business too.

• Moving to EO – A successful transition

The role of HR professionals in a successful transition to Employee Ownership is rarely an administrative one.  There are not usually changes to contracts of employment and the employees’ employment relationship with the business remains the same.  There may be a case for updating senior team contracts as senior team members begin to step up and former owners step back; but this may not take place immediately.

The most important role for HR Leaders is one of effective communication.  Employees should be informed of the changes taking place and understand the benefits, but expectations should also be managed.  The words “Employee Ownership” can be exciting and emotive, but what employees are likely to notice most after the transition, for the short term at least, is continuity; their working lives will stay the same.   It is important employees are prepared for this.

• EO in practice – Employment rights, benefits and governance

The key principle of ownership by an EOT is that employees become owners by virtue of their employment with the Company; they do not have to put in any of their own money to secure ownership and they cease to be owners when they leave.  The beneficiaries of the EOT are all the employees of the business, although it is possible to hold off becoming a beneficiary for up to twelve months if you wish, provided the same principle is applied to all.  Many businesses align this with probation periods. 

Newly employee-owned businesses are often using much of their profits to repay their former shareholders, however once this debt is repaid, employees can expect to see a share of the profits.  Profit is usually shared as bonuses via the payroll, as if the trust itself was to take in a dividend for distribution this would not be tax efficient.   The EOT legislation allows for £3,600 per employee of bonuses to be paid each year free from income tax, although NICS should be paid on this.  These tax free bonuses are subject to some rules about how they can be paid, and all eligible employees should be included in the distribution.  Profit share will normally be decided by the company board.  It is worth noting that the business can still pay other bonuses and run other incentive schemes, but these will be taxed as usual.

• EO Culture and Leadership – Mindset, communication and voice

Successful employee owned businesses can see impressive levels of employee engagement, productivity and innovation.  Retention figures are often very strong, and ownership is viewed very positively in recruitment too.  However, reaping the full benefits of employee ownership may require mindset change in many businesses – HR leaders who understand a culture of ownership can be central to delivering this positive change. 

Open communication is vital to establishing a real culture of ownership and employees should also have a voice in the direction of the business and be able to feed back their opinions to those who lead the business.  HR leaders can have an essential role in facilitating this, as well as ensuring that the nature of ownership is properly understood by employees. 

An important role in the early days of employee ownership can be signposting employee questions, feedback and ideas to the right place, as well as ensuring that everyone understands how their voice can be heard, and that it is not only safe to speak up – it is welcomed.

The most important message for HR leaders working in employee-owned businesses is that these are people first businesses in which an HR function that supports a culture of ownership can be central to success.   Both as an HR professional and as an employee owner yourself, this can be a really rewarding experience.