State Legislation on Employee Ownership
There has been increasing interest in employee ownership in state legislatures. This article describes existing state employee ownership legislation and key pending bills. The NCEO also has model state legislation that includes suggested language on four issues: creating a state employee ownership center, providing tax incentives to help support feasibility studies, providing that employee-owned firms owned and/or controlled by qualifying individuals through an ESOP trust will be eligible for state set aside programs, and allowing professional corporations to be owned by ESOPs. The document also provides an explanation for why this kind of legislation is important. Contact Corey Rosen for the current version at [email protected].
The proposed bills listed here are not a comprehensive list. Instead, we have selected those proposals that have garnered significant support and provide useful models for advocates.
Comprehensive State Laws
In September of 2022, Governor Gavin Newsom signed the California Employee Ownership Act. Both houses approved the bill unanimously. A broader version of the bill previously passed the Senate, but the bill was pared down in the Assembly. The Senate agreed to the pared down version with the understanding that an effort will be made to add the deleted features in the governor's next budget proposal.
The bill establishes the California Employee Ownership Hub within the California Office of Small Business. The Hub will work to “increase awareness and understanding of employee ownership among stakeholders, assist business owners and employees in navigating available resources, and streamline and reduce barriers to employee ownership.” California has a variety of loan support programs that companies seeking to convert to employee ownership could potentially qualify for.
The bill applies to worker cooperatives, ESOPs, and employee ownership trusts. Specifically, the bill directs the Hub to “partner with relevant private, nonprofit, and public organizations including, but not limited to, professional and trade associations, financial institutions, labor unions, worker centers, Small Business Development Centers, economic and workforce development organizations, and nonprofit entities” to provide education and outreach on employee ownership. It also directs the office to set up a referral service model and to work with the various business development loan and grant programs in the state to make it “enhance the ability of broad-based employee ownership vehicles to access California capital programs.”
The deleted language of the bill called on the state to:
- Appropriate funds to make grants to qualified nonprofits to provide outreach and education programs on employee ownership in the state;
- Provide grants of up to $50,000 per company to pay for up to 50% of the cost of conducting feasibility assessments for employee ownership transitions.
- Direct the Program Manager to “work with all California state agencies whose regulations and programs affect employee-owned companies, and businesses with the potential to become employee owned, to enhance opportunities and reduce barriers.”
- Direct the Program to “work with the California Infrastructure and Economic Development Bank, the California Pollution Control Financing Authority, and related entities to shape and implement guidance on lending to broad-based employee ownership vehicles.” This could result in these agencies making loans or loan guarantees for ESOP transition (the Pollution Control Financing Authority has a very broad scope that possibly could include such loans).
The California Senate passed the bill in the summer of 2022 by a unanimous vote. In the Assembly, concerns about the budget impact delaying passage, the bill was amended to leave only the now renamed California Employee Ownership Hub within the California Office of Small Business.
The 2023 California budget did not include funding for this program so its future is uncertain.,
In 2019 and 2020, Colorado Governor Jared Polis established the Employee Ownership Commission and Employee Ownership Office, respectively, housed within the Colorado Office of Economic Development and International Trade (OEDIT). Through Executive Order B 2019 005, the Commission creates a statewide network of technical support, educational programs for business and communities, and increased accessibility to employee-owned business structures. In addition to the support of the Commission, the office has its own dedicated staff. The office was allocated $1.75 million in funding to advance employee ownership initiatives throughout Colorado.
The office offers programming, funding, and resources for businesses interested in becoming employee-owned. In 2021, H.B. 21-1311 established the Employee Ownership Tax Credit, providing $10 million annually in tax credits to fund professional service costs incurred when converting to employee ownership. The office also offers the Employee Ownership Grant, awarding $3,000 to businesses to reimburse conversion costs. See details of the tax credit in the section below on tax incentives.
In addition to funding, the office launched three peer networks for Colorado’s current and aspiring worker cooperatives, ESOPs, and ESOP communications committees. The office also offers a new certification for companies that provide ownership to employees at a level of 20% or more. The companies are included in statewide branding campaigns and are listed on its website on the Colorado Employee Owned Company Map.
The office will operate an “Employee Ownership Navigator” to provide advice to business owners about ownership models, assist with business succession planning, as well as connecting them to local technical assistance and service providers by conducting one-on-one consulting sessions with approved advisors.
Finally, the office will offer a loan program to support employee ownership conversions or existing business sales to employees. Bills HB17-1214 and HB21-1241, called on OEDIT to establish and administer a revolving loan program targeted toward worker-owned cooperatives or ESOPs. The program uses funds from the State Small Business Credit Initiative, deployed through the Cash Collateral Support program, and managed by the Colorado Housing and Finance Authority (CHAFA).
Massachusetts created an employee ownership center through its budget process in 2019. The office had existed in the 1990s as part of the Massachusetts government, but lost its funding in the recession of 1999. In 2019, legislators were able to restore that funding. The office is staffed by two nonprofits, Working Wealth and the ICA Group.
In 2021, S. 261 was introduced to make the state center permanent and a part of the Massachusetts Office of Business Development. The office would “provide education, conduct outreach and promote efforts to create an overall environment in the commonwealth which will expand and enhance employee ownership, increase the number of employee owned companies, publicize and promote the benefits of employee involvement and ownership to policy makers and the general public, encourage collaborative outreach efforts regarding involvement and ownership in the workplace, research and evaluate employee involvement and employee ownership in the commonwealth, showcase employee ownership initiatives in the commonwealth, facilitate and coordinate the sharing of existing information and resources, and provide grants pursuant to the provisions of this chapter.”
The Office would be able to accept outside funding as well as government support. It would be governed by a 19-person advisory committee, including representatives from employee-owned companies.
The bill was passed and signed into law in 2022.
By a unanimous vote, both chambers of the Washington State Legislature passed S.B. 5096, “An act relating to expanding employee ownership.” TThe Governor signed it into law, creating the most ambitious state program to date.
- Creates a state employee ownership program with a director housed in the Washington State Department of Commerce. The program would provide outreach and technical services to help promote ESOPs, worker cooperatives, and employee ownership trusts (EOTs).
- Creates an appointed commission to oversee the project. It would include four members of the legislature (one Republican and one Democrat from each house), five people from the private sector (two from employee ownership businesses, one from a business association, one private-sector economic development expert, and one from a financial institution with employee ownership transition experience), and two from the public sector (one public-sector economic development expert and one from the Department of Commerce).
- Establishes a feasibility assessment and implementation tax credit for ESOPs, worker coops, and EOTs of up to 50% of the first $100,000 for ESOPs and $25,000 for worker coops and EOTs. The total amount of credits is capped at $2 million per year.
- Creates a revolving loan fund that would directly support financing for ESOP or worker cooperative conversion transactions. This funding would be contingent on federal funds being available for this purpose. The State Small Business Credit Initiative (SSBCI) could be one such program, and the bill specifies that SSBCI funds could be used for this purpose.
The bill will need to go thorugh a separate process to receive funding.
New York Assembly bills A1920 and S962 would create a state employee ownership center to be housed at a university to provide outreach, education, and training on employee ownership, including ESOPs, worker cooperatives, and businesses that otherwise have a majority of their voting stock owned by employees. No specific funding is stipulated in the bill. It also provides that companies considering a transition to employee ownership can apply for loan assistance from the New York State business development loans. The loans could be funded through a public authority trust fund that could allocate up to $100 million in initial funding for this purpose. The bill does not contain a specific appropriation for this process, however. New York already authorizes public authority trusts funds for other purposes.
The bill also exempts any sale to a qualifying employee-owned business from capital gains taxes. New York taxes capital gains as income, currently at 8.82%
Both bills are sponsored by Democrats only.
LPRO 3835, the Employee Ownership Assistance Program, is a bill that would establish a comprehensive outreach and funding program to support employee ownership in Pennsylvania. The bill had gathered over 20 cosponsors in the Assembly in 2022 and plans are to introduce in in the 2023 legislative session.
The bill would define employee ownership to include a worker-owned cooperative, an ESOP, or an employee ownership trust in which the majority of voting rights are held by the employees, and all employees have stock allocated with voting rights.
An Office of Employee Ownership within the state would provide outreach, identify barriers and recommend state actions, serve as an advocate for improving government knowledge and support for employee ownership, and promote legislative and policy changes to support the growth of EO. An employee ownership advocate will report to the Governor, and oversee the programs established in this Act.
The Office would select a Pennsylvania non-profit organization to conduct the outreach and education program. The nonprofit would coordinate technical assistance for companies looking to convert to employee ownership, including feasibility studies, as well as to existing firms already employee owned looking to expand. If the feasibility studies or professional services result in a conversion or improvement, the funds will be deemed a loan to be repaid. If the feasibility studies or professional services do not result in conversion or improvement, the business may make a case for a grant. Funding will be capped at $100,000 and 50% of costs for these services. Grants for up to $35,000 for retail establishment companies with no more than 100 employees can be made to for conversion to employee ownership.
Loans and loan guarantees up to $1.5 million or 25% of project costs will be made available through state loan authorities.
The anticipated funding request for the first year is $50 million.
In 2022, SB 1974, "Employee Ownership, Empowerment, and Expansion Act," passed early stages of consideration, but its sponsors decided to wait until 2023 to make a major push for the bill. The bill would have created a tax credit identical to Colorado’s employee ownership tax credit law. It would also provide up to 50% of the costs of conversion for any company converting into an ESOP, employee ownership trust, or worker cooperative, with up to $50,000 for an ESOP and $25,000 for a worker cooperative. This can include legal, appraisal, and/or feasibility studies. The credit would only available for completed sales.
The bill goes two steps beyond the Colorado bill, however, by extending to employee-owned companies the same contracting preferences for companies owned by disadvantaged individuals. The state is directed to conduct an outreach program on this new rule.
Finally, the bill would employee-owned businesses form the Tennessee Business Tax, which is currently from .02 to .3 percent of gross receipts, depending on the kind of business.
In 2023, the House passed HB 2389, “An act relating to companies in which employees have ownership interests through employee stock ownership plans.” The bill would:
- Allow professional corporations to be owned by ESOPs, provided that the voting trustees are licensed in that profession.
- Establish an Employee Ownership Assistance Website in the Texas Economic Development and Tourism Office.
The bill is pending in the Senate as of May 10, 2023.
In the comprehensive bill noted earlier, Colorado became the first state to pass a law that helps cover some of the conversion costs when becoming an employee-owned business. On June 23, 2021 Governor Jared Polis signed into law H.B. 21-1311, making sweeping changes to Colorado tax law. The bill most notably includes a provision to provide $10 million annually in tax credits until 2027 to fund professional service costs incurred when converting to employee ownership. The funding incentive awards up to 50% of conversion costs on an eligible business’ state income taxes, up to $25,000 when converting to a worker cooperative or employee ownership trust and $100,000 when converting to an ESOP (see page 21 of the bill). Qualifying expenses include accounting, business valuation, legal, succession planning, and technical assistance services. More information available in CRS 39-22-542. In 2023, the legislature upped the maximum amount for conversions to worker cooperatives to $40,000 and for ESOPs to $150,000. It also added a credit of 50% of the costs, up to a maximum credit of $25,000, for conversons to qualifying alternative employee ownership structures, such as granting equity to all employees, or expanding employee ownership in an existing firm by at least 20%. The bill is HB 23-1081.
House File 2284, “An Act relating to employee stock ownership plans,” became law in 2012. It provides a 50% reduction in Iowa capital gains taxes for business owners selling to an ESOP as long as the ESOP owns at least 30% of the company after the sale. The provision apparently requires sellers to choose between the Iowa tax break and the Section 1042 federal tax incentive, which have significant differences. First, the Iowa legislation does not require the seller to buy qualified reinvestment property (stocks and bonds of U.S. operating companies) with the proceeds of the sale. Second, the Iowa legislation does not distinguish between C and S corporations, while Section 1042 only applies to C corporations. Because Iowa law (as almost all states) conforms business tax deductions to federal tax deductions, sellers to an ESOP in a C corporation owning 30% or more of the stock of the company already could defer capital gains taxes. So a seller in this circumstance could either use the federal deduction for state purposes and get a tax deferral by following the rules for reinvesting in qualified replacement property or take the Iowa 50% reduction in capital gains taxes and not be taxed on 50% of the gain regardless of what was done with the money. Owners of S corporations are not eligible for the federal tax deferral, so the seller would normally take the 50% Iowa exclusion.
In 2013, Nebraska amended a 1987 bill (LB 775) that provides Nebraska residents with a one-time capital gains tax exclusion from the sale of stock in an employee’s company. The law requires that the company have at least five employees, but in the 2013 revision (effective 2014), the law allowed a sale to an ESOP trust to qualify as well. That means that both ESOP participants and sellers to an ESOP (provided they are employees at the time) can exclude gains from the sale of employer stock from taxable income for state tax purposes. (We were unable to locate the bill providing this exclusion, but the form for claiming the exclusion can be found here.)
In September 2016, the Missouri state legislature passed legislation (H.B. 2030) that parallels the Iowa bill in providing a 50% state tax exclusion for sales to ESPs owning 30% or more of the stock in the company. The law was oringally set to sunset in 2023, but S.B. 20 contains a provision that elminates the sunset.
New York has traditionally been a state where it is difficult to operate as a majority ESOP-owned engineering, architectural, landscape architectural, or land survey firm. Existing law requires that a majority of the owners be licensed professionals. Following a 60-0 vote on May 4, 2021 the New York Senate passed S. 5261 a bill that would allow majority-owned ESOPs to qualify under New York corporate practice rules for these firms if 75% or more of the company’s voting trustees or ESOP plan committee (often the board of directors) are members of the profession. In May 2022, the Assembly passed the bill as well.
The bill was passed in 2022.
The Nebraska legislature passed a bill, LB 49, that would authorize the ownership of public accounting firms by ESOPs. The ESOP could own up to 49% of the firm. The bill passed in 2019 by a vote of 47-0 and was signed into law. Most states already allow minority ESOP-owned CPA firms, and Minnesota allows majority ownership.
H.B. 2246, described in more detail above, would allow professional corporations to be owned by ESOPs, provided that the voting trustees are licensed in that profession.
Qualification for Contracting Preferences
A new law in Maine, LD 1969 directs the Maine Public Utilities Commission to require that any renewable energy project in the state receiving $50,000 or more in state funding to meet certain labor standards, including paying prevailing wages. The law also provides that in soliciting bids for state support for renewable energy projects, the Public Utilities Commission should “consider whether a majority of the individuals working on an assisted project are members of an entity that is employee-owned, including but not limited to an entity that offers employee stock ownership plans.”
The Maine law is the first state law in the country to provide a specific employee ownership preference for using state contracting resources.
Qualification for Contracting Preferences
SB 1974, "Employee Ownership, Empowerment, and Expansion Act," would extend to employee-owned companies the same contracting preferences for companies owned by disadvantaged individuals. The state is directed to conduct an outreach program on this new rule.
H.B. 2246, described in more detail above, would also allow certified Historically Underutilized Businesses (HUBs) to adopt an ESOP without losing their status as an HUB. It would also create contracting preferences at the state, city, council, and special district level for ESOP owned companies.