Recent Employee Ownership Legislation in the U.S.
Employee Ownership Legislation Gathers SteamThe first 14 years of employee stock ownership plans (1973-1987) saw bills introduced and passed almost every Congress to further encourage employee ownership. The reason is simple—Russell Long first learned about ESOPs in 1973 and retired in 1987. For most of that time, he was chair of the powerful Senate Finance Committee, and if he wanted ESOP legislation, it usually got done. Fortunately, he also had the support of a number of other influential members of Congress as well as Ronald Reagan when he was president. After he retired, things slowed down considerably, with only one new law (S corporation ESOPs) passed in 1996 and then amended and made better in 1997. Two laws between 1987 and 2001 placed limits on ESOPs, albeit the second one was to curb blatant abuses in the use of S ESOPs never intended by the original bill's supporters.
There have been no new laws on ESOPs—or any other kind of broad-based employee ownership plan—since 2001, although some proposals have been introduced every Congress. States did not get involved in employee ownership either. Employee ownership is an idea that has always had very broad, but mostly equally shallow, bipartisan support, with the notable, and critical, exception of Russell Long and a few others.
But in the last two years, that has begun to change. There is a groundswell of legislation before Congress, with more bills in the works. More political leaders are beginning to see employee ownership as an important approach to dealing with economic opportunity, job growth, and business transition. This article reviews the bills that have been passed, introduced, or are being developed.
If there has been action on the bill, it is noted. Only primary sponsors are noted. The links will take readers to the text and information about current actions. We will update this article as changes occur.
Congress: ESOP Legislation
Section 1812, National Defense Authorization Act for 2017This bill defined disabled veteran owned business to include certain ESOPs. The very narrowly drawn section allows an ESOP company that has more than one class of stock (under ERISA the ESOP must own the class with the highest combination of voting and dividend rights) to disregard the ESOP ownership in determining whether a majority of the shares are held by a qualifying disabled veteran or veterans for purpose of contracting preferences.
H.R. 2092: The Promotion and Expansion of Private Employee Ownership Act (David Reichert, D-WA and Ron Kind (D-WI); S. 1589 (Pat Roberts, R-KS and Bejamin Cardin, D, MD).
- Allows owners of S corporations to get a tax deferral on the sale of stock to a qualifying ESOPs under the same terms currently allowed for sales of stock to a C corporation
- Allows banks to deduct 50% of the interest income they receive from loans to ESOPs in S corporation that own at more than 50% of the stock.
- Provides needed technical assistance for companies that may be interested in forming an S ESOP through the Department of the Treasury
- Ensures small businesses that become ESOPs retain their SBA certification
S. 1081: The Work Act (Bernie Sanders, I-VT; Sherrod Brown, D-OH; and Elizabeth Warren, D.MAThe Work Act is designed to support existing programs and encourage new state programs to promote employee ownership and employee participation in business decision-making, including technical assistance and outreach efforts, by providing grants for states to establish these programs starting at $300,000 per state in 2018 and rising to $439,000 in 2022. The Act is designed to promote state programs such as in Vermont, Ohio, Pennsylvania, and Colorado.
S. 1082 and H.R. 2357: United States Employee Ownership Bank Act (Senate Bill: Bernie Sanders, I-VT; Patrick Leahy, D-VT; Kirsten Gillibrand, D-N.Y; and Maggie Hassan D-N.H. House: Peter DeFazio, D-OR)This bill creates a new federal U.S. Employee Ownership Bank to provide $500 million in low-interest rate loans and other financial assistance to help workers purchase businesses through an employee stock ownership plan or a worker-owned cooperatives.
Small Business AdministrationLegislation being developed by Senator Kirsten Gillibrand (D-NY) would improve on the Small Business Administration's ESOP loan program by clarifying certain rules and increasing the loan limit, establish an SBA technical assistance and outreach capacity, and make it easier for ESOP companies to qualify for set-asides for minority, disadvantaged, or woman owned businesses. Senator Peters (D-MI) and Senator Risch (R-ID, and the Small Business Committee chair) are working on legislation to direct the Service Corps of Retired Executives (SCORE), part of the SBA, to provide outreach on employee ownership.
Tying Tax Deductions for Executive Compensation to Broad-Based Employee OwnershipSenator Tammy Baldwin (D-WI) is working on legislation that would eliminate the current exemption from the $1 million limit on the deductibility of executive compensation for incentive-based pay (equity grants, bonuses, etc.). The $1 million limit has been largely ineffective because of these rules. Baldwin would eliminate the exception unless a company has a broad-based plan, such as an ESOP or equity grants available to most employees.
H.R. 1343, S. 488: Encouraging Employee Ownership Act (House Bill, Randy Hultgren, R-IL; Senate Bill, Pat Toomey, R-PA; Mark Warner, D-VA)This bipartisan bill would ease current Securities and Exchange Commission rules, making it easier for private companies to provide stock-based compensation to employees, such as option grants or stock purchase grants, without having to register as a public company. The bill would increase the current $5 million cap on the amount of stock closely held companies can award employees before triggering SEC reporting requirements to $20 million. The bill passed the House with little opposition; it is now before the Senate.
H.R. 5719, S. 3152, Empowering Employees through Ownership Stock Ownership Act (2016 versions) To be re-introduced in Congress in 2017 (House Bill, Erik Paulsen, R-MN; Joseph Crowley, NY); Senate Bill, Mark Warner, D-VA and Dan Heller, R-NV)).
This bill passed the House in 2016 but was not acted on in the Senate. It would allow employees to hold on to certain equity compensation awards granted in closely held companies for up to seven years before having to pay tax. Currently, employees may be forced to exercise an award even thought there is not yet a market, with taxes due on exercise.
State and Local Legislation and Initiatives
ColoradoH.B. 17-1214: Passed in 2017, the bill requires the Colorado office of economic development to engage the services of a local nonprofit organization that supports and promotes employee-ownership to educate the staff at the office on the forms and merits of employee ownership in order for the office to promote employee ownership as part of its small business assistance center. It also sets up a revolving loan program to assist transitions to employee ownership, with a limit of $10,000 on the loan.
IowaHF 2085: Passed in 2012, this bill exempts exempt 50% of the net income from taxation if a company is sold to an ESOP that owns at least 30% of the stock. No mention is made of a requirement that the company be a C corporation. The bill also provides for an appropriation of $1 million to the state economic development authority to establish a loan program for qualifying ESOPs, and to provide technical assistance, marketing, and education on ESOPs. The Iowa Economic Development Authority can provide up to $25,000 for funding an ESOP feasibility study.
MassachusettsIn 2017, legislators won to re-fund the Massachusetts Employee Ownership Center, which last was funded in the early 1990s. The effort was not attached to a bill, but is a budget request made by the representatives. The Center will provide outreach and limited technical assistance for employee ownership.
MissouriMissouri passed identical legislation to Iowa, House Bill 2030, The Stock Ownership Deduction Tax Act, with the Assembly overriding a gubernatorial veto.
Newark, NJIn 2017, the city created a full-time position to promote employee ownership.
New YorkS.5685: Introduced in 2017, this bill would have set up low-cost state loans and loan guarantees to employee ownership successions; established a state university-based office for employee ownership to spark and support the growth of employee-owned businesses; and provided state tax relief in the form of a 100% capital gains exemption to encourage business owners retiring or seeking a change of ownership to sell their businesses to employees. It was replaced by AB 5191, a bill that set up a blue-ribbon two-year study to investigate how to encourage employee ownership in New York. That bill passed in 2017.
PennsylvaniaA bill will be introduced in 2017 to conform Pennsylvania law on the taxation of selling to an ESOP with federal law. Capital gains are currently taxable in the state.
TexasH.B. 4171: Introduced in 2017, this bill would allow ESOP-owned companies to qualify as Historically Underutilized Businesses for Texas state set aside programs. Although it did not have significant opposition, it was introduced relatively late in the legislative session. It will be reintroduced in the next session.