Retirement of Boomer Business Owners Could Leave Millions Jobless—Unless Workers Take Over

Alexander Kolokotronis

Companies like Wright-Ryan Construction in Portland, Maine, are increasingly offering Employee Stock Ownership Plans—a step in the right direction toward worker ownership. As baby boomers retire, this creates new opportunities for democratizing businesses. (Derek Davis/Portland Press Herald via Getty Images)

The fed­er­al gov­ern­ment esti­mates that more than 10,000 baby boomers retire every day4 mil­lion peo­ple every year. Between them, soon-to-retire boomers own 2.34 mil­lion busi­ness­es, with near­ly 25 mil­lion employ­ees. Boomer-owned busi­ness­es gen­er­ate $949 bil­lion in pay­roll, and $5.14 tril­lion in sales. Yet the vast major­i­ty of boomer busi­ness own­ers lack a writ­ten tran­si­tion plan for when they retire, and the com­ing shift in own­er­ship — what some have termed the Sil­ver Tsuna­mi” — could affect one-sixth of U.S. work­ers, dec­i­mate mem­ber­ship in local busi­ness asso­ci­a­tions and cham­bers of com­merce, and have rip­ple effects through­out the entire economy.

For the move­ment to democ­ra­tize the work­place, how­ev­er, this tran­si­tion could also present a tremen­dous oppor­tu­ni­ty. Only around 20 per­cent of retir­ing small busi­ness own­ers find a buy­er, and when they do, buy­ers tend to be com­peti­tors, larg­er com­pa­nies, pri­vate equi­ty firms or preda­to­ry real estate devel­op­ers. The above actors, how­ev­er, rarely have the best inter­est of work­ers and local com­mu­ni­ties at heart, thrust­ing many into pre­car­i­ous work and in some cas­es dri­ving gentrification. 

But there’s anoth­er way out. Rather than close up shop or be bought up by the high­est bid­der, busi­ness­es can tran­si­tion into demo­c­ra­t­ic employ­ee-own­er­ship, such as work­er coop­er­a­tives — busi­ness­es owned, con­trolled and man­aged by work­ers, and that oper­ate accord­ing to a one work­er, one vote” deci­sion-mak­ing process. The man­i­fold ben­e­fits of this and oth­er types of demo­c­ra­t­ic employ­ee own­er­ship include reduc­tions in intra-firm income inequal­i­ty, increased voice and say by work­ers them­selves over work­ing con­di­tions, increased pro­duc­tiv­i­ty and effi­cien­cy, poten­tial spillover into increased polit­i­cal par­tic­i­pa­tion, and eco-friendliness. 

Depend­ing on the state or munic­i­pal­i­ty, there may be legal obsta­cles to tran­si­tion­ing exist­ing busi­ness into work­er own­er­ship, but it is not impos­si­ble. And a num­ber of poli­cies, some of which are already being pushed by coop­er­a­tive and labor move­ments across the coun­try, can ease the process along. Such poli­cies can ensure that the surge in boomer retire­ment doesn’t harm the econ­o­my, but instead puts more pow­er in the hands of work­ing people.

Work­er Own­er­ship Today

To grasp the poten­tial for trans­for­ma­tive future reform, we first must grap­ple with the present state of employ­ee own­er­ship. There are only around 300 work­er coop­er­a­tives nation­wide, and they aren’t easy to build from scratch. For one, devel­op­ing busi­ness­es can require years of train­ing, steady build-up, and effec­tive mar­ket­ing — there is a lim­it to how many work­er coop­er­a­tives can be devel­oped at once. The degree of dif­fi­cul­ty also means that work­er coop­er­a­tive devel­op­ers work­ing in iso­la­tion could eas­i­ly face exhaus­tion and burnout. And even after get­ting off the ground, start­up work­er coop­er­a­tives can remain depen­dent on non­prof­it devel­op­ers for an indef­i­nite peri­od. This helps explain the long-term fail­ure of, for exam­ple, a decen­tral­ized non­prof­it-based start­up work­er coop­er­a­tive devel­op­ment pro­gram from 1976 to 1986 in the Unit­ed King­dom. This ten-year exper­i­ment pro­duced approx­i­mate­ly 2,000 new work­er coop­er­a­tives –  – and almost none exist today,” writes Christo­pher Michael, found­ing direc­tor of NYC Net­work of Work­er Coop­er­a­tives and gen­er­al coun­sel for The ICA Group, a non-prof­it con­sul­tan­cy that aims to advance employ­ee ownership.

On the oth­er hand, there are more than 7,000 firms with ESOP (Employ­ee Stock Own­er­ship Plan) sta­tus. An ESOP is an employ­ee ben­e­fit pro­gram where­by employ­er stock is trans­ferred to indi­vid­ual employ­ee accounts with­in a tax-exempt trust. While the work­er coop­er­a­tive sec­tor has expe­ri­enced crests and falls since the 1970s, the total num­ber of employ­ee-own­ers under ESOPs has steadi­ly increased. In total, 13.5 mil­lion employ­ees — or 11.8 per­cent of the total U.S. work­force — work in an ESOP. By con­trast, only 7.4 mil­lion pri­vate-sec­tor work­ers — 6.4 per­cent of entire pri­vate-sec­tor work­force — are union­ized. Among the 7,000 ESOP com­pa­nies, 4,000 are major­i­ty employ­ee-owned; some are even 100-per­cent employee-owned. 

So what does this aston­ish­ing base of ESOPs — and the rel­a­tive dearth of work­er co-ops — have to do with the Sil­ver Tsuna­mi of retir­ing boomers? Start­up work­er coop­er­a­tive devel­op­ment need not be com­plete­ly aban­doned. To engage in effec­tive start­up devel­op­ment, how­ev­er, requires build­ing durable busi­ness asso­ci­a­tions and fed­er­a­tions for work­er coop­er­a­tives. Such asso­ci­a­tions and fed­er­a­tions could offer resources for metic­u­lous research, engage in polit­i­cal advo­ca­cy and lob­by­ing, as well as pro­vide an exist­ing con­sumer base for start­up busi­ness­es to con­nect with. One way to build such a foun­da­tion is through con­vert­ing exist­ing busi­ness­es into demo­c­ra­t­ic employ­ee-owned firms — focus­ing on this now would make future start­up co-ops eas­i­er. Why start a new fledg­ling busi­ness in a hyper com­pet­i­tive glob­al econ­o­my when there are exist­ing healthy busi­ness­es that can be converted? 

The incen­tive struc­ture is already there. For one, bro­ker fees for con­vert­ing to a work­er coop­er­a­tive are less than a typ­i­cal sale. Also, as not­ed in an ICA report, cap­i­tal gains from the sale to a co-op or an Employ­ee Stock Own­er­ship Plan (ESOP) can be deferred indef­i­nite­ly or com­plete­ly avoided.”

Sec­ond, the mod­el is more appro­pri­ate for grad­ual tran­si­tions. Exit­ing own­ers are not required to sell all-at-once, and future cash flows can be used to expe­dite work­ers’ pur­chase of the com­pa­ny. Instead of a scram­bled and unsat­is­fy­ing exit, small busi­ness own­ers can slow­ly tran­si­tion out, or even secure them­selves an abridged role with­in a major­i­ty demo­c­ra­t­ic employ­ee-owned enterprise.

Third, con­ver­sions to demo­c­ra­t­ic employ­ee-own­er­ship ben­e­fits those small busi­ness own­ers that care about leav­ing a lega­cy behind. Rather than sell­ing to an out­side-pur­chas­er in a scram­bled impromp­tu fash­ion, demo­c­ra­t­ic employ­ee-own­er­ship is like­ly to be more con­sis­tent with for­ti­fy­ing a retir­ing busi­ness owner’s lega­cy. Sim­ply put, it leaves the busi­ness in con­trol to those that know the busi­ness best: the work­ers themselves.

Poten­tial Reforms

But in ESOPs, work­er own­er­ship does not always mean work­er democ­ra­cy. Under the 1974 Employ­ee Retire­ment Income Secu­ri­ty Act (ERISA), which grants ESOPs spe­cial tax sta­tus, ESOP trustees are pro­hib­it­ed from pri­or­i­tiz­ing non­fi­nan­cial ben­e­fits, such as work­ing con­di­tions, job secu­ri­ty, or employ­ee own­er­ship, as a goal in and of itself,’ ” Michael writes. Effec­tive­ly, fed­er­al law requires ESOPs to pri­or­i­tize employ­ees’ retire­ment income at the expense of employ­ees’ con­tin­ued own­er­ship.” This means that max­i­miz­ing share­hold­er val­ue is pri­or­i­tized over the needs and con­cerns of work­ers as work­ers — or as com­mu­ni­ty members. 

One effect of this is that, while it is tech­ni­cal­ly pos­si­ble to struc­ture ESOPs as work­er-con­trolled com­pa­nies (and some do), many ESOPs con­fer few vot­ing rights to work­ers. These are often restrict­ed to major share­hold­er deci­sions, such as a restruc­tur­ing or sale of the com­pa­ny. At the state and local lev­els, reforms can address these lim­its. The point here is not to view ESOPs with sus­pi­cion, as many labor unions have, but to build upon what has been achieved to date — specif­i­cal­ly, by adding the impor­tant ele­ments of work­ers’ vot­ing rights and oth­er demo­c­ra­t­ic procedures. 

Since the 1980s, some ESOPs have been run as work­er-con­trolled Demo­c­ra­t­ic ESOPs” (DES­OPs), with one work­er, one vote. Unlike a work­er coop­er­a­tive, a 100-per­cent employ­ee-owned DES­OP does not pay any fed­er­al income tax. This makes the DES­OP more finan­cial­ly attrac­tive than incor­po­rat­ing as a work­er coop­er­a­tive. The down­side is that due to ERISA law require­ments that ESOP trustees pri­or­i­tize finan­cial ben­e­fits, DES­OPs are some­times com­pli­cat­ed and cost­ly to struc­ture. Anoth­er option is cre­at­ing a one work­er, one vote Employ­ee Own­er­ship Trust (EOT). EOTs fall out­side of ESOP law, and also lever­age tax-exempt loop­holes. Gov­ern­ments and civ­il soci­ety can make it eas­i­er to tran­si­tion exist­ing firms into DES­OPs and EOTs by build­ing on exist­ing incen­tive-struc­tures with new legal mech­a­nisms, insti­tu­tion­al sup­port, and capac­i­ty-build­ing programs.

Specif­i­cal­ly, both state and local gov­ern­ments should: (1) expand tax incen­tives for employ­ee own­er­ship; (2) estab­lish a financ­ing pro­gram for employ­ee-own­er­ship suc­ces­sions through loan guar­an­tees; (3) give pref­er­ence to employ­ee-owned busi­ness­es in con­tract­ing out work, e.g., con­struc­tion, clean­ing, cater­ing, etc.; and (4) estab­lish an employ­ee-own­er­ship cen­ter that favors DES­OPs and EOTs.

On this fourth rec­om­men­da­tion, through its Work­er Coop­er­a­tive Law Project, The ICA Group pro­pos­es cre­at­ing Cen­ters for Demo­c­ra­t­ic Employ­er Own­er­ship that acquaint busi­ness own­ers with dif­fer­ent mod­els of employ­ee own­er­ship. Cen­ters would dis­sem­i­nate knowl­edge of tax-exemp­tions and ben­e­fits to retir­ing busi­ness own­ers, and could pro­vide pro­fes­sion­al assis­tance with the process of trans­fer­ring busi­ness own­er­ship to workers.

These could be struc­tured to encour­age full, demo­c­ra­t­ic employ­ee own­er­ship with one work­er, one vote rights — as opposed to only par­tial non­vot­ing employ­ee own­er­ship — through pro­vid­ing tax-exemp­tions on earn­ings attrib­ut­able to any por­tion of com­pa­ny stock under demo­c­ra­t­ic employ­ee own­er­ship.” ICA also pro­pos­es a full cap­i­tal gains exemp­tion for a busi­ness own­er who trans­fers a por­tion of a firm’s vot­ing shares to demo­c­ra­t­ic employ­ee own­er­ship.” This could also be struc­tured along a scale: The more shares turned over into demo­c­ra­t­ic employ­ee-own­er­ship, the more favor­able the cap­i­tal gains tax exemption. 

Incen­tives should focus on the grad­ual tran­si­tion of enter­pris­es — e.g., over sev­en or more years — toward one work­er, one vote employ­ee own­er­ship. Grad­ual tran­si­tion could be more appro­pri­ate for pri­vate busi­ness own­ers who do not intend to retire right away. It is also an effec­tive means by which busi­ness own­ers could pass on insti­tu­tion­al knowl­edge and pro­vide their own train­ing. Grad­ual tran­si­tions min­i­mize and elim­i­nate con­flict by leg­is­lat­ing a smooth pas­sage of con­trol to the employ­ees after the busi­ness own­er is ful­ly divest­ed of their own­er­ship. The point is not sim­ply to pass into demo­c­ra­t­ic employ­ee-own­er­ship, but to do so in a healthy and last­ing way.

Con­vert­ing Firms Now

Pass­ing such poli­cies will take time and effort, but many efforts have already begun. The New Haven chap­ter of Democ­ra­cy at Work (D@W) is advo­cat­ing for many of the above-men­tioned poli­cies (full dis­clo­sure: the author is a mem­ber of D@W’s New Haven chap­ter). The ICA Group is push­ing for such poli­cies across the North­east as well as the nation­al lev­el. In Con­gress, Sen. Bernie Sanders (D‑Vt.) him­self has intro­duced employ­ee-own­er­ship leg­is­la­tion mul­ti­ple times over the last decade. Most recent­ly, as report­ed by In These Times, Sanders, Sens. Patrick Leahy (D‑Vt.), Kirsten Gilli­brand (D‑N.Y.) and Mag­gie Has­san (D‑N.H.) intro­duced two com­ple­men­tary pieces of leg­is­la­tion this May that would ease the tran­si­tion to employ­ee own­er­ship. Iden­ti­cal leg­is­la­tion has been intro­duced in the House by Rep. Jared Polis (D‑Colo.).

The first bill — also intro­duced by Sen. Eliz­a­beth War­ren (D‑Mass.) — is the Work­er Own­er­ship, Readi­ness, and Knowl­edge (WORK) Act. If passed, funds would be pro­vid­ed for edu­ca­tion, out­reach, tech­ni­cal assis­tance and train­ing (to both employ­ees and employ­ers) to democ­ra­tize the work­place. The sec­ond piece of leg­is­la­tion is the Unit­ed States Employ­ee Own­er­ship Bank Act. This leg­is­la­tion would pro­vide direct loans and loan guar­an­tees for com­pa­nies to become at least 51 per­cent employ­ee-owned, whether as an ESOP or a work­er cooperative. 

For­tu­nate­ly, we need not table con­vert­ing exist­ing busi­ness­es until such reforms are passed. In fact, there are already some tax incen­tives for such con­ver­sions, and the process is tried, test­ed and effi­cient if done with the right legal coun­sel. The ICA Group and the Nation­al Cen­ter for Employ­ee Own­er­ship (NCEO) offer pre­lim­i­nary con­sul­ta­tions for busi­ness own­ers inter­est­ed in con­vert­ing their enter­prise. Democ­ra­cy at Work Insti­tute launched a Work­ers to Own­ers” pro­gram to smooth tran­si­tions to work­er own­er­ship as boomers retire. What is still lack­ing, how­ev­er, is the fund­ing to mas­sive­ly scale such tran­si­tions, par­tic­u­lar­ly for the nec­es­sary outreach. 

Munic­i­pal­i­ties can act now to sup­port con­ver­sions. They could track and report local busi­ness clo­sure rates, with impor­tant asso­ci­at­ed con­tent such as the num­ber of jobs lost. Look­ing at busi­ness licens­es on-file they can deter­mine which and how many busi­ness­es have been oper­at­ing for at least the last 15 years. This would allow Cen­ters for Demo­c­ra­t­ic Employ­ee Own­er­ship to con­duct tar­get­ed out­reach, such as through con­tact­ing busi­ness own­ers on the verge of retirement.

Out­reach can take on many dif­fer­ent forms. It could mean reach­ing out to busi­ness bro­kers and local eco­nom­ic devel­op­ment agen­cies so as to famil­iar­ize them with mod­els of demo­c­ra­t­ic employ­ee-own­er­ship. It should also mean pri­or­i­tiz­ing out­reach to local cham­bers of com­merce and busi­ness asso­ci­a­tions, whose mem­ber­ship may also plum­met with mass turnover in small busi­ness own­er­ship. If these groups want to main­tain a healthy mem­ber­ship, joint­ly host­ing sym­po­siums, sem­i­nars and train­ings on demo­c­ra­t­ic employ­ee-own­er­ship could go a long way.

Con­sid­er­ing the free fall in pri­vate-sec­tor union mem­ber­ship, labor unions would be wise to get on the employ­ee-own­er­ship band­wag­on. They could help ensure demo­c­ra­t­ic employ­ee-owned firms would be union­ized, offer­ing orga­nized labor anoth­er source of dues-pay­ing mem­bers as well as increased lever­age with cap­i­tal­ist firms. In those cities and states were eds & meds” indus­tries dom­i­nate, for exam­ple, and unions seek to tip the local bal­ance of pow­er in their favor, demo­c­ra­t­ic employ­ee-own­er­ship could even be a means by which orga­nized labor and busi­ness stand togeth­er. This could take place through coali­tion build­ing between work­er-owned busi­ness­es and labor unions, such as through coop­er­at­ing on pro­gres­sive push­es for city coun­cil and may­oral elec­tions. This in turn could trans­late into greater bar­gain­ing pow­er for work­ers with­in union­ized cap­i­tal­ist enterprises.

Uti­liz­ing the net­works and knowl­edge of labor unions, demo­c­ra­t­ic employ­ee-owned firms would be able to scale while guard­ing against the poten­tial for self-exploita­tion (which man­i­fests in start­up work­er coop­er­a­tives as sweat equi­ty” with mem­bers ini­tial­ly work­ing long hours for less than desired pay). This has prece­dent: There are at least thir­teen union­ized work­er coop­er­a­tives in the Unit­ed States, includ­ing the largest work­er coop­er­a­tive in the coun­try, Coop­er­a­tive Home­care Asso­ciates.

A part­ner­ship between labor unions and demo­c­ra­t­ic employ­ee-owned firms is a return to the labor movement’s roots in fight­ing for self-man­age­ment. If labor unions and bud­ding work­er coop­er­a­tive fed­er­a­tions were to join togeth­er, labor and asso­ci­at­ed com­mu­ni­ty groups could gain deci­sive orga­ni­za­tion­al pow­er not only in gov­ern­ment, or eds & meds,” but in civ­il soci­ety and the broad­er polit­i­cal eco­nom­ic land­scape. And the Sil­ver Tsuna­mi may pro­vide just the open­ing need­ed to make that happen.

Alexan­der Kolokotro­n­is is a Ph.D. stu­dent in polit­i­cal sci­ence at Yale Uni­ver­si­ty. He is the founder of Stu­dent Orga­ni­za­tion for Demo­c­ra­t­ic Alter­na­tives and for­mer­ly the Stu­dent Coor­di­na­tor of NYC Net­work of Work­er Coop­er­a­tives and Work­er Coop­er­a­tive Devel­op­ment Assis­tant at Make the Road New York. You can fol­low him on Twit­ter at @avk48.
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