As worker-owners, we’re used to doing things ourselves. We start businesses, figure out democratic decision-making, and confront systemic issues that deny wealth to communities. We’re tenacious and self-governing, so why limit our influence to our workplaces? As our movement grows—and it is, rapidly—we’re innovating faster than the law can keep up, often operating in gray areas that can be as uncertain as they are productive. What would it look like to stitch up these loopholes and create a full-fledged support system?
Co-ops and their support networks have been a part of the recent rise in attention paid to economic justice, and our participation has allowed us to establish unique positions to solidify gains in policy. Municipal-level efforts in Austin, Philadelphia, Madison, New York City, and elsewhere have shown that local advocacy can produce big results for the worker cooperative movement. Millions of dollars have been procured for development work. Council members and legislators who make economic policies are becoming sympathetic to the needs of our movement. And laws that shape our field are being written or revised by cooperators and their allies.
The momentum doesn’t stop at the local level. Some states, too, are climbing on board and establishing favorable frameworks for worker cooperatives. California’s AB816, a bill that cuts through the red tape of starting a worker co-op and makes life easier for businesses that are already up and running, was recently signed into law. Advocates in Maine have gotten a bill past their legislature that would provide them with the best support system in the country for converting traditional businesses to worker cooperatives. Federally, too, we have allies. Worker ownership support bills have seen the Senate floor and the topic is even on the minds of presidential candidates.
Worker-owners and their supporters are driving these changes, and we can take it further. There are three areas where worker cooperatives can make policy gains; these align with many of the major issues facing worker co-ops, though some will have a ripple effect, also aiding the new economy generally. The ideas here draw from the cases above as well as conversations with members of the US Federation of Worker Cooperatives Member Council on Policy and Advocacy where we have been tracking initiatives and generating ideas for future strategic priorities.
Financial & Capital Access
Small businesses in general and worker co-ops in particular do not have an easy time accessing the capital they need, especially when they are starting up and growing. There are many structural reasons that this is true, these reasons range from concentration in the banking industry to institutional racism. Problems this large require systemic solutions, and policy can go a long way to enabling us to address them.
Fortunately, some supports already exist and can be better leveraged. Worker cooperatives already qualify for some existing federal programs, but there is a lack of understanding—on the part of cooperators and program administrators alike—about how co-ops can benefit. Two such programs, the Small Business Administration's 7A (for lending to small businesses through non-traditional channels) and 8A (for capital access for disadvantaged and marginalized communities) programs are designed to address precisely the two pernicious problems mentioned above, and would provide broad benefits if streamlined to be more co-op friendly. The changes could be as basic as educating administrators responsible for those programs on how to provide support to the co-ops seeking their assistance, and how they can encourage traditional companies to consider worker ownership, perhaps by making it easier for worker co-ops to qualify or providing special assistance to co-op applicants.
There are also industry-specific support programs, provisions for small business technical assistance, and other existing state funds for which worker cooperatives are eligible, like the widely applicable green energy loan and grant fund, REAP. If we’re prepared to make use of these programs, they can help level the playing field. Maine’s largest worker co-op, Island Employee Cooperative, received an incredible amount of support from Cooperative Development Institute when they merged three businesses into one worker co-op in 2014. CDI’s job didn’t stop at the conversion; they helped the new worker-owners make use of an existing state program to provide customized on-site training through a $15,000 state training grant. Co-op developers aren’t typically in a position to provide job trainings and industry certifications, so it is wise for cooperators and developers alike to be aware of how they can receive this type of support.
We are also advantaged by not having to rely solely on credit as other small businesses often must. As cooperatives, we are able to offer equity investments to owners and investors alike. It can be difficult and expensive to stay on the right side of the law when it comes to offering shares to either class, but financiers like Cutting Edge Capital are well-versed in alleviating those pressures. One way to do so is to rewrite state-level securities law to allow exemptions for member investment in cooperatives. Minnesota, for example, has made co-ops exempt from the onerous requirements of the state’s securities law, a move that has helped cooperatives to flourish there. Raising funds would be far simpler if the regulations were consistent and like Minnesota’s nationwide.
Another complementary way to achieve the same goal is to simplify the direct public offering (DPO) options. DPOs are used to allow sale of shares of non-voting stock to outside investors, and if these offerings, too, were exempt, co-ops could choose to sell non-voting shares to the public at a much lower up-front cost. A recently passed law in Massachusetts permits this for capitalizations up to $50,000, which is quite small but it provides us with some groundwork.
Surprisingly, state-chartered credit unions in eight states can make equity investments in cooperatives. This means that they can participate in DPOs by buying preferred shares and investing in the co-ops they support. Where this is not yet the case, we can effect changes that encourage this close cooperation among cooperatives.
Credit unions can be allies in other mutually beneficial ways as well. Current regulatory limits on business loans stipulate that no more than 12.5% of a credit union’s assets can be lent to small businesses. If more of these assets were made available, specifically by exempting worker co-ops and small businesses (under 20 employees) from counting toward the limit, it would enable lending to the companies that have the hardest time getting it.
Similarly, investment cooperatives and community economic development funds can provide capital to worker cooperatives. A good deal of funding for these projects comes from self-directed retirement funds, which the Alberta Community and Cooperative Association has leveraged using Canadian legislation that incentivizes investment and better regulates such funds. Creative policies like Canada’s would enable investment from these and other tax-advantaged funds.
The state can not only minimize red tape and provide some advantages, it can also provide development funds as well as lend. Revolving loan funds are one well-developed method for maintaining dedicated financial support for worker cooperatives. In Richmond, CA, the city manages its own municipal loan fund for worker cooperatives at the behest of their enterprising mayor. While Richmond created and maintains the fund, New York City chose to allocate funds to the Working World’s revolving fund, not as direct investment, but to be put toward its administration. Even larger state organizations have a role to play in this approach, too; federally- or state-funded agencies can provide technical assistance and other support. The Vermont Employee Ownership Center receives some state funding, and the National Center for Employee Ownership is piloting a state-level affiliate program in Pennsylvania with an eye toward providing this type of support in each state, ideally with the assistance of federal funding.
Conversions
Many traditional business owners are soon retiring, a trend economists refer to as the Silver Tsunami. Since “baby boomers” own 66% of businesses with employees, Project Equity notes that the number of businesses changing hands or facing closure is a “huge opportunity” to grow the number of worker cooperatives. Indeed, unless converted to cooperatives, those businesses will likely be sold to out-of-state buyers or private equity firms that may relocate jobs or the entire enterprise. Worse still, especially in rural areas, buyers may not be found and the businesses will simply be shuttered. As such, converting these retirees’ businesses to worker cooperatives is an opportunity to not only save jobs but to further develop community wealth. It’s also beneficial to our movement to convert traditional businesses; conversions succeed more often than start-ups.
Retiring business owners look to make a maximally profitable exit from their companies. To make the Silver Tsunami work in our favor, selling to their employees will need to be made an obvious, easy, and advantageous option through changes to tax law and risk reduction. One existing advantage we have is the 1042 rollover option, a federal statute which allows owners to defer capital gains when they sell at least 30% of their company to their employees. Ohio allowed this to apply to its cooperative code, an advantage considered by Select Machine when they converted. Still, the 1042 rollover isn’t widely known and is even less widely used. Allocating state funding for education and technical assistance for business owners and employees who are considering conversion to cooperative or employee ownership would make benefits like it more accessible.
Employee ownership will be unfamiliar to these business owners, and state funding for a feasibility study would do away with both their questions and their concerns about spending time and money figuring it out. Indeed, some employee ownership centers already receive state support for this work, as is the case in Vermont. To take another cue from the Select Machine conversion, they used federal funds earmarked to avert job loss through the Workforce Innovation and Opportunity Act’s Rapid Response services. Rapid Response is designed to help laid-off workers quickly transition to new employment, but the funds could also be used to facilitate an employee buyout. The law providing this support is federal; with some effort it could be brought to any state.
Similar qualifications to Rapid Response funding apply to the USDA's loan guarantee program. The Business & Industry Loan Guarantee facilitates acquisitions when the loan will keep the business from closing and/or save or create jobs, making it especially advantageous to the circumstances of the Silver Tsunami, though it is limited to rural areas.
These tools are substantial existing policies that can be enhanced to favor conversions to worker cooperatives, but there are also unexplored areas that could bolster our work. A recently introduced bill in Massachusetts offers employees the opportunity to be the first party notified and the first eligible to bid when a business is up for sale or transfer. Right of first refusal legislation such as this could go further and require that the purchased business restructure to become a democratic workplace.
Understanding and Advantage
Only roughly half of the 50 states have worker co-op statutes on the books and there is no federal definition specific to our unique form. Worker co-ops are not well understood in the law and so are at a disadvantage on many fronts. The U.S. Federation of Worker Cooperatives has recently pursued a shared definition with the goal of using member input to shape the educational materials the organization uses to educate politicians and other officials. Such a definition could be used to draft a federal statute and the process is helping to cement common ground among cooperators.
There are a number of miscellaneous rules and regulations that keep worker co-ops from competing or functioning at their best. Traditional labor laws, for example, are written to protect employees, but worker-owners are laborers and owners, a situation that leads to confusion about which regulations apply. A common concern among worker owners is whether and how workers compensation should be handled. A bill before the New York legislature would exempt worker cooperatives from workers’ compensation regulations unless the workers choose to opt in. The bill does not require the workplace to replace those traditional protections with other recourse for worker-owners injured on the job, however, such as disability insurance, and this is an area where further research and innovation is required before policy advances can make a meaningful difference.
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