As Labor Day arrives — and economic inequality rises on the political agenda — a little noticed measure in the recently signed defense spending bill aims to address the widening wealth divide between workers and the owners or top executives who manage them. The measure, co-sponsored by Sen. Kirsten Gillibrand (D-N.Y.), is intended to expand financing options and raise awareness for programs that can help employees become partial owners of the companies where they work.
The new provision could also help address what has been called a “silver tsunami” of retiring Baby Boomer business owners. Much has been made of what that generation’s departure from the workforce will mean — a loss of institutional knowledge, a shift in the job market and a drain on Social Security. But less attention has been paid to the wave of retiring Boomers who own closely held private businesses. They will need to sell their companies, transition them to a new generation of owners — or risk shutting them down, cutting jobs in the process.
The provision, known as the Main Street Employee Ownership Act before it was added to this year’s defense bill, will make it possible for firms to use Small Business Administration loans to finance what’s known as employee stock ownership plans, or ESOPs, an arrangement that can help transfer ownership of the company to employees rather than have to find a suitable buyer or rely on family members who may be ill-suited or unprepared to keep the lights on.
In an ESOP, companies get tax incentives to either set up a trust fund into which they contribute shares or to finance the purchase of shares through a loan. Companies then give shares to all employees in amounts based on their relative pay or on a more equal basis.
The new provision also empowers the SBA to assist with employee ownership plans and raise awareness of the approach. The plans are predominantly used by closely held or privately owned companies — and while some publicly traded companies, including Procter & Gamble, use them, they are much rarer.
The new measure is “the most significant policy change on employee share ownership in over two decades,” said Joseph Blasi, the director of the Institute for the Study of Employee Ownership and Profit Sharing at Rutgers University, who worked with Gillibrand’s office on the bill. Still, its immediate impact is probably limited to small companies: The SBA loans that can be used are capped at $5 million, though they can be combined with other financing.
But it’s also a rare bipartisan stab at finding a way to address the gap in wealth, according to Corey Rosen, founder of the National Center for Employee Ownership, a nonprofit membership group. One economist’s analysis found that the richest one percent of American households own 40 percent of the country’s wealth, the highest it has been in 50 years.
“We’re grasping for ways to deal with economic inequality and pretty much the two sides can’t agree on anything — except this,” Rosen said. “While this particular bill is just one step in that direction, it indicates here’s a path that’s worth exploring.”
As of the end of 2014, the average employee share in ESOPs of closely held private companies was $134,114, said Blasi. (The average 401(k) balance at the end of 2015 was $73,357, according to data from the nonprofit Employee Benefits Research Institute.) Workers can only pocket the value of their shares from ESOPs when they leave the company; they then sell the shares back to their employer.