Worker-owned Cooperatives

Worker cooperatives are businesses that are owned and democratically governed by their employees. They operate in numerous industries, including childcare, commercial and residential cleaning, food service, healthcare, technology, consumer retail and services, manufacturing, wholesaling and many others. Some 300 worker co-ops throughout the U.S. provide their employees with both jobs and ownership—allowing them to directly benefit from the financial success of the business.

Democratic Goverance

Like other cooperatives, the board of directors for a worker co-op is elected by, and from within, its membership-in this case, the workers. The board is always majority controlled by the workers, though some worker co-ops have outside directors and advisors serving on their boards.

Management structures of worker co-ops vary greatly, depending on the desires of the members. Some worker co-ops use a traditional, management hierarchy, while others use more flat management systems that allow employees to be more directly involved in management decisions. Others use a team-based system that employs elements of both traditional and open management systems.

Profits and Wages

Each year, worker co-ops return profits not needed for reinvestment in the business, to their worker-owners in the form of patronage dividends. Dividends are typically distributed based on management position, hours worked, salary and/or seniority.

Similarly, pay structures vary greatly. Some worker co-ops use a traditional, seniority- and skill-based pay scale. At the other end of the spectrum are worker co-ops that pay all workers the same wage.

Joining a Worker Co-op

Typically, workers may join their co-op after a probationary period lasting from a few months to more than a year. At that time, workers are allowed to buy an equity share in the business—the cost of which is usually deducted from their paychecks in small amounts each month. In some cases, existing worker-owners may vote on whether to accept the new member as a co-owner. When workers leave the co-op, their equity share is returned to them.

Examples:

• Collective Copies, founded in 1983, is a worker-owned copy company that operates two storefronts in Florence and Amherst, Mass.
• Arizmendi Bakery, founded in 2000, is a worker-owned bakery cooperative in San Francisco, CA specializing in morning pastries, artisan breads and gourmet pizza. The Association of Arizmendi Cooperatives include three other worker-owned bakeries operating in the area: The Cheese Board in Berkeley, Arizmendi Bakery & Pizzeria in Emeryville, and Arizmendi Cooperative in Oakland. Each of the four local co-ops is independently operated by their worker-owners.
• Big TimberWorks, based in Gallatin Gateway, Mont., was formed as a co-op in 1999, after its previous owner sold it to the employees. The co-op constructs high-quality, custom timber-frame homes and other structures. It has 40 employees, 14 of which are owner-members of the co-op.
• Beluga Software, based in Olympia, Wash., is a worker-owned technology cooperative that writes and customizes software for use on the Internet, Unix, Linux and Windows for its clients.

Worker Co-ops Provide Options to Small Business Owners

Section 1042 of the U.S. tax code provides tax incentives to owners of businesses that sell their companies to the workers in the form of a co-op or an ESOP. Since the mid 1980s, this measure led to the creation of thousands of ESOPs, but it has been little applied to co-ops.

New research by the Ohio Employee Ownership Center suggests that Section 1042 provides new succession and retirement options to small business owners who cannot afford to convert their business to an ESOP. By selling to their workers as a co-op, the business owner can defer capital gains made from the sale of the company.

Read more about Section1042.

Are ESOPS Co-ops?

ESOPs, or businesses with employee stock ownership plans, are not cooperatives. But some ESOPs share characteristics with worker-owned co-ops. ESOPs allow employees to become owners of the business through company stock invested in their retirement plans.

Ownership and Democratic Control


ESOPs can be majority-owned by their workers, but most are not. By contrast, all worker co-ops are majority-owned by employees.

Some majority-owned ESOPs provide for significant democratic input by their employees. But few ESOPs have employees serving on the board of directors of the company. Worker cooperatives, on the other hand, are always democratically governed and controlled by their employees, with at least a majority of the board controlled by the workers.

Profits earned

ESOPs allow employees to benefit from the success of the business through gains in the value of the stock they own through their retirement plan. Therefore, stock earnings over the years of the employee's tenure are accessible at retirement. Stock gains are not taxable until they are withdrawn during retirement.

By contrast, profits earned by a worker co-op are available to worker-owners at the end of the year, through patronage dividends. These dividends are taxable income in the year they were received.