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Staff mutuals - how does employee ownership work?

Employee ownership within staff mutuals can take a number of different forms and these differ depending on the underlying legal structure of the mutual.

One of the key decisions in establishing a public services staff mutual will be whether the mutual wishes to allow profit to be distributed to its owners, which will include its employees; or whether its aim is to take the form of a social enterprise, where profits are re-invested or distributed to achieve a defined social good.

The different forms of employee ownership

To date, most public services staff mutuals have taken the form of a social enterprise, often established as a Community Interest Company, either as a company limited by guarantee or company limited by shares (CIC). 

For both company types, there is a restriction on the size of dividend that can be paid to members, with the remaining profits being applied to the CIC's objects which have to achieve a social good. This means that although a CIC is entitled to pay market rate salaries to attract and retain staff, employees don't receive distributions of the profits of the business.

However, it has been shown that the CIC model of employee ownership delivers increased levels of innovation and engagement. Employee owners can voice their views via a staff council or other body which ensures a frequent and ongoing dialogue between the executive board running the mutual and the employees who own it. In a staff mutual the information flow between management and those employees providing front line services has particular credibility, as the executives have to (and will want to) listen to the owners of the business.

Where the mutual is established to allow employees to receive benefits from the surpluses of the organisation, the mutual may be established either as a registered society (RS) or as a traditional employee owned business model where the company is limited by shares (the EO model). 

In the RS model, employees become members of the RS and may receive profits related to participation in the RS' business. The membership structure usually operates on a "one member, one vote" basis, giving the employees the ability to voice their opinions and increase the levels of active engagement throughout the business.

The EO Model allows staff mutuals to utilise the new form of employee ownership model that the government has sponsored in the private sector. The EO Model employees either:

  • hold shares directly so that each employee holds a defined number of shares;
  • hold shares indirectly and collectively as the beneficiaries of a specifically established trust called an Employee Ownership Trust (EoT); or
  • combine their holdings through direct ownership of shares and an indirect interest through the EoT.

The benefits outlined above of engagement, accountability and information flow remain. In addition the employee owners can benefit economically from the performance of the business through dividends and, where direct ownership is involved, future share price appreciation.

How would employee hold shares directly or indirectly in the EO Model?

It is likely that employees taking shares directly under an EO Model would do so under a tax advantaged government approved share plan such as a Share Incentive Plan, which allows employees to acquire and hold shares in a tax efficient manner. 

However, a simpler approach may be an indirect ownership model similar to that established by John Lewis. Under this model:

  • employees collectively own shares in the staff mutual;
  • no employee has a specific entitlement to particular number of shares; 
  • a trustee board acts as the mouthpiece of the employee owners; and 
  • the employee owners share in any profit of the business, often on a pro rata basis by reference to their salary. 

This type of indirect ownership can now be facilitated through the new government approved EoT which allows tax free bonuses to be paid to employees working within the mutual. 

What does the governance structure of a staff mutual look like?

Like other businesses a staff mutual will be run by an executive board. The difference is that its owners are also the employees that provide its services. 

This presents an opportunity to not only hold the board accountable to the same people that the business employs and but also allow staff the ability to ensure that the executive board listens to its viewpoint. At the same time the board will benefit from the increased information flow which can lead to more innovation and efficiency, improving the overall business.

The interaction between the executive board and the employee owners is normally managed through the establishment of a staff council, trustee board or committee. Whilst promoting the sense of ownership within the business it can collate opinions and feedback to the executive board the owners' views and opinions.

This engagement and interaction between the executive board and its employee owners distinguishes a public services staff mutual from both the authority from which has spun out and more traditional private sector companies. 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at September 2015. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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