Can we start new employee-owned companies in Ohio on a mass scale? Tools from Spain

The core of the Corporation of Labor is the following: 

1. It is a form of incorporation in which workers in the company own more than 50% of the shares in the company;
2. No single person (employee or outsider) generally can own more than 1/3 of the stock in the company (one exception – when a public organization takes partial ownership, it can hold up to 49%); and
3. No more than 25% of the hours worked by permanent employees of the company can be worked by non-owners in companies with fewer than 25 employee shareholders and no more than 15% of the hours can be worked by permanent employees in companies with more than 25 employee owners, i.e., employee owners have to provide at least 75% of the hours worked in smaller companies and more than 85% in larger companies.

The SLs are part of the "social economy," says Hernandez. They seek "balance between human and business development" and to create "an equilibrium between capital and labor."

SLs come in two varieties. The first is the regular Corporation of Labor (Sociedad Anonima Laboral) which originated as a way to buy companies threatened by shutdown or job loss. It dates in practice to the late 1970s in worker buyouts, and was accorded separate legal status through 1986 legislation; it requires a minimum capitalization of 60,000 Euros (about $80,000 at the current exchange rate of €1 = roughly $1.35). The second is the Limited Liability Corporation of Labor, established in 1997, which requires a minimum capitalization of 3,000 Euros and is appropriate to new start-ups. So easy to establish are the SLs that roughly 3 out of 4 employee-owned start ups in the Basque region now take that legal form.

In Spain as a whole, there are 2600 of the former, employing 38,000, and 17,700 of the latter, employing 93,000. So average employment is low (under 7) but total employment is a respectable 130,000.

While Sociedades Laborales have modest tax benefits (primarily for incorporation and transfer taxes), their real appeal since 1985 is that employees can receive their unemployment compensation (24 months in Spain and between €24,000 and €30,000, depending on the number of children the unemployed worker has) in a lump sum to recapitalize the company or to start a new company.

There are two major problems in starting new businesses: (1) capitalizing the firm (financial capital), and (2) building a reliable group of employees who can work together successfully (social capital).

("Social capital" is the relations of collaboration and trust between the employees that grew out of years of working together in an existing business. It’s lost automatically in plant shutdowns and takes years to rebuild. The failure to do so successfully is one of the major causes of new business failure in the US.)

Beginning in the late 1970s, Spain began encouraging groups of employees who lost their jobs to shutdowns or layoffs to jointly start new employee-owned businesses, saving social capital for the new business, and converting worker financial rights into capital for new business start ups.

The initial mechanism for capitalizing new firms was lump-sum distribution of severance pay in shutdown or layoff situations. (Spain had a general system of severance pay for valid dismissals – today it is 20 days’ wages for each year of service up to a maximum of 12 months’ pay.) Obviously bankrupt businesses that are shutting are not going to pay severance to their workers, so the Ministry of Labor lent the employees their severance to help capitalize the new business. Today there’s a national severance insurance fund which can provide severance pay when companies can’t.

Beginning in 1985, the government also provided lump-sum distribution of unemployment compensation to employees in major permanent layoff/shutdown situations to help capitalize new employee-owned companies through co-ops or Labor Corporations. In order for the employee group to receive lump-sum distributions, they needed to have a viable business plan to resuscitate their shut firm or to start a new employee-owned company. The plan has to have been vetted by a reputable cooperative or SL development program and to pass the scrutiny of the unemployment compensation system. The unemployment compensation system continues to monitor the new employee-owned business for three years.

The funds are used to capitalize or recapitalize the business and to provide working capital (including wages) in the start-up or restart phase. Obviously this system also reduces long-term unemployment by creating new businesses.

What’s to keep us from trying a pilot program like this in Ohio?

One of the truly astonishing aspects of the Spanish system of employee ownership start-ups is the intense level of services provided by various employee-ownership business development centers. They are well staffed and provide services that go far beyond what our Small Business Development Centers provide.

And they have an extraordinary success rate assisting employee groups with adequate social and financial capital: only about 1 in 5 cooperative business start-ups fail in the first five years, as contrasted with about 4 out of 5 conventionally owned business start-ups in the US.

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