The Differences Between ESOPs, Unions, and Worker Coops

Companies can have many different kinds of leadership structures and organizations. Some of these, like the traditional board of directors and C-levels, tend to be very exploitative of workers; unions formed in response and allow workers to exert collective bargaining pressure to protect their rights. Other forms of organization, such as worker co-ops and ESOP ownership models, also exist.

What are the differences between these three models, what do you need to know about them, and which is best? Let's talk about it.

What is a Labor Union?

A labor union, worker's union, or simply a union, is an organizational structure for employees of a given business or within a given industry. It's a structure that exists as a way to leverage the power of the employees all together, against the management that would exploit them without compensation if they could.

Labor unions have a long and storied history in the United States and around the world. Many of the earliest unions were focused on garment makers and shoemakers as far back as the late 1700s and early 1800s. Over time, more and more professions have unionized, and now there are many unions, large and small. Examples include:

• The Teamsters Union
• The United Food and Commercial Workers Union
• The United Auto Workers Union
• The National Education Association

There are also unions for creative professions, such as:

• The International Alliance of Theatrical Stage Employees
• The Screen Actors Guild and American Federation of Television and Radio Artists
• The Freelancers Union
• The National Writers Union

And, of course, there are narrower company-specific unions, like the recent Starbucks Workers Union.

Labor unions are usually democratic organizations where workers pay dues to support the union and elect union officers to guide the union's operations. In return, the union as an organization offers protection to its members. They can help fight against unjust treatment, uphold labor laws, and threaten to take companies to court for exploitation.

One of the most powerful tools a labor union has is the power to strike. When a strike action is authorized, workers in the union either refuse to work entirely or, if they're in an essential service position like healthcare providers, work but refuse to process payments. This puts pressure on the management of the organizations causing problems, and brings them to the bargaining table.

Generally, when faced with an immediate and devastating lack of operations, management will come to the table. Bargaining and deal-making then occur, and the union works to support workers with additional benefits, pay, limitations on hours, or other demands.

Some unions are, of course, better than others. Police unions are notoriously insular and operate more like a self-defensive brotherhood. Some company unions are heavily influenced or bought out by the corporation and don't offer much protection or proactive activity. On the other hand, many of the biggest unions are very proactive in protecting the rights and freedoms of their members. Collectively, unions can also coordinate with one another for industry-wide or national-level organizations.

There are many criticisms of unions; some are valid, and others are not. Some unions have been involved in organized crime in the past. Some are ineffective. Some are compromised. Some are simply too small to influence much.

On the other hand, criticisms such as needing to pay dues or needing to join unions for certain industry or company positions, are essential to maintain their power. It's not as though those dues or those memberships are ineffective, either. Big, industry-altering changes have been made on the power of unions. Even the fact that we take a 40-hour workweek as a baseline is the result of union struggles to prevent exploitation with overly long hours.

Where applicable, unions generally apply a badge, label, or "union bug" to products their labor is used to create. We have a more detailed rundown of union labels over here if you want to learn more.

That's labor unions; what about worker co-ops and ESOPs?

What is a Worker Co-Op?

A worker co-op is, essentially, what might happen if the labor union looks up at the management and thinks, "What do we even need them for?"

An organization owned by a worker co-op is not really a company; it's a cooperative. Ownership is split between the workers, management and direction are voted on through democratic means, or a board of leaders is elected by the workers to handle operations while representing the whole of the co-op.

Co-ops are as old as the industrial revolution, though the more modern environment for worker co-ops didn't start until the mid-1800s, with groups like the Rochdale Society of Equitable Pioneers, and later with the current movement that started in the 1960s.

The general idea, of course, is that everyone is in it together. Workers own the cooperative collectively, have a vested interest in the success of the organization, guide the managerial decision-making to goals that align with the greatest will of the cooperative, and collectively reap the benefits of success – or failure.

If a cooperative does well and grows, everyone involved in it gains their share of the profits. If a cooperative falters and fails, on the other hand, everyone falls together.

Often, worker co-ops are established on a bit of a delay. New hires and new members aren't inducted right away but are evaluated on a probationary period to make sure they're suited for co-op work and for their ability to provide insight and influence that can help guide the cooperative.

In today's modern environment, co-ops are relatively scarce and small. It's often a structure used by a small group of people who want to start a company together, but don't have the funds for a traditional corporation, or who want to all have a share of the administration rather than splitting up duties like a traditional board of directors. The largest worker co-op in the world today is the Mondragon Corporation, a Spanish corporation founded in 1956 and employing around 70,000 people.

On the other hand, there are only an estimated thousand or so worker co-ops in the United States, representing fewer than 10,000 people. They aren't a very prominent or widespread structure, especially compared to labor unions.

When successful, a worker co-op tends to be a very stable formula that can withstand variance in the market, and can make more reasoned decisions that benefit everyone rather than chasing the nearest short-term profits at the expense of longevity.

The downside, and one of the reasons why co-ops aren't all that popular, is that they aren't necessarily an advantage in the market. Workers foot the bill for up-front costs of forming and running a business, and profits, since they're split amongst the workers, can take a long time to recoup those costs. Downturns can be harder to resist, and management decision-making can be slow. Wages tend to be lower on average, though the pay disparity between the highest and lowest earners is much lower than it is compared to a standard corporation.

This brings us to the third structure: the ESOP.

What is an ESOP?

If a co-op is a way of structuring a business, and a union is a way of bargaining with a potentially exploitative or oppressive managerial class, how does an ESOP fall into the pattern?

ESOP stands for Employee Stock Ownership Plan. However, don't let the name fool you; it doesn't really have anything to do with ownership or control over the company.

ESOPs are, essentially, a retirement fund. Workers who are employed by a company that offers an ESOP are able to put shares of the company – newly issued for the purpose – into a trust fund. The trust holds them and manages money and is managed by a qualified trustee.

The idea is that employees, over the course of their careers, vest into some amount of shares of the company. These shares are part of the pay and benefits package the employee is offered as part of their employment. Sometimes, vesting is gradual, with a certain number of shares each month or year of employment. Other times, it's 0% until a certain number of years of employment pass, whereupon 100% are vested. Still other times, it's immediate upon hiring, though that's rare and potentially subject to limitations.

The idea behind an ESOP is that the workers who are issued shares are encouraged to "give it their all" for the company because anything that helps the company improve in market share or value will, in turn, increase the value of the shares.

When a vested employee leaves the company or retires, the company buys the shares from them, and the money becomes a sort of severance package or retirement plan, depending on how it's structured. It might be a lump sum or amortized payments. The purchased shares are either redistributed (such as to a replacing employee) or are voided.

The ESOP structure is beneficial for a few reasons. For one thing, employees get more value out of it than raw money, and there are tax advantages to both the company and the employee. Some companies can even be effectively private, with the ESOP trust holding 100% of the company's shares.

The downsides of the ESOP structure are formidable, though.

• ESOPs are expensive for a company to manage and are largely inflexible.
• ESOPs often bring in regulatory scrutiny as a tax evasion risk, though that's a risk more for the company than the employees.
• ESOPs don't confer leadership stake or power. Workers with shares ostensibly have some voice, but in reality, they don't get any real power out of it.
• ESOPs become less valuable if the company tanks and their value relies entirely on stock price and market whims.
• ESOPs only really work for companies large enough to manage the high fees, and have a profit margin such that they can continue to grow and fuel the plan.

Among these, the lack of leadership influence is the biggest area where the ESOP structure falls flat compared to unions or co-ops. A company with an ESOP still needs to be more transparent on average than another firm, but the degree to which they consider employee influence is somewhat limited.

ESOPs are very common in certain industries, like manufacturing, and cover around 15 million people across 8% of the private sector workforce. They also aren't mutually exclusive; no co-ops are likely to have ESOPs because of the relative sizes necessary, but companies that employ union labor may have ESOPs as part of the compensation package.

Which is Best, ESOP, Co-Op, or Union?

It's fairly clear that unions win the day.

ESOPs aren't really a structure that protects workers; in fact, if anything, it's just a way to abstract some of the value of the pay and benefits a worker gets while "encouraging" them to work their hardest for the benefit of the company. In extreme cases, they can even be an implied threat or attempt to be pressured to maintain loyalty under duress. Employees about to vest might be more hesitant to leave a poor situation for a better job, for example.

Co-ops are a good idea in theory, but in practice, they aren't often successful. Investors hesitate to invest in them, disagreements between workers can cause devastating problems, and they're very hard to manage appropriately. There's also a self-reinforcing problem of unfamiliarity; people aren't really sure of how they work or confident in their operation, so they hesitate to join, form, or invest in them, so they don't grow.

Unions, meanwhile, work within traditional power structures to form an opposition to exploitation. When well-managed and with sufficient buy-in, they become a force that can alter the course of the nation – and, in fact, have numerous times in the past. When the alternative is unchecked exploitation or trusting management to "do the right thing," the choice is clear. For workers, for companies, and for every purpose other than the bottom line of the C-level crew, unions are the best option.

Do you have any questions about any of the three? If so, be sure to let us know! We'd be more than happy to help.