Oct 29, 2019

Written By David Carnes

The "gig" economy vs employee ownership

Oct 29, 2019

Written By David Carnes

Welcome to the future: two disparate forms of economic organisation are vying for supremacy in the 21st century.

We’re now about three decades into the information age, and the pace of change continues to accelerate. Old industries are dying as new ones are born, of course, but the change is more profound than that. Even rigid labels such as capitalism and socialism are becoming outdated as the economy morphs into ever more innovative forms.

The “Gig” Economy

Consider Joe. After graduating, he embarked on a career with a retail chain, where he worked full-time for more than 40 years before retiring with a full company-funded pension that supported him until the day he died. The salary he was paid was enough to support a family of four on only one income.

Now consider Joe’s granddaughter Angela. After graduating, she took a permanent full-time management position with a sizeable retail chain, only to see it collapse in the face of online competition. She now juggles a handful of low-paid freelance jobs—driving for a ridesharing company, delivering packages for an online retailer and writing articles for various websites. She enjoys no guaranteed income, no minimum wage and no retirement plan.

Welcome to the gig economy. “Gigs” are temporary freelance positions in which you work for various clients, not for a single boss. Since you may or may not be able to cobble together a full-time living in the same industry, a “jack of all trades” mentality prevails among large sections of the freelance community. As of 2018, the UK hosted about two million freelancers.

Telecommuting

With so much work happening online today, there’s often no need to go to the office. Consequently, many workers are opting out of the office routine in favour of working from home—or wherever they can carry a laptop. According to the UK Labour Force Survey, 2.2 million UK workers telecommute, and the number is growing exponentially. Although many traditional employees now telecommute, freelancers are greatly overrepresented among telecommuters.

Although telecommuting offers many conveniences, for freelancers in particular it often means they must compete directly with a national or global workforce, even in the location where they reside. And much of the world can afford to work much more cheaply than the average UK worker can, if for no other reason than that the cost of living is cheaper elsewhere in the world than in the UK.

The disadvantages of the gig economy

The new “gig economy” has been praised for spurring innovation, for allowing businesses to tailor the size of their workforce to seasonal variations in consumer demand, and for reducing payroll expenses. Criticism comes mainly from workers’ advocates, and not without reason. “Gig” workers are legally considered “independent contractors” rather than employees, and as such they lack many of the labour law benefits that employees take for granted. As a freelancer:

- You have no job security. A freelance client doesn’t have to “fire” you—all he needs to do is stop sending you new work, which frequently happens without any advance notice. A freelancer is forced to juggle many clients to avoid becoming too dependent on any one of them.

- Many of the “safety net” features guaranteed to employees by labour law don’t exist. Your clients offer you no sick leave, no paid holidays, no pension and no health benefits. You have to take care of these matters yourself.

- Juggling clients often requires quite a bit of administrative work, for which you will not be separately paid.

- You will not have the advantage of a company HR department that offers on-the-clock skills training seminars. You will have to arrange for your own, off-the-clock training, and any fees you pay will come out of your own pocket.

The continued expansion of the gig economy is likely to result in a widening gap between rich and poor, the addition of many white-collar workers to the permanent underclass, calls for radical political solutions to the slow destruction of the middle class, and a retirement crisis of potentially unimaginable proportions. A storm is brewing, and time is running out to do something about it.

Fortunately, however, not all changes in the structure of the economy are negative—in fact there is one emerging alternative that, if properly supported by appropriate legislation, might help UK workers—as well as the entire world—escape the “gig economy” trap.

Employee ownership

Marx would be appalled at the extent to which employee ownership has blurred the distinction between “bourgeoisie” and “proletariat”. That being said, however, most employee-owned companies do not vest their employees with a controlling interest in the company (employee-owned corporations are a major exception). What they do instead is provide their employees with enough of a stake in the company to trigger superior motivation.

What is employee ownership?

Employee ownership can be defined as an ownership structure in which a company allows all of its employees (i) a meaningful economic stake in the business and (ii) the benefit of organisational structures that promote employee engagement. This boils down to two main perks—financial benefits in proportion to the company’s profitability, and a say in how the company is owned and run. The gig economy offers neither of these benefits.

By the foregoing definition, employee ownership is responsible for about 4% of the UK’s annual GDP, and the number of employee-owned businesses is growing at a 10% annual rate, according to the Employee Ownership Association. Employee ownership is a rising star.

At least 300 UK forms can be classified as employee-owned, including Clansman Dynamics, PA Consulting Group, Mott MacDonald Group, Talis Group and the West Highland Free Press. In 2017, the UK's 50 largest employee-owned companies sold over £22.7 billion in goods and services, and they employed over 175,000 employees. Scotland in particular seems to be taking the lead in establishing employee-owned companies.

Forms of employee ownership

Most employee ownership schemes can be divided into three categories:

Direct employee ownership, in which the company allows employees themselves to own a significant proportion of company shares;

Indirect employee ownership, where shares are placed in a trust fund for which the employees are the beneficiaries; and

Combined direct and indirect ownership.

Routes to employee ownership

Obviously, it doesn’t all happen automatically. There are a number of processes by which a company might become employee-owned. Here are just a few.

- Company owners decide to sell the company to their employees. This is the most common route to employee ownership.

- A company decides to broaden its existing ownership structure to include all of its employees.

- A start-up company decides on an employee ownership model from the beginning.

- A failing company allows its own employees to buy it out, in order to avoid bankruptcy or insolvency.

The 2014 tax incentives

The government has taken notice of the growing prominence of employee ownership as well as its encouraging track record of success. In 2014, it introduced two new tax benefits designed to promote employee-owned businesses:

- Company owners may now sell a controlling interest in their company to an employee trust without owing any capital gains tax.

- Employees who work for companies controlled by an employee trust may receive tax-free bonuses of up to £3,600 per year.

- How employee ownership can benefit a company

- Employee ownership can benefit a company in a multitude of tangible and intangible ways that both enhance customer service and improve the company’s bottom line.

- Employee ownership creates a more trusting environment that improves employee productivity, by reducing the day-to-day frictions and resentments that can act as a constant but unseen drag on profitability.

- Employees also simply try harder when they feel involved in the business at every level. A feeling of engagement generates “discretional effort”—more than just the minimum effort needed to do a job—which in turn results in greater efficiency as well as innovation at the grassroots level.

- Finally, employee morale tends to improve dramatically. Although it’s difficult to put a number on this type of intangible asset, it’s ultimately beneficial to the company.

How employee ownership can benefit employees

Employee ownership can benefit employees in all manner of ways, some of which are decidedly counterintuitive. Workers at employee-owned companies accumulate assets faster than employees at traditional companies, even after averaging out for purchasing power. No one is sure why this is the case, but the explanation is probably psychological.

Employees of employee-owned companies are more likely to enjoy a multitude of non-salary benefits such as flexible work schedules, retirement plans, maternity and paternity leave, childcare benefits and tuition reimbursement for job-related training.

Given the profitability of most employee-owned companies, none of this seems to come at the expense of company profits. Instead, it seems to operate more like an investment from the company into its own human resources, and one that pays off handsomely.

Employees of employee-owned companies retain their positions longer than other employees do—the average employee has been at the company for 5.2 years, compared to 3.4 years for employees of traditional companies.

Possible legal reforms

The UK government could take the following legal initiatives to further encourage the formation of employee-owned companies:

- Establish a corporation tax deduction for contributions to employee trust funds, that applies even after the trust owns a controlling interest in the company.

- Allow companies and company owners to avoid capital gains tax when selling company shares directly from a non-employee to an employee (without using an employee trust fund as an intermediary).

- Establish generous subsidies for organisations that encourage and facilitate employee ownership, especially consulting firms and think tanks.

- Generate online and offline publicity for the successes of employee-owned companies, so that employers will recognise the benefits of this type of ownership.

- Create a brand-new business vehicle, such as a modified LLC, that is specifically designed to accommodate the needs and concerns of employee-owned companies.

This is just a bare beginning, for course. The most innovative and effective ideas are likely to come from employees themselves, whether or not they already possess an ownership stake in the companies they work for.

The future of the UK labour market

We live in a time of seismic shifts in the economic landscape that in some ways resemble a slow-motion earthquake. No matter how things turn out, over the next few years, we must all brace for a revolutionary long-term impact on the way that goods and services are produced and distributed.

Unlike the case of a natural disaster, however, we have some control over what’s happening. We can watch as passive spectators while inevitable changes in the economy swallow us whole, or we can use rational incentives to create a new and higher economic foundation.

Key Takeaways

Two of the most consequential innovations in the labour market are the “gig” economy and employee-owned companies. These two forms of economic organisation are distinct from each other, and each of them carries profound implications for what it means to “have a job.”

The “gig” economy is a short-term, quick-fix solution to current business needs that’s simply unsustainable in the long run. Ultimately, it’s bad for both workers and companies.

Employee ownership is a win-win proposition for employers and employees. The enhanced legal rights granted to employees do not lead to a zero-sum competition between capital and labour—instead, they lead to mutually beneficial arrangements.

Companies can enhance their value either directly (by increasing sales, for example) or indirectly, by investing in the people who make it all happen—the employees. This type of investment can in turn lead not only to increased sales but also to lower production costs, as efficiency soars and innovation becomes a day-to-day part of company culture.

Business planning isn’t all about numbers. Although numbers still matter, qualities that are intangible at the input level, such as a sense of community and common purpose, can result in decidedly tangible benefits (increased profits, for example) at the output level.

The successful track record of employee-owned companies demonstrates that the value of employee morale has been grossly underestimated and that the best way to enhance employee morale is to give them a legal stake in the business.

Commercial Insights