Worker-Owners and Unions
Source SolidarityInfoServices
Date 06/10/17/07:01

Worker-Owners and Unions
Why Can't We Just Get Along?


Dollars and Sense

This article is from the September/October 2006 issue
of Dollars & Sense magazine. issue 267 cover

YOU HAVE PROBABLY heard the story of the scorpion that
convinces a frog to carry it across a river. Halfway
across, the scorpion stings the frog, which means both
will drown. The frog does not understand; the scorpion
explains, "I couldn't help myself. It's my nature."

In the abstract, worker-owned enterprises and labor
unions would appear to have much in common. Both share
the goal of improving pay and working conditions. Both
aim to give workers a say in the workplace. And both
belong on any progressive's short list of strategies
for building a more just economic system.

But when unions and worker-owned businesses actually
interact, they sometimes act more like the fabled

The Ohio Employee Ownership Center at Kent State, where
I work, provides preliminary technical assistance on
worker buyouts. I once met with a group of employees
exploring a worker buyout of a failing paper mill in
southwest Ohio. When I asked them why they thought they
would do any better, they gave me an example. Pointing
to a large machine, they explained that it broke down
regularly, resulting in lost production. Any repairs
they could make were only temporary, until permanent
replacement parts could be installed. They went on to
explain that the mill had been bought and sold three
times over the past two years. Two owners ago the parts
had been purchased, but they were still sitting in a
storeroom. When these employees became the owners, they
were going to install the parts.

But would the workers really cooperate with management
as employee owners, and would management really
cooperate with them and empower them to make decisions
and act independently? Or, as with the scorpion, were
the decades of confrontational labor-management
relations so engrained in the nature of both groups
that they would sink their own company? In that
instance we'll never know, because the buyout effort
did not go forward. Competing Models?

Worker-owned businesses can take a variety of forms,
from full-fledged worker cooperatives to companies
whose structure and management practices are
indistinguishable from ordinary capitalist firms except
for the fact that their employees own some or all of
the company's shares (see "The Many Forms of Worker
Ownership."). Because most of the manufacturing
companies where worker buyouts have been used to avert
plant closures were unionized, unions have had to
grapple with reshaping their role in this new context.

The term "worker ownership" can describe a variety of
business structures. At one end of the spectrum, the
worker-owned cooperative model rejects the very notion
that capital should control the business and enjoy an
unlimited return. To the contrary, as political
economist David Ellerman describes it, in the
cooperative model labor hires capital, governance is
based on membership in the firm, and the return to
capital is limited. As a result, investors are not
easily attracted. Workers themselves typically have
little capital to invest. So co-ops are rarely found in
capital-intensive industries; most of the 400
for-profit co-ops in the United States are in
labor-intensive service industries, which do not
require expensive tools.

Another model involves direct worker ownership of
voting stock. Unlike the cooperative, this model
accepts the capitalist system but rejects the
capitalist. Here, the workers accept the assumption
that control and profits should be allocated according
to the number of shares one owns, but reject absentee
ownership of shares by those who do not work at the
firm. Only a handful of worker- owned companies are
structured this way because workers typically lack
capital to invest and are averse to risking the little
they may have.

By far the most common structure of worker ownership is
the Employee Stock Ownership Plan, or ESOP, which has
been used in over 11,000 U.S. companies since first
being written into legislation in 1974. About 9,225
ESOPs are active today, according to the National
Center for Employee Ownership. ESOP participants often
share ownership of the company with large investors.
Moreover, in most companies with ESOPs the
worker-owners not only accept that capital, not labor,
has the right to govern the business, but also allow
someone else to vote their shares of that capital.

The ESOP itself is a trust that receives tax-deductible
retirement contributions from the company. Two
characteristics set ESOPs apart from other retirement
plans, such as 401(k)s. First, ESOPs are not only
allowed, but required, to invest a majority of their
assets in the employer company's own stock. Second, an
ESOP can borrow money to acquire stock, releasing
shares to individual participants as future
contributions are made. While employees may not possess
credit, cash, or collateral, the ESOP provides a
vehicle for the sponsoring employer to fill this gap
with the credit, cash, and collateral of the company
itself. In other words, ESOPs provide workers with a
tax-advantaged structure for financing the acquisition
of their company.

The legal owner of the capital is the ESOP trust,
overseen by a trustee appointed by the board of
directors. In managing the ESOP's assets, under current
law the trustee is allowed to consider only the
workers' interest in increasing the value of their
retirement holdings--not their interests as employees
with concerns such as job security.

While worker buyouts to avoid shutdowns account for
only about 3% of all ESOPs, a majority of these are
companies with union representation prior to the
buyout. Without the leadership, structure, and
protection afforded by a union, employees generally
cannot build common cause quickly enough to present
themselves as viable buyers, before machinery has been
moved out and customers turned away.

While unions and worker-owners share many aims, there
are also profound differences. True cooperatives
address working conditions through direct democracy at
the company level. Members have the right to
participate in making decisions on matters such as
compensation and business planning. Co-op members do
not like being restricted in their decision-making by
factors external to the cooperative--even factors like
industry-wide collective bargaining agreements. When
co-ops interact with other co-ops, they typically form
secondary cooperatives controlled by the member co-ops,
which run them to serve their common needs. One might
say that co-ops tend toward decentralization.

In contrast, unions depend on numbers to build their
strength. They need to maintain a degree of discipline
among their locals, insisting on relative uniformity
around key issues. Unions' most effective strategy for
bringing about changes in the workplace is the
collective refusal to work. If the central leadership
cannot count on each local to follow its direction, the
threat of a strike loses credibility. Thus, unions
depend on centralization in order to create enough
power to offset that of the owners. Why Worker-Owners
Need Unions

Moreover, union representation might seem to be
superfluous for worker-owners, who after all are
supposed to have decision-making authority by virtue of
being owners. Most ESOPs are not structured so as to
give workers significant decision-making authority. But
even in the most democratic ESOP, a union can have an
important role to play. One way to look at the role of
unions is to observe the balance of power that exists
between the three branches of government in the United
States. The legislative branch makes the laws, as the
board of directors in a company sets policy by which
management must manage. The executive branch implements
or executes the laws on a daily basis, as management
runs the day-to-day operations. Even in those ESOPs
where the worker-owners have the right to participate
in electing the board of directors, that right does not
protect any individual employee from the power that
management enjoys to hire and fire, for example. Just
as the judicial branch protects individual citizens
from the misuse of power by an executive, the union
protects individual workers from the arbitrary use of
power by management.

Collective bargaining is another role that unions play.
A union can help worker-owners to assess their
situation in the context of industry-wide working
conditions and compensation practices. And via the
union, information flows both ways. In a cooperative or
an ESOP practicing so-called open book management, the
employees have full access to the company's financial
information. With such transparency, the union
negotiating team does not have to guess about what the
company can afford; it has the information required to
calculate what is available for compensation. Using
this as a frame of reference, the union is also in a
better position to bargain for strong agreements
throughout the industry.

Access to group rates on benefits like health insurance
or multi-employer pensions can be another advantage
that unions bring, especially in the case of
cooperatives, which tend to be much smaller than ESOP

Unions also bring a ready-made communication structure,
which can be helpful in building an ownership culture
among workers who are accustomed to having little say
in the business.

Some of the positive synergies between union
representation and worker ownership were at play in a
Toledo textile firm. In 1991, GenCorp was planning to
close down an unprofitable division, but instead agreed
to sell it to the 200-plus employees as Textileather.
The Amalgamated Clothing and Textile Workers Union
(ACTWU) supported the buyout and joined with management
in building successful employee participation. Training
in participatory practices was implemented from the
beginning, and an effective jointly led employee
involvement structure resulted in a 28% increase in
productivity, a 40% drop in scrap, and greatly reduced
machine downtime in the first year. The company was
immediately profitable. Ultimately, though,
Textileather's worker-owners decided that their primary
goal was job security, not ownership. In 1996, when the
acquisition debt was paid off, management and workers
agreed to sell the company. The buyer not only paid
160% of the valuation price, but also agreed to
increase wages, bring in additional work creating more
jobs, and give the employees the first right of refusal
if it decided to sell the plant in the future.

At another worker-owned firm, an initially strong
union-ESOP relationship failed to prevent a breakdown
of the worker-ownership structure. Republic Engineered
Steels' 4,500 employees, spread among eight plants in
four states and primarily organized by the United
Steelworkers (USWA), chose to buy their division from
steel giant LTV in 1989 to avoid a shutdown. The new
contract defined a structure for employee
participation: Work groups would meet regularly to
identify opportunities for change. They could implement
actions that affected only their area; other proposals
would be kicked up to the department level, the plant
level, and in some cases to a corporation-wide joint
labor-management committee. To get this structure to
work, 100 managers and their corresponding 100 union
representatives trained jointly for a week to become
co-facilitators. Union and management also formed a
joint committee to direct the ownership training

With a solid foundation of worker-owner participation,
the company successfully cut $80 million out of its
annual $800 million expenses in only 18 months--not by
cutting compensation, but by implementing employees'
ideas for improving operations.

Two events changed the picture. First, to provide
equity for the buyout, employees had agreed to roll
over $20 million from their LTV retirement plan in
exchange for preferred stock that paid annual dividends
at 16%. In order to retire this expensive debt,
management convinced the employees to let the company
go public. But management miscalculated the price the
shares would obtain, disappointing the workers and
shaking their confidence in company leadership.
Furthermore, in an attempt to enhance the company's
reputation with its new outside shareholders and raise
its share price, management became less sensitive to
the priorities of its worker-owners.

Then, in the late 1990s the price of steel took a deep
plunge. Instead of responding to the crisis by taking
advantage of the participatory structures that had so
methodically been created, management fell back on its
traditional MO, implementing changes with no worker
input. When management made plans to open a new plant
where it could get the most concessions from the local
government--a decision that would have put many of its
Massillon, Ohio, worker-owners on the street--the union
became so frustrated that it sought out an investor to
buy the company, giving up ownership in order to
dislodge an entrenched management.

Unions have other ways of getting management's
attention, short of selling the company. Some choose
the traditional union weapon: the strike. In 1998, the
worker-owners at the 100% employee-owned Republic
Storage Systems, represented by the Steelworkers, chose
to go on strike, ostensibly over a few pennies. In
fact, this was their way of expressing a vote of no
confidence in the CEO. Soon after, the CEO did resign,
and the employees found a new leader they were prepared
to follow. In fact, in 2003, when the entire plant was
severely damaged by a flood, employees came in on their
own time to clean up the plant. Communication and

Union members are conditioned to be suspicious of
management. Worker buyouts are far more likely to be
successful if workers and management build trust; the
experience of a number of companies shows that the best
way for managers to build that trust is to operate with
transparency and open up workers' access to

The union bargaining committee at Dimco-Gray, a 100%
employee-owned company with about 110 worker-owners,
was refusing to budge on management's proposed profit
sharing formula. Management wanted to reserve an amount
equivalent to 5% of the company's assets before paying
out 50% of the remainder as profit-shares to the
employees. The bargaining committee members decided the
trigger for profit sharing should be no more than 3% of

The impasse was broken after an Ohio Employee Ownership
Center trainer met with the committee. After reviewing
the basics of the profit and loss statement and the
balance sheet, employees asked, "Where does the
company's share go?" The trainer explained that it went
to build up the company's equity, in the same way that
the principal portion of monthly mortgage payments
increases a homeowner's equity. The union team realized
that the issue was not how much do we get and how much
do they get. As a 100% employee owned company, the
employees get it all. The question is, rather, how much
do we take out for current consumption, and how much do
we re-invest for a stronger retirement. Agreement on
the contract was reached the very next day.

At Republic Engineered Steels, a group of 50
employee-owners, half blue collar and half white
collar, attended an offsite peer-training workshop.
Believing the program to be a sham, some of the union
members had signed up to be trainers so they could
expose it. I recall overhearing some union participants
discussing how the company had brought them there to be
brainwashed. But when they realized they were getting
real information, they became much more supportive of
the changes and became the company's best trainers.
Their reversal in attitude got the attention of others,
who had known them to be outspoken skeptics. Reasonable

Although workers and companies can clearly benefit from
maintaining union representation following a worker
buyout, unions have historically been skeptical about
worker ownership. For one thing, they have had to
contend with a string of companies that have engaged in
deceptive practices in connection with creating ESOPs
or selling plants to workers.

For instance, the International Brotherhood of
Teamsters has good reason to be suspicious of employee
ownership. In the 1980s, when deregulation was exposing
trucking companies to lower-cost competition, the
Teamsters refused to negotiate any changes to the
master contract. At the same time, the union did not
object if individual locals chose to exchange specific
items in the contract for an equivalent amount of
company stock held in an ESOP.

With this hands-off position, neither opposing nor
encouraging employee ownership, the union left its
locals at the mercy of the companies. Some trucking
company owners were able to get away with matching
their workers' concessions with stock in assetless
"front" companies that leased their trucks from the
owner's separate asset-holding company. When the front
companies failed, the workers had neither revenue nor
assets to give their stock any value.

One of the Ohio Employee Ownership Center's first
employee buyout efforts was with Atlantic Foundry in
Akron, Ohio. The owners had announced a shutdown
because the foundry was unable to turn a profit. A
quick analysis showed that the revenues did cover the
direct costs, generating a gross profit, and that with
sufficient sales volume, the buyout would be able to
cover its indirect and debt service costs.

Despite this good news, the Steelworkers showed little
initial support for the buyout effort and eventually
took a clear position opposing it. Why was the union
not willing to help these workers save their jobs?

The reason the foundry was losing money was its pension
obligations to past workers; the plant simply did not
generate sufficient income to cover this additional
non-operating expense. Deeper analysis revealed that
the owners had withdrawn a significant amount of
non-operating assets and placed them in a separate
company, whose balance sheet did not show the
obligations to the retirees. The owners had offered to
sell the company "for a song" as long as the workers
took the retiree obligation with them. The union
believed that the new company would fail if saddled
with this obligation, and that the retirees would then
have a more difficult time going after the original

In the case of a deceptive sale, as with Atlantic
Foundry, the union did exactly the right thing. Had the
Steelworkers not drawn attention to the deceptive
offer, the workers would have taken on more debt--the
obligation to the retirees--than the operation could
service. This would have left them bankrupt and
unemployed--and left the retirees with a more difficult
legal battle in any attempt to salvage their pensions.
In essence, the active employees and the seller were
negotiating a sale based on the risk capital of an
absent voice: the retirees. The union brought that
voice to the table. With this transparency, a more
feasible transaction might have been possible. For
example, negotiators could have placed a fair value on
the retiree obligation; a trust could have been funded
with a note from the new worker-owned company, equal to
the fair market value of the operating business, and
with cash from the seller to cover the balance. Of
course, this was exactly the outcome that the unethical
sellers were attempting to avoid. Not surprisingly, the
foundry still sits idle today, two decades later.

Unions also have legitimate concerns about worker
buyouts leading to decertification of the union. For
the most part, if a company does not have a union
before becoming worker-owned, it probably will not form
a union afterward. Employees reason, "If we didn't need
a union when we were owned by someone else, why would
we need one now that we own the place?" Similarly,
companies that have a union before the buyout often
continue with the union under worker ownership.
However, in some instances sellers have forced workers
to disband their union as a condition of the buyout
deal. In the case of Plymouth Locomotive, the owners
refused to sell to a union workforce. The UAW agreed to
decertification in order to let the buyout move
forward. In the case of the Brainard Rivet Division of
Textron, the employees did not decertify; the union
local simply ceased to exist when the plant was closed.
When Fastener Industries, a successful 100%
employee-owned company, offered the Brainard workers
the opportunity to reopen as a subsidiary, the workers
agreed not to re-establish the union.

On the other hand, organizing drives sometimes do
succeed at employee-owned companies where workers view
the union as a mechanism for reshaping the ESOP along
more democratic lines. At Voto Sales and Manufacturing
in Steubenville, Ohio, for example, the management
controlled the initial board of directors following the
buyout, allowing them to put a hand-picked trustee in
charge of the ESOP. In other words, while owning only a
minority of the company stock, management had
positioned itself as the controlling shareholder group.
The workers brought in a union as a way to establish a
balance of power. After establishing a Steelworkers
local, the employees were able to get the ESOP modified
to pass through voting rights directly to the
participants, in effect, bringing management under the
control of the owners again.

Finally, unions have a duty to workers across an
industry as well as to those in a particular workplace.
Recently a worker co-op member contacted me looking for
guidance on resolving a difficult conflict between his
co-op and the union that organizes a few of its
employees. Most of the workers at this site had
supported the worker buyout and joined the co-op. A few
of the workers, who are represented by a union, chose
not to become members. In order to generate the surplus
necessary to pay off the acquisition debt, the members
agreed to reduce their wages and benefits. However, the
union insisted that the terms of the collective
bargaining agreement not be altered. The co-op members
believed that to stick to the contract would be unfair
to the members who were not in the union, because they
were making sacrifices to help the co-op survive. And
if all of the members were compensated as the union
members expected to be, the business would fail. Since
one of the principles of a co-op is autonomy from
outside organizations, it seemed inappropriate for the
union to be insisting on sticking to the contract, when
even the members affected were willing to adapt.

But the co-op members had to recognize that the union
was not dealing with their company in a vacuum. A union
has to bargain with the entire industry and try to get
the best possible deal for all of its members. Any time
a local agrees to a lower-cost contract with one
employer, that undercuts the union's bargaining
position with all other employers. Each employer will
expect to get the same contract as the competition, so
the result is that wages fall. Industry-wide worker
solidarity is just as important to union members as
autonomy is to co-op members.

As it turns out, in this instance both the need to
respect an industry-wide collective bargaining
agreement and the co-op members' right to compensate
everyone fairly and according to cooperative values can
probably be satisfied. For the co-op members, their
compensation is not wages per se, but rather an advance
on their profit share. If the union-member employees
are to receive higher pay in accord with their
contract, that can be offset by giving them a smaller
share of the surplus as owners. The nonunion co-op
members, who get a smaller "advance" now, will receive
a larger profit-share down the road. The Road Ahead

Can worker-owners and unions get along? Notwithstanding
the profound differences between worker ownership and
union representation as strategies for improving
working conditions and giving workers a voice, and in
spite of unions' sometimes valid skepticism, the simple
answer is: They must! Globalization has exposed both
the labor movement and worker-owned cooperatives to
intense competition within a framework of laws and
policies that relentlessly favor corporations over
workers. To respond effectively, workers need a varied
toolkit; they cannot afford to abandon solidarity
merely because different groups pursue different

The collaboration between the Hotel Employees and
Restaurant Employees union (HERE) and Cooperative Home
Care Associates, a large, Bronx, N.Y.-based co-op,
provides a good case study. When HERE sought to
organize CHCA's employees, the workers, who already had
significantly better pay and working conditions than
most home health aides, initially showed little
interest. CHCA's management, on the other hand, saw an
opportunity: a successful industry-wide organizing
campaign would raise the payroll of the competition
closer to the co-op's costs.

CMCA's managers believed a union organizing drive would
benefit their co-op. Likewise, creating co-ops may
benefit a union's organizing work, according to
Lisabeth Ryder, an American Federation of State,
County, and Municipal Employees (AFSCME) administrator.
Ryder believes that when public-sector jobs are
contracted out to large corporations, unions such as
AFSCME, instead of repeating traditional organizing
drives that face growing obstacles and often fail,
could help the privatized workers to turn their units
into worker-owned cooperatives that could then bid
against the corporation for the government contract.

Today, the worker-ownership and labor movements are
engaged in an expanding dialogue. This June, several
union leaders participated in a symposium in Halifax,
Nova Scotia, on cooperatives and their workers. In
September, the Canadian Worker Co-op Federation hosted
over a dozen regional labor leaders at a two-day
workshop in Saskatoon to explore the development of a
joint strategy for worker-driven interventions to avert
plant closures. Retired Steelworkers President Lynn
Williams set the tone for the meeting with a brief
review of his union's development of a proactive
position on employee buyouts. Participants ended the
meeting by forming the Prairie Labour-Worker
Cooperative Council; with the Ohio Employee Ownership
Center as a model, the council aims to create a
regional program and infrastructure to support worker
buyouts and foster collaboration between the
worker-ownership and labor movements.

The U.S. Federation of Worker Cooperatives hopes that
its effort to engage labor leadership at its biannual
conference this October in New York will prove just as
successful as that of its Canadian counterpart.

As unions and co-ops engage in further discussion and
collaboration, they may discover unexpected synergies
between the two strategies. Ideally, such
collaborations will turn out to strengthen and
invigorate both the union staff and members and the
worker-owners who are willing to cross over and work
together toward a common goal of empowering workers.

Dan Bell is currently the International Program
Coordinator at the Ohio Employee Ownership Center at
Kent State University, where he has worked since the
center opened in 1987. He has consulted on employee
buyouts and developed training programs to help new
employee-owners expand their role beyond a particular
job to a company-wide focus. Bell authored Bringing
Your Employees into the Business: An Employee-Ownership
Handbook for Small Business (1988) and An Employee
Owner's Guide to Understanding Financial Reports
(1994). During the 1990s he implemented OEOC programs
in Russia and Chile; in the United States he has worked
with the steering committees forming the U.S. Worker
Cooperative Federation and the Eastern Cooperative
Conference. This article was adapted with permission
from a paper presented at a symposium held by the
Master of Management--Co-operatives and Credit Unions
Program, St. Mary's University, Halifax, Nova Scotia in
June 2006.

Dollars & Sense 29 Winter Street, Boston, MA 02108 USA
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Copyright (c) 2006 Economic Affairs Bureau, Inc.

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