A Skeptical Conversation about ESOPs

Two CEOs who have adopted employee ownership take questions from a third who is considering it.

Good morning! We don’t have a new 21 Hats podcast episode for you today—we’ll be back in two weeks—but we do have a terrific video conversation about the pluses and minuses of employee ownership.

Today’s highlights: There can be tax consequences for employers who permit remote work. There can be legal challenges for employers who try incentives to get employees vaccinated. And what explains the surprising increase in startups?

THE 21 HATS CONVERSATION

What’s in It for the Owner? A Skeptical Conversation about ESOPs: “The proponents of employee stock ownership plans can make them sound like the greatest thing ever. With an ESOP, a business owner can take a big chunk of money off the table—or even all of it—while still getting to run the business. And there are some pretty great tax breaks. Oh, and it may even solve income inequality in America. On the other hand, if ESOPs are so great, why are there so few of them? Both Jeff Taylor and Jim Kalb run companies with employee stock ownership plans. Jay Goltz is thinking about implementing one — but he’s got questions, such as: Where does the money to buy the company come from?”

• “What if you do the ESOP and the business gets into trouble? Does the owner come out okay in that deal?”

• “Do you need to be a certain size? Do you need to be profitable? What are the key requirements to even consider doing this?”

• “Jim, you made the switch fairly recently. Do you think there's been a change in the way your employees view the company since going ESOP?”

• “How about firing an employee who's a part of the ESOP. Is that more difficult because it's an ESOP?”

• Have there been moments when you thought, Oh, man, this was a mistake. I'm really sorry I did this?”

GOVERNMENT SUPPORT

This owner gave back his PPP loan because his banker said he could apply again and get a larger loan. Then the program ran out of money: “When Carmelo Ramos, 36, got his second-draw loan from the Paycheck Protection Program in February, he was grateful. The $11,458 loan was more than the roughly $6,200 he got in the first round of the program in 2020. Though it didn’t cover all the business his training consultancy lost due to the coronavirus pandemic, it helped. Then, his personal business banker at Capital One notified him that he could get even more money — an additional $7,000 — if he gave back his loan and reapplied.”

• “‘The money I would’ve received would have made a difference,’ said Ramos, adding it would have covered his pay. He was also planning on investing some of the loan into new marketing materials.”

• “Ramos was one of millions of business owners stuck in the pipeline in early May when the PPP suddenly exhausted the $292 billion allocated to it.” READ MORE

REOPENING

Some employers are trying carrots instead of sticks to get employees vaccinated: “Dollar General, Houston Methodist, Kroger, Petco, Target, Walmart, the Maryland state government, and numerous other companies have offered various-sized cash stipends to workers who get vaccinated. The bonuses usually don't exceed $500. Yes, but: There is no clear standard for how large those rewards can be without violating federal disability, anti-discrimination, and privacy laws, as the U.S. Equal Employment Opportunity Commission continues to lag on issuing guidance.”

• “The EEOC previously said rewards involved with employer wellness programs could equal up to 30 percent of someone's health insurance premium without being too coercive or invasive. But a federal court invalidated that rule.”

• “Anthem is offering a credit to vaccinated employees that can be used to lower their health insurance premiums (Anthem provides Anthem insurance to its employees). Anthem originally said the credit was worth $50, but later retracted that press release and removed how much the credit was worth.”

• “‘Until the EEOC issues updated guidance, it's a bit risky to offer vaccination incentives,’ said Meghan O'Brien, an attorney at the law firm Archer who tracks this issue and recommends any vaccine incentive equal no more than one day's pay. ‘Reasonable minds can vary as to what can be considered too much of a monetary incentive.’” READ MORE

OPPORTUNITIES

Americans are cleaning up: “Deodorant, teeth whitener and condoms are in high demand. Sales of perfume, nail polish, swimsuits, sunscreen, tuxedos, luggage and alarm clocks are climbing fast, according to companies that make these products and large retailers. When the mayor of Washington, D.C., announced that bars and clubs would fully reopen in June, Landen Lama, a 25-year-old political consultant thought, ‘I have a month to get ready.’ He ordered teeth-whitening gel online, has been using more facial treatment masks and tanning outside, he said. ‘It will be awkward meeting strangers again,’ he said. ‘Everyone wants to look their best.’”

• “Sales of sexual health products, which includes condoms, were up 32 percent for the week ended May 1 compared with a year ago, according to NielsenIQ data.”

• “Consumers also are paying up for higher-end grooming products, in part because many Americans had their disposable income increase amid the pandemic, executives said.” READ MORE

HUMAN RESOURCES

Have you considered the tax consequences of letting employees work remotely? “Companies have to shoulder the compliance burden involved with navigating a complex patchwork of local, state and, potentially, international tax laws. ‘Taxes are something you really need to look at in order to understand what to do when somebody is requesting remote work,’ said [Lorraine] Cohen, a San Francisco-based partner in accounting firm Deloitte’s global employer services practices. In many cases, the tax pitfalls come when an employee of a company chooses to relocate to an area where the company didn’t previously have a physical location. Michael L. Raff, director of the tax department at Northfield, Illinois-based Gordon Law Group Ltd., said those moves can have implications for income, sales and payroll taxes, depending on the local or state rules involved.”

• “Raff said most states have rules that once a company eclipses a threshold of payroll, property or sales within a state, they are then considered to have a ‘nexus’ in that state for income tax or sales tax purposes. Having a physical presence in a state is typically a trigger to generate a sales tax nexus.”

• “‘Just by having one employee over state lines where you previously didn’t can bring about significant changes to your tax liabilities,’ he said. ‘That’s one of the biggest concerns I have.’” READ MORE

For some companies, adjusting to hybrid work schedules is proving to be a challenge: “Companies are laying down new rules and setting expectations for hybrid work as some workers come back in and others remain out of office. At JPMorgan Chase, employees on some teams can schedule work-from-home days, but not on Mondays or Fridays. At Salesforce.com offices that have reopened, Thursdays are proving to be the most popular in-office day, creating high demand for meeting rooms and collaboration spaces, and prompting the company to rethink its office design.”

• “Executives at PricewaterhouseCoopers have voiced worries that workers who stay remote could wind up as second-class corporate citizens, falling behind in promotions and pay ...”

• “Many managers now worry about a brain drain from their ranks. Some companies that are hiring say they can’t find knowledge workers willing to come into an office five days a week, according to chief executives, human-resource chiefs and recruiters.”

• “‘It’s become really sort of a requirement if you’re looking for top talent,’ Mr. Herrington says. ‘Those folks are pretty much saying, Hey, if I can’t have a bit of a hybrid work environment, then I’m probably not going to be interested.’”

• “Tope Awotona, the founder and CEO of Calendly, an Atlanta-based company that makes scheduling software, says he is hiring in places like Georgia, Florida and Texas, and plans to give people the option to come into an office or not. He is providing staff with memberships to co-working spaces near them, so they don’t have to work from their homes if they don’t want to.” READ MORE

Restaurant workers explain why they don’t want their old jobs back: “In interviews with The Washington Post, 10 current and former workers expressed a wide range of reasons they are or were reluctant to return to work. Some, like Conway, have left the industry or changed careers, saying they felt like the industry was no longer worth the stress and volatility. Others said jobs that didn’t pay enough for them to make ends meet no longer felt appropriate to them.”

• “All described the pandemic as an awakening — realizing that long-held concerns about the industry were valid, and compounded by the new health concerns.”

• “And forced to stop working or look for other jobs early on in the pandemic, many realized they had other options.” READ MORE

MARKETING

Here’s how to get started livestreaming: “Livestream shopping has been popular in China for over a decade, but it's beginning to gain momentum in the U.S. Several startups have emerged in the last couple of years to bring the phenomenon stateside — Popshop Live, WhatNot, and NTWRK are just a few. ... Pandemic-induced shutdowns accelerated the trend's ascension in the U.S. — the market is expected to be worth $6 billion this year and $25 billion by 2023, according to retail and technology research firm Coresight Research.”

• “There are several livestream apps and platforms available, each with its own features for different types of businesses. Some function as web pages, so customers only need a link to access your site, while others require customers to download an app and set up an account.”

• “You should consider how the platform you choose reaches particular audiences. Popshop Live and WhatNot have strong collector communities, while others like NTWRK are powered by limited-edition products and hype culture.”

• “It might take a while to build an audience, so utilize any following you already have on other platforms. All of the sellers Insider spoke to promote their livestream shows on social media a few days before they go live. Be sure to include instructions on how to tune in for anyone new to livestream shopping.” READ MORE

STARTUPS

Since the pandemic, there has been a surprising surge in startups: “A new study — using data that allows researchers to more precisely track new businesses across time and place — finds that the surge coincides with federal stimulus, and is strongest in Black communities. Across a number of states, the pace of weekly business registrations more than doubled in the months after the CARES Act was signed in March 2020. Business registrations rose again, by 60 percent, around the period of the supplementary aid package signed in December. Coinciding with the third wave of stimulus in March, weekly business registrations have been up by 20 percent, but the data is less complete.”

• “The pandemic might mark the end of a slump in entrepreneurship that has lasted for several decades. Steep job losses, a widespread shift in how people work and a big influx of federal spending could prompt the kind of disruption that changes how people think about work and what they want to do with their lives.”

• “‘The idea that the pandemic has kind of restarted America’s start-up engine is a real thing,’ said Scott Stern, an economist at M.I.T. and one of the authors of the research. ‘Sometimes you need to turn off the car in order to turn it back on.’”

• “‘Startups have always fallen in recessions,’ said John Haltiwanger, an economist at the University of Maryland who studies business formation. ‘This is the only one I know where start-ups grew.’” READ MORE

CUSTOMER SERVICE

What would you do if you found a million-dollar lottery ticket discarded inadvertently by a customer? “Abhi Shah, who discovered a winning Diamond Millions scratch-off lottery ticket while throwing away discards at his family’s convenience store in Southwick, Mass., considered buying a Tesla, a house or perhaps another store. But the 30-year-old and his parents, who work at the Lucky Stop store, made a different decision: They gave the winning ticket back to the longtime customer who had thought it was a loser and tossed it.”

• “‘We had mixed emotions,’ Shah told The Washington Post on Monday. ‘We didn’t sleep for two nights, but I don’t know what happened. My inner soul told me, That’s not right. You know who that person is. You should give that ticket back to them. And that’s exactly what I did.’”

• “Lea Rose Fiega has been a regular at the store at least since the Shah family bought it five years ago, he said. Fiega, who worked for a nearby insurance company, visits several times a week during her lunch break to buy scratch-offs, handing back the valueless ones, which were piled up on the counter until they were later thrown out.” READ MORE

THE MORNING REPORT AUDIO

We’ve been publishing a daily podcast in partnership with the Small Business & Entrepreneurship Council that offers an audio version of the Morning Report. Given that the vast majority of you prefer to read this newsletter, we’re discontinuing the daily audio version. Every Friday, though, Gregg Stebben, who has been the host of the podcast, and I will continue to offer our weekly wrap-up of the most important stories for business owners and entrepreneurs. You can LISTEN HERE

If you see a story that business owners should know about, hit reply and send me the link. If you got something out of this email, you can click the heart symbol, you can click the comment icon below, and you can share it with a friend. Thanks for reading, everyone. — Loren