Can ESOPs and Unions Coexist?

Employee ownership is gaining momentum, and unions are part of the conversation. Many privately held companies with unionized workforces are exploring tax-qualified employee stock ownership plans (ESOPs) as a way to align interests, boost engagement, and share in the companies’ long-term success. This trend reflects a shift toward inclusivity, inviting union employees into the ownership circle. However, participation in an ESOP is not automatic for union employees. It depends on the workforce dynamics and the terms negotiated in collective bargaining agreements (CBAs), making the decision whether to include union employees in an ESOP one that calls for nuance rather than a one-size-fits-all policy. In this article, we’ll explore the strategic, legal, and cultural factors that influence whether and how union employees are included in an ESOP.

Refresher: What Is a Union and a CBA?

A union is an organized group of workers formed to protect and advance its members’ interests in wages, benefits, and working conditions. A CBA is a contract negotiated between the union and the employer that governs the terms and conditions of employment for union members. This can cover wages, health and retirement benefits, job classifications, working hours, grievance procedures, and more.

In a unionized workforce, generally any modification to employment terms, including the introduction of a new benefit like an ESOP, requires negotiation and agreement with the union.

Key Considerations When Deciding to Include or Exclude Union Employees

Regulatory

Ensuring compliance with ERISA when choosing whether to include union employees in an ESOP is critical. The plan must operate in accordance with the employee protections provided by ERISA, and coverage and non-discrimination testing rules apply. Coverage and nondiscrimination testing refers to a set of IRS-mandated tests designed to ensure that retirement plans, such as ESOPs, do not disproportionately favor highly compensated employees over others. These tests help verify that the plan benefits a broad cross-section of employees, not just owners or executives.

Including or excluding union employees affects the ESOP’s coverage and nondiscrimination testing. Excluding a large portion of the workforce (such as union employees) could trigger compliance issues unless the union group is distinctly recognized in the plan as a noneligible group. In certain circumstances, there are ways to include some union employees without affecting non-discrimination testing.

Under the National Labor Relations Act (NLRA), an ESOP is considered a “mandatory subject of bargaining.” If union employees are to be included or excluded, the employer must notify and negotiate with the union before implementation.

Benefit to Participants

Union employees subject to a CBA may already have benefits that exceed those of their non-union peers. In these situations, it is wise to determine whether providing an additional benefit at the cost of diluting the share allocation to non-union staff is worthwhile. Including union employees in an ESOP increases the participant pool, impacting per-participant share allocations and potentially reducing the value of the benefit to non-union employees. Alternatively, inclusion could drive employee morale and enhance efficiencies and profitability, offsetting any dilutive impacts of inclusion. 

If a company hires employees from multiple unions, each CBA should be assessed separately for ESOP participation purposes.

Sustainability

In some cases when a company has a CBA with a union (or CBAs with multiple unions), most employees are union members, and can represent as much as 90% of the total headcount. The transition to an ESOP may face unique challenges if these employees are excluded from the plan, especially when the company has a high equity value relative to non-union payroll. Although the ESOP benefit could be substantial for non-union employees in this circumstance, which could initially be perceived as positive, the company must comply with retirement plan contribution limits set by the IRS. Generally, retirement plan contributions are limited to no more than 25% of the employer’s eligible annual payroll, capped at the annual additions limitation under Section 415 ($72,000 per participant for 2026). The company must also ensure it has the ability to repurchase the ESOP shares of departed employees in the future. 

In some circumstances, a company’s union employees may be temporary or short-term employees subject to substantial turnover and not expected to be with the company long enough to see significant benefits from ESOP participation. However, if the union consists of a regular, full-time workforce that contributes significant value to the company, allowing union employees to participate in the ESOP may help to create alignment and engagement that in turn contributes to increased company value.

Communication and Culture

When deciding whether to include union members in the ESOP, a well-planned internal communication strategy, coordinated with union leadership, should be developed to properly explain the ESOP benefit, eligibility, and interaction with the CBA.

Including union employees in an ESOP may produce intangible benefits within a company, such as fostering a greater sense of alignment and shared purpose across the company. A 2019 study by the National Center for Employee Ownership reported “dramatically lower turnover than national averages” in ESOP companies. If retention among union employees is an issue, inclusion in the ESOP may incentivize employees to remain with the company longer term. To realize the cultural benefits that can come with ESOP participation, the value of employee ownership must be well communicated to all participants in a way that helps employees feel they are being rewarded for their contribution to the company’s success.

Do You Have to Include Union Employees?

Inclusion or exclusion depends on company-specific circumstances and is subject to the CBA, but generally:

• Employers are not required to include union employees in an ESOP unless the CBA specifically mandates it.
• Inclusion or exclusion may require bargaining: If the employer wants to include or exclude some or all of the union employees, it is generally required to negotiate with the union.
• Exclusion is permitted: Many companies choose to exclude union employees, either for simplicity or due to constraints imposed by the CBA.

Benefits and Drawbacks of Including Union Employees

Benefits

Alignment of Interests: Provides union members with a direct financial interest in the company’s success, which can positively influence productivity and loyalty.

Recruitment and Retention: Enhances the ability to recruit and retain union employees by offering an additional benefit compared to competing union companies in similar markets that do not have ESOPs.

Positive Culture: Signals a commitment to broad-based employee ownership and shared success.

Drawbacks

Negotiation: Generally requires bargaining with the union, which can delay implementation and add legal complexity.

Potential for Disputes: Adding union employees to the ESOP after the initial transaction is structured may be perceived negatively by non-union employees if the company does not consider changes in benefits provided by the ESOP due to the increased eligible payroll pool.