Existing law establishes the Department of Transportation and requires it to improve and maintain the state highways. Existing law authorizes the department to enter into any contracts required for the performance of its duties, as provided. Existing law establishes bid preferences in public contracting for certain types of bidders, including, but not limited to, small business and microbusiness bidders.

This bill would, on and after January 1, 2028, require the department to provide certain bid preferences to a contractor or subcontractor with an employee stock ownership plan (ESOP) that bids in which 30% or more is owned by the ESOP when the contractor or subcontractor bids or is part of a bid on a state-funded construction contract, as specified. The bill would make it unlawful for a person or contractor person, contractor, or subcontractor to engage in specified behaviors related to the fraudulent obtaining or retaining of an ESOP bid preference and would subject a person or contractor person, contractor, or subcontractor engaged in those behaviors to a suspension from bidding on or participating in any contract with the department for certain periods and specified civil penalties.

Existing law establishes the Department of Transportation and requires it to improve and maintain the state highways. Existing law authorizes the department to enter into any contracts required for the performance of its duties, as provided. Existing law establishes bid preferences in public contracting for certain types of bidders, including, but not limited to, small business and microbusiness bidders.

This bill would, on and after January 1, 2028, require the department to provide certain bid preferences to a contractor with an employee stock ownership plan (ESOP) that bids on a state-funded construction contract, as specified. The bill would make it unlawful for a person or contractor to engage in specified behaviors related to the fraudulent obtaining or retaining of an ESOP bid preference and would subject a person or contractor engaged in those behaviors to a suspension from bidding on or participating in any contract with the department for certain periods and specified civil penalties.

Date of Hearing: August 5, 2026

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Buffy Wicks, Chair

SBPCA Bill Id:SB 1174

Author:(Valladares) – As Amended Ver:June 15, 2026

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill directs the Department of Transportation (Caltrans) to provide a bid preference to a contractor with an employee stock ownership plan (ESOP).

More specifically, this bill directs Caltrans to provide a bid preference to a contractor with an ESOP, as follows:

• 2% to a qualified contractor with 30% to 49% of the business owned by its ESOP.
• 3% to a qualified contractor with 50% to 99% of the business owned by its ESOP.
• 4% to a qualified contractor with 100% of the business owned by its ESOP.
• An additional 1% for a qualified contractor that is a signatory to a collective bargaining agreement or master labor agreement.

The bill makes it unlawful for a person, contractor or subcontractor to willfully or knowingly commit fraud regarding ESOP qualification, provide false statements to a state official regarding ESOP acceptance, obstruct or impede an investigation of the qualifications of an ESOP contractor, fraudulently obtain public moneys, and cooperate in the establishment of a contractor found to have violated the foregoing prohibitions.

The bill makes an entity that violates these prohibitions liable for specified sanctions—up to $5,000 for the first violation and a civil penalty not to exceed $20,000 for each additional or subsequent violation, as well as suspension from bidding or participating in any contract or project for Caltrans for a period of one month to one year. In addition, the bill prohibits Caltrans from contracting with a suspended contractor or subcontractor and requires Caltrans to report an alleged violation to the Attorney General.

FISCAL EFFECT:

1. This bill creates significant new costs for Caltrans to establish the ESOP bid-preference program and significant ongoing costs to administer it. Caltrans anticipates needing three new positions in the first year of implementation, at an annual cost of roughly $600,000, to establish program procedures (special fund). Caltrans did not provide an estimate of ongoing costs to administer the program, instead asserting such costs will depend upon how much and how often the bid preference is used.

In addition, Caltrans projects significant increases in its contracting costs, likely in the millions of dollars annually, and warns of a corresponding decrease in maintenance and rehabilitation projects, absent additional funding.

1. Cost pressures (Trial Court Trust Fund, General Fund) of an unknown, but potentially significant amount to the courts to adjudicate any additional filings resulting from violations of the bill’s prohibitions. Actual costs will depend on the number of cases filed and the amount of court time needed to resolve each case. It generally costs approximately $1,000 to operate a courtroom for one hour. Although courts are not funded on the basis of workload, increased pressure on the Trial Court Trust Fund may create a demand for increased funding for courts from the General Fund. The state budget provides annual General Fund backfills to the Trial Court Trust Fund to offset revenue reductions, totaling approximately $117.3 million in 2025-26.

COMMENTS:

Typically, a statute requires a state agency to award contracts to the lowest qualified bidders. However, existing law establishes multiple contract procurement programs to encourage state contracting with small businesses, disabled veteran-owned businesses, businesses performing work in distressed areas and employing individuals at higher risk of unemployment, and for projects servicing disadvantaged communities identified by CalEPA. Generally, such a procurement preference program applies a percentage-based preference to artificially lower the bid cost for eligible businesses.

Caltrans administers programs to communicate with and provide bid preferences to businesses owned by people with certain characteristics. For example, through the Small Business (SB) program, the Disabled Veteran Business Enterprise (DVBE) program and the Disadvantaged Business Enterprise (DBE) program, Caltrans provides bid preferences in contracting, training and technical assistance.

According to the California Employee Ownership Coalition, which is the sponsor of this bill, an ESOP is an ownership structure in which, over time, employees earn an ownership stake in the company they work for, which is held in trust on behalf of the employees without requiring workers to invest their own money. According to the coalition, there are more than 780 ESOPs in California representing 12,378 employee-owners, and 70 of these ESOPs are associated with construction businesses.

The author describes this bill as a way to increase the diversity of ownership of the companies with which the state does business that is more effective and efficient than are programs through which the state gives biding preference to companies owned by members of certain groups or those who have certain characteristics, such as women, those with disabilities and veterans. According to the author:

The most efficient way to achieve California’s policy objective, that is, to diversify ownership to a broader population, is to incentivize shared ownership through employee stock ownership plans (ESOPs). Rather than requiring each qualified individual to start up their own enterprise, this strategy would allow existing owners to extend ownership rights to employees via grants of stock through ESOP accounts, a process separate from the employee’s compensation.

Some companies in the construction industry or related fields agree, including many companies that offer an ESOP. However, several entities disagree. For example, the Associated Builders and Contractors of California, the Associated General Contractors, California Chapters, and the Western Electrical Contractors Association each generally objects to bidding practices that preference one model of employee compensation over others. Buildout California—which describes itself as the world’s largest industry association dedicated to the sustainable growth of LGBT and allied-owned businesses, professionals, tradespeople, and stakeholders across architecture, engineering and construction services—similarly objects, but also opposes the bill because:

SB 1174 would not expand opportunities for small or diverse firms; instead, it would redirect work toward companies that qualify for the new preference, regardless of whether they offer the most accessible or inclusive contracting approach. This shift limits the ability of underrepresented businesses to compete for meaningful roles on public projects and further strains already limited contracting opportunities.

Analysis Prepared by: Jay Dickenson / APPR. / (916) 319-2081

Date of Hearing: June 30, 2026

ASSEMBLY COMMITTEE ON JUDICIARY

Ash Kalra, Chair

SBPCA Bill Id:SB 1174

Author:(Valladares) – As Amended Ver:June 15, 2026

SENATE VOTE: 33-0

SUBJECT: PUBLIC CONTRACTS: DEPARTMENT OF TRANSPORTATION: BID PREFERENCES: EMPLOYEE STOCK OWNERSHIP PLANS

SYNOPSIS

CalTrans has historically administered bid preferences under the Small Business (SB), Disabled Veteran Business Enterprise (DVBE), and Disadvantaged Business Enterprise (DBE) outreach and procurement programs. The DBE program is a federal program and, due to the current administration’s changes to regulations, no longer considers race- or sex-based factors. The DBE program, like the other programs, focuses on who owns the company. With the changes to who can qualify under the federal DBE, a new type of bid preference can offer a different method to expand opportunity when it comes to public contracts. This bill requires CalTrans to administer a bid preference program specifically for companies that have employee stock ownership plans (ESOP). These companies would receive specified bid preference values depending on the percentage of ownership their ESOPs control.

The bill is sponsored by the California Employee Ownership Coalition (CEOC) and supported by the ESOP Association and several employee-owned construction companies. This bill is opposed by Buildout California and a few associations of contractors, including the Associated Builders and Contractors of California. The bill passed out of the Assembly Committee on Transportation by a 15-0 vote.

SUMMARY: Requires the State Department of Transportation (CalTrans) to provide certain bid preferences to a contractor with an ESOP that bids on a state-funded construction contract, as specified. Specifically, this bill:

1. Requires CalTrans, on or after January 1, 2028, to provide bid preferences for a state-funded construction contract to each ESOP contractor that bids on a state-funded construction project as follows:
2. 2% to a qualified contractor with 30 to 49% of the entity owned by its ESOP.
3. 3% to a qualified contractor with 50 to 99% of the entity owned by its ESOP.
4. 4% to a qualified contractor with 100% of the entity owned by its ESOP.
5. An additional 1% for a qualified contractor that is a signatory to a collective bargaining agreement or master labor agreement.
6. Prohibits the award of bid preferences to a noncompliant bidder or to achieve applicable minimum requirements.
7. Provides that it is unlawful for a person, contractor or subcontractor to willfully or knowingly commit fraud regarding ESOP qualification, provide false statements to a state official regarding ESOP acceptance, obstruct or impede an investigation of the qualifications of an ESOP contractor, fraudulently obtaining public moneys, and cooperate in the establishment of a contractor found to have violated the foregoing prohibitions.
8. Makes a person, contractor or subcontractor who violates the prohibitions above liable for a civil penalty not to exceed $5,000 for the first violation, and a civil penalty not to exceed $20,000 for each additional or subsequent violation. Anyone who fails to pay a penalty is prohibited from bidding on any contract with CalTrans for a specified period or until the penalties are satisfied.
9. In addition to civil penalty fines, a person, contractor or subcontractor who is found in violation of the above-mentioned actions is required to be suspended from bidding or participating as either a contractor, subcontractor, or supplier, in any contract or project for CalTrans for a period between one month to one year, as specified.
10. Prohibits CalTrans from entering a contract with a suspended contractor or subcontractor and requires it to report an alleged violation to the Attorney General.
11. Defines the following terms:
12. “Contractor” means any person or entity, within the meaning of the provisions of Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code, who submits a bid and performs work on a state-funded construction contract.
13. “Department” means the Department of Transportation.
14. “Employee stock ownership plan” or “ESOP” has the same definition as that term is defined in paragraph (7) of subsection (e) of Section 4975 of the Internal Revenue Code, as that provision read on January 1, 2022.
15. “ESOP contractor” means a contractor or subcontractor that presents an attestation by an independent, certified public accountant, as defined in Section 5033 of the Business and Professions Code, of a percentage equal to or greater than 30 percent of the issued and outstanding shares of the contractor that are owned by its ESOP at the time of bid.
16. “Person” means any individual, firm, corporation, association, or other entity doing business in California.
17. “Subcontractor” means a contractor who contracts to perform work on a project without contracting directly with the awarding authority.

EXISTING LAW:

1. Establishes CalTrans with various powers and duties, including but not limited to, planning, designing, constructing, operating, and maintaining the State’s highway system, as specified. (Government Code Section 14001 et seq.)
2. Establishes bid preferences in public contracting for certain types of bidders, including, but not limited to, small business, microbusiness, and disabled veteran business enterprise bidders. (Government Code Section 14835 et seq; Military and Veterans Code Section 999 et seq.)
3. Requires CalTrans to achieve, at a minimum, an overall rate of 25% certified small business participation and 3% for disabled veteran business enterprises in state-funded contracts and procurement. (Government Code Section 14110.3.)
4. Consistent with federal and state requirements, requires CalTrans to develop a plan by January 1, 2020, to increase by up to 100% the dollar value of contracts and procurements awarded to small businesses, disadvantaged, business enterprises, and disabled veteran business enterprises. (Government Code Section 14110.)
5. Requires CalTrans to submit to the Legislature, by January 1, 2019, a detailed outreach plan intended to increase procurement opportunities for small business enterprises, including, but not limited to, those owned by women, minority, disabled veterans, LGBT, and other disadvantaged groups, in all transportation programs managed by CalTrans. (Government Code Section 14110.1.)
6. Makes certain legislative findings and declarations of the Legislature under the California Employee Ownership Act, including that employees becoming owners would create opportunities for wealth-building and community stability. It would also help California create a more inclusive, equitable, and stable economy, supported by the studies of employee-owned businesses and their success and resiliency during the Great Recession and the COVID-19 pandemic. (Government Code Section 12100.31.)
7. Defines “employee stock ownership plan,” pursuant to federal law, as a defined contribution plan which is a stock bonus plan which is qualified, or a stock bonus and a money purchase plan both of which are qualified under section 401(a), and which are designed to invest primarily in qualifying employer securities. (26 U.S.C. Section 4975.)

FISCAL EFFECT: As currently in print this bill is keyed fiscal.

COMMENTS: CalTrans has historically administered bid preferences under the Small Business (SB), Disabled Veteran Business Enterprise (DVBE), and Disadvantaged Business Enterprise (DBE) outreach and procurement programs. The DBE program is a federal program and, due to the current administration’s changes to regulations, no longer considers race- or sex-based factors. The DBE program, like the other programs, focuses on who owns the company. With the changes to who can qualify under the federal DBE, a new type of bid preference can offer a different method to expand opportunity when it comes to public contracts. According to the author:

California law establishes several programs that provide preferences to several classes of businesses on public works construction. Those programs, however, are fundamentally flawed. They only assess the owners of those businesses which, in some cases, could only be one person. SB 1174 proposes a more equitable wealth distribution compared to other construction procurement preferences for construction contracting. One way to do that, which the legislature has recognized through the passage of AB 2849 (Bonta) and SB 1407 (Becker) both from 2022, is the promotion of employee-owned businesses. Government Code Section 12100.31(c) perfectly explains the benefits of those entities:

Employees becoming owners would create opportunities for wealth-building and community stability. It would also help California create a more inclusive, equitable, and stable economy, supported by the studies of employee-owned businesses and their success and resiliency during the Great Recession and the COVID-19 pandemic.

The most efficient way to achieve California’s policy objective, that is, to diversify ownership to a broader population, is to incentivize shared ownership through employee stock ownership plans (ESOPs). Rather than requiring each qualified individual to start up their own enterprise, this strategy would allow existing owners to extend ownership rights to employees via grants of stock through ESOP accounts, a process separate from the employee’s compensation. Given the current demographic breakdown of the California workforce on public infrastructure projects as documented by Caltrans in the 2024 Disparity Study, these Plans would directly distribute ownership to the intended populations on a much broader and more inclusive scale than existing policies. According to the study, 65.8% of California construction workers during the period of 2018 to 2022 were people of color. Modelled after California’s Small Business Enterprise and Disabled Veterans Business Enterprise programs, SB 1174 […] establishes a scaled bid preference for construction companies that operate an ESOP program. This will build wealth for construction workers.

ESOPs. An employee stock ownership plan (ESOP) is an ownership structure that allows employees to have an ownership stake in the company where they work. The ESOP is a trust that holds the employees’ stock and is funded by the company. The shares in the trust are then distributed, based on tenure or compensation, to individual employee retirement accounts. When an employee retires or leaves, the shares are then cashed out and provided to the employee. In California, according to the bill’s sponsor, there are approximately 70 construction companies that are ESOP-owned, representing roughly 12,378 employee-owners.

This bill requires CalTrans to provide a bid preference for ESOP contractors for any state-funded construction contract. The bid preference is based on the percentage the company owned by its ESOP. Bid preferences work by taking a percentage of the price for the lowest responsive bid—that is not from a preferential bidder—and deducting that amount from all qualifying preferential bids. The bill also includes a provision that adds an additional one percent bid preference to an ESOP company that is a signatory to a collective bargaining or master labor agreement that covers the contract being bid on.

For companies that are 30 to 49 percent owned by their ESOP, they would receive a two percent bid preference value; companies that are 50 to 99 percent owned by their ESOP, would receive a three percent bid preference value; and companies that are 100 percent owned by their ESOP, would receive a four percent bid preference value. To illustrate, if the lowest non-ESOP bid was $100,000, and a company that was 50 percent owned by its ESOP bid $103,000, the ESOP bid would receive a $3,000 bid preference (3% of $100,000), making it $100,000 ($103,000 reduced by $3,000), for the purposes of bid selection.

The bill specifies it is unlawful to knowingly and intentionally commit fraud in the pursuit of obtaining acceptance as an ESOP contractor. The bill also specifies it is unlawful to willingly and knowingly make a false statement regarding ESOP status, obstruct or impede an investigation into ESOP status, or attempt to obtain public money that a party is not entitled to. The penalties specified for these acts are $5,000 for the first violation, and $20,000 for the second and any subsequent violation. If a person, contractor, or subcontractor establishes or exercises control over a contractor found to be in violation of the aforementioned offenses, they will receive an initial penalty of $50,000 and a $200,000 penalty for the second and any subsequent violations. Additionally, a party in violation of this bill will be prevented from bidding on a future CalTrans contract for not less than 30 days and not more than one year. CalTrans must report any alleged violations to the Attorney General, who may then decide to bring a civil action.

Constitutional Concern. As mentioned above, the current federal administration changed the regulations regarding the DBE program, in light of a federal district court decision. The U.S. District Court for the Eastern District of Kentucky concluded that the sex-based and race-based factors used to determine if a business was disadvantaged—and therefore eligible for the program—was unconstitutional under the Equal Protection Clause of the U.S. Constitution. (Mid-Am. Milling Co., LLC v. United States DOT (Sep. 23, 2024) 2024 U.S.Dist.LEXIS 171113.) Essentially, the court held that because a business may be women-owned or minority-owned, does not create the presumption that the business is disadvantage under the federal program. This bill stays away from the constitutional concerns, because the preferences afforded are not for characteristics that would fall under the Equal Protection Clause.

ARGUMENTS IN SUPPORT: This bill is sponsored by the California Employee Ownership Coalition (CEOC) and supported by the ESOP Association and several employee-owned construction companies. CEOC write in support:

SB 1174 proposes a new type of bid preference that targets companies that operate employee stock ownership plans (ESOPs). Rather than an “independently owned and operated” business, or one owned by investors, companies that operate ESOPs are owned by their employees. This is a unique and expanding business model that gives workers the opportunity to share ownership in their employer.

SB 1174 is a modest step to encourage the development and expansion of ESOPs in California. The bill creates a bid preference, up to maximum of five percent, to ESOP companies that bid on Caltrans construction projects that are 100% state funded. The bid preference is scaled based on the level of ESOP ownership.

The legislature should work to expand and encourage worker ownership because they provide wealth and economic security for workers. In fact, ESOPs in California have distributed an estimated $11.2 billion in value to their employee-owners. These distributions represent meaningful wealth building outcomes for tens of thousands of California workers.

The ESOP Association writes in support:

SB 1174 establishes a bid preference for ESOP contractors bidding on state-funded construction contracts. By providing graduated preferences based on the degree of employee ownership, the bill creates a practical incentive for businesses to adopt and expand employee ownership while rewarding companies that already share ownership with their workers. The bill also reflects the realities of public contracting by applying the preference both to traditional low-bid procurements and to best-value competitions that rely on bidder scores rather than price alone.

SB 1174 also creates a straightforward and workable process for qualifying for the preference. Rather than requiring the state to create a separate certification system, the bill allows bidders to present objective documentation at the time of bid, including an IRS determination letter, Form 5500 filed with the U.S. Department of Labor, and an independent review of ESOP ownership. The bill protects the integrity of the preference by establishing meaningful civil penalties and suspension provisions for fraud or abuse, using an enforcement structure modeled on the existing California preference program for Small Business Enterprises.

California recognized the power of employee ownership when it passed SB 1407 in 2022 with bipartisan support, creating the Employee Ownership Hub to address the hundreds of thousands of California businesses and millions of workers affected by the coming wave of business-owner retirements. SB 1174 builds on that vision by using a targeted contracting tool to support businesses that provide life-changing ownership to their employees.

The societal and economic benefits of employee ownership are well documented. ESOP companies provide workers with meaningful opportunities to build wealth and retirement security. They also tend to have higher productivity, lower turnover, and stronger long-term resilience than comparable non-employee-owned businesses. Employee ownership helps keep companies rooted in their communities, protecting local jobs and supporting a more stable and inclusive economy.

ARGUMENTS IN OPPOSITION: This bill is opposed by Buildout California and a few associations of contractors. The Associated General Contractors (AGC), California Chapter write in opposition:

California’s public contracting system is built on a simple, long-standing premise: the lowest responsive and responsible bidder wins. This standard protects taxpayers, ensures fairness, and prevents political influence from distorting procurement decisions. SB 1174 would replace that objective standard with a subjective preference, allowing a bidder to win a contract even when they are not the lowest-cost provider. These exceptions make the competitive bidding system less transparent, less predictable, and more vulnerable to manipulation.

Bid preferences do not create new value; they simply shift awards away from the lowest-cost bidder. As a result, the state pays more for the same project, agencies lose the ability to select the most cost-effective contractor, and construction budgets stretch further, reducing the number of projects that can be delivered. In a year when California faces significant fiscal constraints, SB 1174 would increase project costs without improving safety, quality, or performance.

Preferences disadvantage qualified contractors and reduce competition. Contractors who have invested in safety, training, workforce development, and compliance may still lose work solely because they do not qualify for a preference category. This reduces the number of bidders, which is well-documented to drive up prices and limit competition — the opposite of what public procurement should encourage.

The Associated Builders and Contractors of California (ABC CA) write in opposition:

Government contracts are generally awarded to the lowest bid submitted by a responsible and responsive bidder. This policy helps ensure that taxpayer dollars are spent efficiently and effectively while preventing government agencies from providing preferential treatment to certain companies. While well-intentioned, SB 1174 undercuts both of these fundamental principles of good government spending.

Creating a new bid preference will increase project costs with no tangible benefit in the project outcome or to Californians at large. Indeed, this change will reduce how far taxpayer dollars go, ultimately limiting the number of projects Caltrans can deliver and the benefit the agency is able to provide to the state as a whole. This impact will be especially significant in a year when the budget is already under considerable strain.

[…]

Like any form of employee compensation, ESOPs have shortcomings. Under an ESOP, employees are allocated shares of the company while they work there. However, unlike more traditional stock options, they are generally unable to sell those shares or access their value until they retire or leave the company. Further, unlike a traditional 401(k), an ESOP does not provide a diversified retirement portfolio. An employee's retirement security may depend entirely on the value of their ESOP stock. An employee may spend 40 years accumulating company stock only to see the business fail before retirement, leaving them with little or nothing to retire on.

Despite providing employees with stock, an ESOP does not guarantee any of the features traditionally associated with “ownership”. A company providing an ESOP does not necessarily mean that the company is entirely employee-owned. It does not even mean that employees own any significant number of shares. The shares allocated through an ESOP do not entitle employees to an equal share of company profits, guarantee voting rights on all business decisions, ensure a safer working environment, or necessarily result in higher hourly compensation.

REGISTERED SUPPORT / OPPOSITION:

Support

California Employee Ownership Coalition (sponsor)
Ambroseadvisors
Bapko Metal
C. Wells Pipeline Materials INC.
Caltrol, INC.
Couts Heating and Cooling
Employee-owned S Corporations of America
Eureka Capital Partners, LLC
Ggg Demolition, INC.
Griffith Company
Marina Landscape, INC.
Mcguire and Hester
Murray Company
Pavement Coatings Co.
Pavement Recycling Systems
Prs Holdings, INC
Prs Logistics
Riverside Construction Company, INC.
Sustainable Emulsions, LLC
The ESOP Association

Opposition

Associated Builders and Contractors of California
Associated General Contractors, California Chapters
Buildout California
Western Electrical Contractors Association

Analysis Prepared by: Griff Ryan-Roberts / JUD. / (916) 319-2334

Date of Hearing: June 22, 2026

ASSEMBLY COMMITTEE ON TRANSPORTATION

Lori D. Wilson, Chair

SBPCA Bill Id:SB 1174

Author:(Valladares) – As Amended Ver:June 15, 2026

SENATE VOTE: 33-0

SUBJECT: Public contracts: Department of Transportation: bid preferences: employee stock ownership plans.

SUMMARY: Requires the California Department of Transportation (Caltrans), on or after January 1, 2028, to provide a bid preference, up to 5%, for state-funded construction projects, to qualified contractors offering employees an Employee Stock Ownership Plan. Specifically, this bill:

1. Defines the terms “contractor” and “subcontractor”.
2. Defines “employee stock ownership plan (ESOP)” by referencing a federal definition in the Internal Revenue Code, as of January 1, 2022. In essence, it is a way for employees to gradually become part-owners of their company through their retirement benefits, with the government setting rules to make sure the plan is fair and properly managed.
   
3. Defines an “ESOP contractor” to mean a contractor or subcontractor that presents the following documentation at the time of bid: an attestation by an independent, certified public accountant, as defined in Section 5033 of the Business and Professions Code, of a percentage equal to or greater than 30 percent of the issued and outstanding shares of the contractor that is owned by its ESOP at the time of bid.
   
4. Requires Caltrans, on or after January 1, 2028, to provide bid preferences for a state-funded construction contract to each ESOP contractor that bids on a state-funded construction project as follows:
   
   1. 2% to a qualified contractor with 30 to 49% of the entity owned by its ESOP.
   2. 3% to a qualified contractor with 50 to 99% of the entity owned by its ESOP.
   3. 4% to a qualified contractor with 100% of the entity owned by its ESOP.
   4. An additional 1% for a qualified contractor that is a signatory to a collective bargaining agreement or master labor agreement.
      
5. Prohibits the award of bid preferences to a noncompliant bidder or to achieve applicable minimum requirements.
   
6. Provides that it is unlawful for a person, contractor or subcontractor to willfully or knowingly commit fraud regarding ESOP qualification, provide false statements to a state official regarding ESOP acceptance, obstruct or impede an investigation of the qualifications of an ESOP contractor, fraudulently obtaining public moneys, and cooperate in the establishment of a contractor found to have violated the foregoing prohibitions.
   
7. Makes a person, contractor or subcontractor who violates the prohibitions above liable for a civil penalty not to exceed $5,000 for the first violation, and a civil penalty not to exceed $20,000 for each additional or subsequent violation. Anyone who fails to pay a penalty is prohibited from bidding on any contract with Caltrans for a specified period or until the penalties are satisfied.
8. In addition to civil penalty fines, a person, contractor or subcontractor who is found in violation of the above-mentioned actions is required to be suspended from bidding or participating as either a contractor, subcontractor, or supplier, in any contract or project for Caltrans for a period between one month to one year, as specified.
   
9. Prohibits Caltrans from entering a contract with a suspended contractor or subcontractor and requires it to report an alleged violation to the Attorney General.

EXISTING LAW:

1. Establishes Caltrans with various powers and duties, including but not limited to, planning, designing, constructing, operating, and maintaining the State’s highway system (Government Code (Gov Code) §14001, et seq.).
   
2. Establishes bid preferences in state agency contracting for certain types of bidders, including, but not limited to, small business, microbusiness, and disabled veteran business enterprise bidders (Gov Code §14835 et seq; Military & Veterans Code §999 et seq.).
   
3. Requires Caltrans to achieve, at a minimum, an overall rate of 25% certified small business participation and 3% for disabled veteran business enterprises in state-funded contracts and procurement (Gov Code §14110.3).
   
4. Consistent with federal and state requirements, requires Caltrans to develop a plan by January 1, 2020, to increase by up to 100% the dollar value of contracts and procurements awarded to small businesses, disadvantaged, business enterprises, and disabled veteran business enterprises (Gov Code §14110).
   
5. Requires Caltrans to submit to the Legislature, by January 1, 2019, a detailed outreach plan intended to increase procurement opportunities for small business enterprises, including, but not limited to, those owned by women, minority, disabled veterans, LGBT, and other disadvantaged groups, in all transportation programs managed by Caltrans (Gov Code §14110.1).
   
6. Makes certain legislative findings and declarations of the Legislature under the California Employee Ownership Act, including that employees becoming owners would create opportunities for wealth-building and community stability. It would also help California create a more inclusive, equitable, and stable economy, supported by the studies of employee-owned businesses and their success and resiliency during the Great Recession and the COVID-19 pandemic (Gov Code § 12100.31.).
   

FISCAL EFFECT: According to the Senate Appropriations Committee: unknown one-time and ongoing costs to Caltrans, likely in the hundreds of thousands of dollars annually, to update internal contracting guidance and processes and to conduct ongoing compliance monitoring activities on state-funded construction contracts. Also unknown potentially significant increased state contracting costs, to the extent awarding contracts to ESOP bidders reduces competition in the bid pool and results in higher contracting costs.

COMMENTS: According to the author, “California law establishes several programs that provide preferences to several classes of businesses on public works construction. Those programs, however, are fundamentally flawed. They only assess the owners of those businesses which, in some cases, could only be one person. SB 1174 proposes a more equitable wealth distribution compared to other construction procurement preferences for construction contracting. One way to do that, which the legislature has recognized through the passage of AB 2849 (Bonta) and SB 1407 (Becker) both from 2022, is the promotion of employee-owned businesses.

The most efficient way to achieve California’s policy objective, that is, to diversify ownership to a broader population, is to incentivize shared ownership through employee stock ownership plans (ESOPs). Rather than requiring each qualified individual to start up their own enterprise, this strategy would allow existing owners to extend ownership rights to employees via grants of stock through ESOP accounts, a process separate from the employee’s compensation.”

What is an ESOP? An ESOP is a retirement plan that gives workers an ownership stake in a company. The IRS regulates ESOPs similarly to 401K plans. To establish an ESOP, a company forms a trust fund that holds company shares (up to 100%) on behalf of employees. The shares are allocated to employees on an annual basis proportional to their compensation (e.g., an employee earning 10% of the total eligible payroll would receive roughly 10% of the shares allocated in a given year). The shares vest over time (e.g., 20% a year for five years) and are held in trust until the employee retires or leaves the company, at which time the vested shares are distributed to the employee and sold back to the company at fair market value. Unvested shares are forfeited and revert back to the company. If the company is a publicly traded company, an employee would typically sell their shares on the stock market.

According to the bill’s sponsor, there are over 780 ESOPs in California representing 12,378 employee-owners; 70 of these ESOPs are associated with construction businesses. The sponsors assert that employee-owners earn 33% higher median wages than comparable non-employee-owners, have more than twice the assets in retirement plans, and 92% higher median household wealth than non-employee-owners. They also argue that ESOPs allow workers to build wealth without personally assuming the financial risks associated with company ownership, such as capital risk and liability exposure; risks remain with the corporate entity, while benefits are shared across the workforce.

Caltrans’ existing bid preferences. Caltrans administers Small Business (SB), Disabled Veteran Business Enterprise (DVBE), and Disadvantaged Business Enterprise (DBE) outreach and procurement programs. In addition to bid preferences, Caltrans provides training and technical assistance to small businesses and organizes outreach events. The DBE program is a federal program that is intended to ensure nondiscrimination in the award and administration of U.S. Department of Transportation contracts (though as of October 3, 2025, Caltrans has temporarily suspended this program due to federal regulatory changes that remove consideration of race- or sex-based factors).

This bill is modeled after state agency bid preferences of 5% for certified SBs and DVBEs required by existing law for state contracts greater than $5,000 but less than $250,000. The state applies these bid preferences by taking 5% of the price of the lowest responsive bid that is not a SB or DVBE and then deducting this amount from all qualifying SB or DVBE bids. Of the $2.3 billion in state-funded contracts awarded by Caltrans in 2024-25, nearly $900 million or 39% was awarded to SBs; $58 million or 2.5% was awarded to DVBE. State law also establishes 25% and 3% minimum annual participation goals for SBs and DVBEs and Caltrans has generally met these goals in recent years. DBE goals vary annually, and Caltrans has had mixed success in achieving them.

Comparing ESOP firms with SBs/DVBEs may not be a fair comparison. Bid preferences are a common procurement tool for governments to favor certain suppliers. Evidence suggests that ESOP employees accumulate significantly more wealth than employees at otherwise-comparable non-ESOP firms, including those that are small businesses. However, comparing ESOP firms with SBs or DVBEs on this measure, as the sponsors do, may not be entirely appropriate since the state’s existing bid preferences are not primarily wealth distribution mechanisms—they are procurement equity programs designed to address market access barriers for specific populations. Accordingly, the committee may wish to consider ESOP and SB/DVBE preferences as serving complementary, but distinct equity goals, and that state procurement could potentially be enhanced by creating a pathway for employee-owned firms to receive bid preferences alongside—but not necessarily instead of—SB or DVBE programs.

Bid preferences may increase or decrease state costs. There is some evidence that bid preferences can lower government procurement costs by increasing competition between favored and unfavored firms forcing the latter to bid closer to costs, which ultimately acts to lower the winning bid. However, in a 2007 study of Caltrans’ SB bid preferences, procurement costs increased 3.8% due to reduced competition from lower cost firms. Assuming $2.3 billion in annual procurement and that Caltrans’ overall contract spend increases by 0.25% due to this bill, Caltrans estimates annual procurement costs would increase by $5.7 million. This bill, like existing SB and DBVE bid preferences, is limited to state-funded construction contracts and would not apply to federally-funded projects or projects that receive both federal and state funds.

Writing in support, the California Employee Ownership Coalition states that “The legislature should work to expand and encourage worker ownership because they provide wealth and economic security for workers. In fact, ESOPs in California have distributed an estimated $11.2 billion in value to their employee-owners. These distributions represent meaningful wealth building outcomes for tens of thousands of California workers.”

Related legislation. SB 713 (Valladares) in 2025 would have required DGS to establish a process for an ESOP qualified contractor to be certified and required Caltrans to provide bid preferences for qualified ESOP companies beginning January 1, 2027. This bill was held in the Senate Appropriations Committee.

SB 1407 (Becker), Chapter 733, Statutes of 2022) established the California Employee Ownership Hub and a Hub Manager within the Office of Small Business Advocate aimed at increasing awareness and understanding of employee ownership of businesses, assisting business owners and employees in navigating available resources, and streamlining and reducing barriers to employee ownership.

REGISTERED SUPPORT / OPPOSITION:

Support

California Employee Ownership Coalition (sponsor)

Ambrose Advisors

Bapko Metal

C. Wells Pipeline Materials

Caltrol

Couts Heating and Cooling

Employee-Owned S Corporations of America

Eureka Capital Partners

GGG Demolition

Griffith Company

Marina Landscape

McGuire and Hester

Murray Company

Pavement Coatings Co.

Pavement Recycling Systems

PRS Holdings

PRS Logistics

Riverside Construction Company

Sustainable Emulsions

The ESOP Association

Over Thirteen Hundred Individuals

Opposition

Associated General Contractors, California Chapters
Buildout California
Western Electrical Contractors Association

Analysis Prepared by: Dan Chia / TRANS. / (916) 319-2093

 THIRD READING  

Bill No: SB 1174

Author: Valladares (R)

Introduced: 2/18/26

Vote: 21

SENATE TRANSPORTATION COMMITTEE: 12-0, 4/7/26

AYES: Cortese, Strickland, Archuleta, Arreguín, Blakespear, Gonzalez, Grayson, Menjivar, Richardson, Seyarto, Valladares, Wiener

NO VOTE RECORDED: Dahle

SENATE JUDICIARY COMMITTEE: 13-0, 4/21/26

AYES: Umberg, Niello, Allen, Ashby, Caballero, Durazo, Laird, Reyes, Stern, Valladares, Wahab, Weber Pierson, Wiener

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/14/26

AYES: Cervantes, Seyarto, Cabaldon, Dahle, Grayson, Richardson, Wahab

SUBJECT: Public contracts: Department of Transportation: bid preferences: employee stock ownership plans

SOURCE: California Employee Ownership Coalition

DIGEST:

This bill requires the State Department of Transportation (Caltrans) to provide certain bid preferences to a contractor with an employee stock ownership plan (ESOP) that bids on a state-funded construction contract, as specified.

ANALYSIS:

Existing law:

1. Establishes Caltrans and provides the Department with various powers and duties, including but not limited to, planning, designing, constructing, operating, and maintaining the State’s highway system, as specified.
2. Authorizes Caltrans to enter into any contracts required for the performance of its duties, as provided.
3. Establishes bid preferences in public contracting for certain types of bidders, including, but not limited to, small business and microbusiness bidders.

This bill:

1. Requires Caltrans, on or after January 1, 2028, to provide certain bid preferences to a contractor with an ESOP that bids on a state-funded construction project, as specified.
2. Provides various definitions as they pertain to the provisions specified in this bill.
3. Specifically, requires Caltrans to provide a bid preference to qualified contractors for state-funded construction contracts, as follows:
4. Two percent to a qualified contractor with 30 to 49 percent of the entity owned by its ESOP.
5. Three percent to a qualified contractor with 50 to 99 percent of the entity owned by its ESOP.
6. Four percent to a qualified contractor with 100 percent of the entity owned by its ESOP.
7. An additional one percent for qualified contractors that include employees covered by a collective bargaining agreement or master labor agreement.
8. Specifies that the bid preference shall not be awarded to a noncompliant bidder and shall not be used to achieve any applicable minimum requirements.
9. Provides that it is unlawful for a person or contractor to willfully or knowingly carry out a number of actions pertaining to fraud, providing false statements, and / or impeding an investigation of qualifications as an ESOP contractor, as specified.
10. Imposes a variety of civil penalty fines for a person or contractor who is found in violation of the abovementioned actions, as specified.
11. In addition to civil penalty fines, a person or contractor who is found in violation of the abovementioned actions is required to be suspended from bidding or participating as either a contractor, subcontractor, or supplier, in any contract or project for Caltrans for a period between one month to one year, as specified.
12. Prohibits Caltrans from entering a contract with a person or contractor suspended for one of the abovementioned violations during the period of suspension, as specified.

Comments

1. Purpose of this bill. According to the author, “California law establishes several programs that provide preferences to several classes of businesses on public works construction. Those programs, however, are fundamentally flawed. They only assess the owners of those businesses which, in some cases, could only be one person. SB 1174 proposes a more equitable wealth distribution compared to other construction procurement preferences for construction contracting. One way to do that, which the legislature has recognized through the passage of AB  2849 (Bonta) and SB 1407 (Becker) both from 2022, is the promotion of employee-owned businesses. Government Code Section 12100.31(c) perfectly explains the benefits of those entities:

“Employees becoming owners would create opportunities for wealth-building and community stability. It would also help California create a more inclusive, equitable, and stable economy, supported by the studies of employee-owned businesses and their success and resiliency during the Great Recession and the COVID-19 pandemic.

“The most efficient way to achieve California’s policy objective, that is, to diversify ownership to a broader population, is to incentivize shared ownership through employee stock ownership plans (ESOPs). Rather than requiring each qualified individual to start up their own enterprise, this strategy would allow existing owners to extend ownership rights to employees via grants of stock through ESOP accounts, a process separate from the employee’s compensation. Given the current demographic breakdown of the California workforce on public infrastructure projects as documented by Caltrans in the 2024 Disparity Study, these Plans would directly distribute ownership to the intended populations on a much broader and more inclusive scale than existing policies. According to the study, 65.8% of California construction workers during the period of 2018 to 2022 were people of color. Modelled after California’s Small Business Enterprise and Disabled Veterans Business Enterprise programs, SB 1174, as proposed to be amended, establishes a scaled bid preference for construction companies that operate an ESOP program. This will build wealth for construction workers.”

1. Employee stock ownership plan. Ultimately, an ESOP is a retirement plan, in some ways similar to and governed by the same laws and regulations as a 401k plan, which provides a company’s workforce with an ownership interest in the company. To establish an ESOP, a firm forms a trust that purchases the shares of a company from the owner and allocates the shares to employees as part of their compensation. ESOP shares are part of an employee’s remuneration for work performed. Shares are allocated to employees and may be held in an ESOP trust until the employee retires or leaves the company. Once the employee retires or leaves the company, the shares are then either bought back by the company for redistribution or voided.

Most private U.S. companies operating as an ESOP are structured as S Corporations. S Corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. According to the IRS, to qualify for S corporation status, the corporation must meet a number of requirements, including being a domestic corporation and have no more than 100 shareholders.

1. Caltrans’ contracting. Caltrans has in place utilization goals and bid preferences for certified Disadvantaged Business Enterprises (DBE), Small Businesses (SB), and Disabled Veteran Business Enterprise (DVBE) when soliciting state contracts. Certified Small Businesses and DVBE can receive a 5% bid preference on applicable state solicitations. Additionally, Caltrans has established utilization goals of 25% for SBs, 5% for DVBEs, and 22.2% for DBEs.

The contractor certification process is managed by the Department of General Services (DGS). For example, in order to obtain certification as a small business for public works contracts, a company must meet the following requirements:

• Be independently owned and operated;
• Not dominant in field of operation;
• Principal office located in California;
• Owners, Officers, Members/Managers, Partners must be domiciled in California;
• Average annual gross receipts of forty-three million dollars ($43,000,000) or less over the previous three (3) tax years, as biennially adjusted in accordance with Government Code section 14837, subdivision (d)(3). If the business or its affiliate(s) has been in existence for less than three (3) tax years, then the GAR will be based upon the number of years in existence; and,
• A business with 200 or fewer employees (including affiliates).

The provisions specified in this bill attempt to align ESOP companies with a similar bid preference structure afforded to SBs and DVBEs. The author points to ESOP construction companies as businesses that provide more equitable wealth distribution for its employees in comparison to its DBE, SB, DVBE counterparts that are currently eligible for bid preferences. As a result, the author and sponsors of this bill claim that by offering similar bid preferences for ESOP companies, these companies will be incentivized to grow and in turn, provide greater financial opportunities for its shareholder employees. On the other hand, it’s important to note that providing a 2%-5% bid preference for ESOP construction companies may lead to increase project costs for Caltrans. However, at this time, as the total number of ESOP construction companies that may participate if this measure were to go into effect is unknown, an approximation of the fiscal impact is unclear.

1. Federal Regulations. It’s important to note that on October 3, 2025, the United States Department of Transportation (U.S. DOT) issued an Interim Final Rule (IFR), which took immediate effect revising / modifying DBE eligibility for state transportation programs. The IFR removes race- and sex-based presumptions from the definition of “socially and economically disadvantaged individual” as it pertains to DBE eligibility. Instead, majority owner(s) must now demonstrate on a case-by-case basis that the individual meets the criteria described in federal regulations (i.e. 49 CFR Section 26.671) to qualify as a DBE. Caltrans has informed current DBE eligible businesses, per federal law, that they must reapply for DBE eligibility with Caltrans and be reevaluated under the updated federal criteria. The author asserts that under the updated federal requirements, many businesses may be subject to losing their DBE status and ESOPs may serve as a viable alternative.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Senate Appropriations Committee:

• Unknown one-time and ongoing costs to Caltrans, likely in the hundreds of thousands of dollars annually, to update internal contracting guidance and processes and the Contract Administration & Tracking System II, and to conduct ongoing compliance monitoring activities on state-funded construction contracts. (State Highway Account)
• Unknown potentially significant increased state contracting costs, to the extent awarding contracts to ESOP bidders reduces competition in the bid pool and results in higher contracting costs (Various transportation special funds, federal funds). Actual increases in project costs will vary and depend on, among other things, the number of eligible ESOP contractors, frequency of use, and the cost of the contracts awarded. Staff notes that this bill would cover all state-funded construction contracts for programs administered by Caltrans.

SUPPORT: (Verified 5/14/26)

California Employee Ownership Coalition (Sponsor)

Ambrose advisors
Bapko Metal
C. Wells Pipeline Materials INC.
Caltrol, INC.
Couts Heating and Cooling
Employee-owned S Corporations of America
Eureka Capital Partners, LLC
Ggg Demolition, INC.
Griffith Company
Marina Landscape, INC.
Mcguire and Hester
Murray Company
Pavement Coatings Co.
Pavement Recycling Systems
Prs Holdings, INC
Prs Logistics
Riverside Construction Company, INC.
The Esop Association

1,355 Individuals

OPPOSITION: (Verified 5/14/26)

None received

Prepared by: Manny Leon / TRANS. / (916) 651-4121

5/16/26 10:39:51

**** END ****

SENATE COMMITTEE ON

Senator Sabrina Cervantes, Chair

2025 - 2026 Regular Session

SB 1174 (Valladares) - Public contracts: Department of Transportation: bid preferences: employee stock ownership plans

Bill Summary:

SB 1174 would require the Department of Transportation (Caltrans) to provide a bid preference of up to five percent to a contractor with an employee stock ownership plan (ESOP) that bids on a state-funded construction project, beginning on January 1, 2028, as specified.

Fiscal Impact:

• Unknown one-time and ongoing costs to Caltrans, likely in the hundreds of thousands of dollars annually, to update internal contracting guidance and processes and the Contract Administration & Tracking System II, and to conduct ongoing compliance monitoring activities on state-funded construction contracts. (State Highway Account)
• Unknown potentially significant increased state contracting costs, to the extent awarding contracts to ESOP bidders reduces competition in the bid pool and results in higher contracting costs (Various transportation special funds, federal funds). Actual increases in project costs will vary and depend on, among other things, the number of eligible ESOP contractors, frequency of use, and the cost of the contracts awarded. Staff notes that this bill would cover all state-funded construction contracts for programs administered by Caltrans.

Background:

An employee-owned company is one where employees own part or all shares in a business. While the forms of employee ownership may be different (such as stock grants, worker cooperatives, and stock options), the goal is the same: to promote employee ownership in a business. One form of employee ownership comes in the form of an ESOP, which acts as a retirement plan, in some ways similar to and governed by the same laws and regulations as a 401k plan, that provides a company’s workforce with an ownership interest in the company. To establish an ESOP, a firm forms a trust that purchases the shares of a company from the owner and allocates the shares to employees as part of their compensation. ESOP shares are part of an employee’s remuneration for work performed. Shares are allocated to employees over time based on compensation or tenure, and may be held in an ESOP trust until the employee retires or leaves the company, at which time the shares may be either cashed out and bought back by the company for redistribution or voided.

Under current law, Caltrans currently has utilization goals and bid preferences for certified Disadvantaged Business Enterprises (DBEs), Small Businesses (SBs), and Disabled Veteran Business Enterprises (DVBEs) when soliciting state contracts. Certified Small Businesses and DVBEs can receive a 5% bid preference on applicable state solicitations. Additionally, Caltrans has established utilization goals of 25% for SBs, 5% for DVBEs, and 22.2% for DBEs. For federally funded projects, Caltrans applies a DBE goal of 22.2%.

The contractor certification process is managed by the Department of General Services (DGS). For example, in order to obtain certification as a small business for public works contracts, a company must meet the following requirements:

• Be independently owned and operated;
• Not dominant in field of operation;
• Principal office located in California;
• Owners, Officers, Members/Managers, Partners must be domiciled in California;
• Average annual gross receipts of forty-three million dollars ($43,000,000) or less over the previous three tax years, as specified; and,
• A business with 200 or fewer employees (including affiliates).

Existing law, as enacted by SB 1407 (Becker), Chap. 733/2022, established the California Employee Ownership Program, within Office of the Small Business Advocate. The program is designed to support businesses transitioning to employee ownership in a variety of aspects including, but not limited to, education and outreach, technical assistance, and policy development.

Proposed Law:

SB 1174 would require Caltrans, when preparing a solicitation for a state-funded construction project, to provide a bid preference to an ESOP contractor as follows:

• A preference of 2% if 30 to 49 percent of the ESOP contractor is owned by its ESOP. (For this and the other bid preferences, this would be applied to the lowest responsible bidder meeting specifications or 2% of the highest responsible bidder’s score, as applicable)
• A preference of 3% if 50 to 99 percent of the ESOP contractor is owned by its ESOP.
• A preference of 4% if 100 percent of the ESOP contractor is owned by its ESOP.
• An additional 1% would be added to each of the above preferences to an ESOP contractor that includes employees covered by a collective bargaining agreement or master labor agreement.

This bill would also do the following:

• Specify that that the bid preference shall not be awarded to a noncompliant bidder and shall not be used to achieve any applicable minimum requirements.
• Make it unlawful for a person or contractor to willfully or knowingly carry out a number of actions pertaining to fraud, providing false statements, and/or impeding an investigation of qualifications as an ESOP contractor, as specified.
• Require Caltrans to report an alleged violation to the Attorney General, who must determine whether to bring a civil action against a person or contractor for a violation.
• Impose specified civil penalties for violations of those prohibitions, and further suspend a person or contractor found to be in violation of those provisions from bidding or participating as either a contractor, subcontractor, or supplier, in any contract or project for Caltrans for a period between one month to one year, as specified.
• Prohibit Caltrans from entering a contract with a person or contractor suspended for one of the abovementioned violations during the period of suspension, as specified.
• Specify that the bill’s provisions would become operative on January 1, 2028.

Related Legislation:

SB 713 (Valladares), which was held on this Committee’s Suspense File last year, would have required the Department of General Services to establish an ESOP contractor certification program, required the Office of the Small Business Advocate to maintain a list of qualified ESOP contractors, and required Caltrans to provide a bid-preference for certified ESOP contractors, similar to the preference in this bill.

SB 1407 (Becker), Chap. 733/2022, established the California Employee Ownership Program, within Office of Small Business Administration.

AB 2849 (Bonta, Ch. 808, Stats. 2022) established a panel to conduct a study regarding the creation of an Association of Cooperative Labor Contractors for the purpose of facilitating the growth of democratically run high-road cooperative labor contractors, as provided.

SB 553 (Wilk, 2019), which failed passage in the Senate Governmental Organization Committee, would have required an entity awarding a contract pursuant to the State Contract Act to provide a 3 percent bid preference to a qualified ESOP bidder, as defined.

Staff Comments:

By providing a bid preference on Caltrans construction projects that is similar to preferences offered to other business enterprises, this bill is intended to encourage the development and expansion of the ESOP business model that builds wealth and economic security for workers. According to the bill’s sponsors, there are over 780 ESOPs in the state, 70 of which are construction businesses, representing 12,378 employee-owners. The overall fiscal impact related to providing a new bid preference of up to 5% for ESOP contractors is unknown, but potentially significant, and would depend upon the volume of ESOP contractors bidding on Caltrans’ state-funded construction projects, the specified applicable bid preference provided on those contracts, and the overall costs of those contracts.

-- END --

SENATE JUDICIARY COMMITTEE

Senator Thomas Umberg, Chair

2025-2026 Regular Session

Bill No: SB 1174 (Author:Valladares)

Version: February 18, 2026

Hearing Date: April 21, 2026

Fiscal: Yes

Urgency: No

AMConsultant:

SUBJECT

Public contracts: Department of Transportation: bid preferences: employee stock ownership plans

DIGEST

This bill requires the State Department of Transportation (CalTrans) to provide certain bid preferences to a contractor with an employee stock ownership plan (ESOP) that bids on a state-funded construction contract, as specified.

EXECUTIVE SUMMARY

The author and sponsor of the bill argue that existing preferences for certain types of businesses in state contracting are based on who the owner is instead of how the employees are compensated, such as the disabled veteran enterprise program. This bill would provide for a preference in bidding on CalTrans contracts for a contractor with an ESOP, which is an employee-owned company where employees own part or all shares in a business. The author and sponsor argue that this bill could act as an incentive for construction businesses to convert to ESOPs. The bill’s provisions in this Committee’s jurisdiction are the civil penalties and enforcement provisions. The bill is sponsored by the California Employee Ownership Coalition and supported by several business entities. No timely opposition was received by the Committee. The bill passed the Senate Transportation Committee on a vote of 12 to 0.

PROPOSED CHANGES TO THE LAW

Existing law:

1. Establishes CalTrans with various powers and duties, including but not limited to, planning, designing, constructing, operating, and maintaining the State’s highway system, as specified. (Gov. Code § 14001 et seq.)
2. Establishes bid preferences in public contracting for certain types of bidders, including, but not limited to, small business, microbusiness, and disabled veteran business enterprise bidders. (Gov. Code § 14835 et seq; Mil. & Vet. Code § 999 et seq.)
3. Makes certain legislative findings and declarations of the Legislature under the California Employee Ownership Act, including that employees becoming owners would create opportunities for wealth-building and community stability. It would also help California create a more inclusive, equitable, and stable economy, supported by the studies of employee-owned businesses and their success and resiliency during the Great Recession and the COVID-19 pandemic. (Gov. Code § 12100.31.)

This bill:

1. Defines the following terms for purposes of the bill.
   1. “Contractor” means any person or entity who submits a bid and performs work on a state-funded construction contract.
   2. “Department” means the Department of Transportation.
   3. “Employee stock ownership plan” or “ESOP” has the same definition as that term is defined in paragraph (7) of subsection (e) of Section 4975 of the Internal Revenue Code, as that provision read on January 1, 2022.
   4. “ESOP contractor” means a contractor that presents the following documentation at the time of bid:
      1. A valid and favorable ESOP determination letter from the Internal Revenue Service.
      2. Its most recently filed Internal Revenue Service Form 5500. The department may request any additional schedules associated with the form.
      3. An independent review that establishes the percentage of the ESOP contractor that is owned by its ESOP. The independent review shall be performed by an independent accounting firm and shall cover, at minimum, all of the following:
         1. Certification that the review was performed in accordance with standards established by the American Institute of Certified Public Accountants.
         2. Certification that the statements are the representations of management.
         3. Certification that the review consisted of inquiries and analytical procedures that are lesser in scope than those of an audit.
         4. Certification that the accountant is not aware of any material modifications that need to be made to the statements for them to be in conformity with generally accepted accounting principles.
2. Requires CalTrans when it prepares a solicitation for a state-funded construction contract to provide a bid preference to an ESOP contractor.
3. Requires the bid preference to be calculated as provided below.
   1. If 30 to 49 percent, inclusive, of the ESOP contractor is owned by its ESOP, one of the following may apply:
      1. in solicitations where an award is to be made to the lowest responsible bidder meeting specifications, the preference to the ESOP contractor shall be 2 percent of the lowest responsible bidder meeting specifications; or
      2. in solicitations where an award is to be made to the highest scored bidder based on evaluation factors in addition to price, the preference to the ESOP contractor shall be 2 percent of the highest responsible bidder’s total score.
   2. If 50 to 99 percent, inclusive, of the ESOP contractor is owned by its ESOP, one of the following may apply:
      1. in solicitations where an award is to be made to the lowest responsible bidder meeting specifications, the preference to the ESOP contractor shall be 3 percent of the lowest responsible bidder meeting specifications; or
      2. in solicitations where an award is to be made to the highest scored bidder based on evaluation factors in addition to price, the preference to the ESOP contractor shall be 3 percent of the highest responsible bidder’s total score.
   3. If 100 percent of the ESOP contractor is owned by its ESOP, one of the following may apply:
      1. in solicitations where an award is to be made to the lowest responsible bidder meeting specifications, the preference to the ESOP contractor shall be 4 percent of the lowest responsible bidder meeting specifications; or
      2. in solicitations where an award is to be made to the highest scored bidder based on evaluation factors in addition to price, the preference to the ESOP contractor shall be 4 percent of the highest responsible bidder’s total score.
   4. An additional 1 percent to the bid preferences under is to be provided to an ESOP contractor that includes employees covered by a collective bargaining agreement or master labor agreement.
4. Requires the bid preference amount in solicitations where an award is to be made to the lowest responsible bidder to be computed by assessing the sum of the percentages above to the ESOP contractor’s lowest responsive bid.
   1. The bid preference amount in solicitations where an award is to be made to the highest scored bidder based on evaluation factors in addition to price is to be computed by assessing the sum of the percentages above on the ESOP contractor’s highest scored bid. The bid preference shall then be subtracted from the bid. This amount shall be used for bid evaluation purposes.
5. Prohibits bid preferences under this bill from being awarded to a noncompliant bidder and it cannot be used to achieve any applicable minimum requirements.
6. Makes it unlawful for a person or contractor to do any of the below listed acts.
   1. Knowingly and with intent to defraud, fraudulently obtain, retain, attempt to obtain or retain, or aid another in fraudulently obtaining or retaining or attempting to obtain or retain, acceptance as an ESOP contractor.
   2. Willfully and knowingly make a false statement with the intent to defraud, whether by affidavit, report, or other representation, to a state official or employee for the purpose of influencing the acceptance as an ESOP contractor.
   3. Willfully and knowingly obstruct, impede, or attempt to obstruct or impede, any state official or employee who is investigating the qualifications of a person or contractor that has requested acceptance as an ESOP contractor.
   4. Knowingly and with intent to defraud, fraudulently obtain, attempt to obtain, or aid another person or contractor in fraudulently obtaining or attempting to obtain, public moneys to which the person is not entitled under this chapter.
   5. Establish, or cooperate in the establishment of, or exercise control over, a contractor found to have violated any of the provisions in (a) through (d).
7. Makes a person who violates any provision of 6)(a) though (d) liable for a civil penalty not to exceed $5,000 for the first violation, and a civil penalty not to exceed $20,000 for each additional or subsequent violation.
   1. A person who violates 6)d) is liable for a civil penalty not to exceed $50,000 for the first violation and $200,000 for each additional or subsequent violation. A person or contractor that fails to satisfy this penalty is prohibited from further contracting with CalTrans until the penalties are satisfied.
8. Provides that a person or contractor that violates 6) is, in addition to the penalties provided for in 7), to be suspended from bidding on or participating as either a contractor, subcontractor, or supplier, in any contract or project for CalTrans for a period of not less than 30 days nor more than one year. However, for an additional or subsequent violation, the period of suspension is to be extended for a period of up to three years.
9. Requires CalTrans to report an alleged violation to the Attorney General, who is required to determine whether to bring a civil action against any person or contractor for a violation of these provisions.
10. Prohibits CalTrans from entering into a contract with a person or contractor suspended for a violation of these provisions during the period of suspension. CalTrans is prohibited from awarding a contract to any contractor using the services of a person or contractor suspended for violating these provisions during the period of the suspension.
11. Requires CalTrans to verify that the contractor to whom a contract is being awarded, or a person or contractor being used by that contractor, is not under suspension for violating these provisions.
12. Makes these provisions operative on January 1, 2028.

COMMENTS

1. Stated need for the bill

The author writes:

California law establishes several programs that provide preferences to several classes of businesses on public works construction. Those programs, however, are fundamentally flawed. They only assess the owners of those businesses which, in some cases, could only be one person. SB 1174 proposes a more equitable wealth distribution compared to other construction procurement preferences for construction contracting. One way to do that, which the legislature has recognized through the passage of AB 2849 (Bonta) and SB 1407 (Becker) both from 2022, is the promotion of employee-owned businesses. Government Code Section 12100.31(c) perfectly explains the benefits of those entities:

Employees becoming owners would create opportunities for wealth-building and community stability. It would also help California create a more inclusive, equitable, and stable economy, supported by the studies of employee-owned businesses and their success and resiliency during the Great Recession and the COVID-19 pandemic.

The most efficient way to achieve California’s policy objective, that is, to diversify ownership to a broader population, is to incentivize shared ownership through employee stock ownership plans (ESOPs). Rather than requiring each qualified individual to start up their own enterprise, this strategy would allow existing owners to extend ownership rights to employees via grants of stock through ESOP accounts, a process separate from the employee’s compensation. Given the current demographic breakdown of the California workforce on public infrastructure projects as documented by Caltrans in the 2024 Disparity Study, these Plans would directly distribute ownership to the intended populations on a much broader and more inclusive scale than existing policies. According to the study, 65.8% of California construction workers during the period of 2018 to 2022 were people of color.^[1] Modelled after California’s Small Business Enterprise and Disabled Veterans Business Enterprise programs, SB 1174, as proposed to be amended, establishes a scaled bid preference for construction companies that operate an ESOP program. This will build wealth for construction workers.

1. This bill seeks to enact an ESOP preference in CalTrans contracts

An employee-owned company is one where employees own part or all of the shares in a business. While the forms of employee ownership may be different (such as stock grants, worker cooperatives, and stock options), the goal is the same: to promote employee ownership in a business. According to the National Center For Employee Ownership, construction is the third most popular industry for ESOP ownership in the U.S. at 16 percent, after manufacturing (21 percent) and professional services (19 percent).^[2] The author and sponsor argue that this bill could act as an incentive for construction businesses to convert to ESOPs, which could lead to diversity of ownership and stronger economic outcomes for employees. They state that this bill furthers the goals of the California Employee Ownership Act, noting that the Legislature stated:

Employees becoming owners would create opportunities for wealth-building and community stability. It would also help California create a more inclusive, equitable, and stable economy, supported by the studies of employee-owned businesses and their success and resiliency during the Great Recession and the COVID-19 pandemic. (Gov. Code § 12100.31(c).)

The bid preference provisions of this bill are modeled after the ones under the Small Business Enterprise and Disabled Veterans Business Enterprise programs. (Gov. Code § 14835 et seq; Mil. & Vet. Code § 999 et seq.) The civil penalty provisions are modeled off the penalty provisions under the Small Business Enterprise program, though the amounts of the civil penalties in this bill differ from the Small Business Enterprise program. (Gov. Code § 14842.5.) In order to be liable for a civil penalty, the bill requires knowing and willful conduct by a person or contractor and only authorizes the Attorney General to bring an enforcement action.

1. Stakeholder statements

The California Employee Ownership Coalition, the sponsor of the bill, writes in support stating:

[…] Current law provides for a variety of bid preferences and participation goals for certain types of businesses in public works contracts. They include the Small Business Enterprise (SBE), Disabled Veteran Business Enterprise (DVBE) and Disadvantaged Business Enterprise (DBE) programs. However, current law does not recognize employee-owned companies, despite their demonstrated benefits to workers and communities.

SB 1174 proposes a new type of bid preference that targets companies that operate employee stock ownership plans (ESOPs). Rather than an “independently owned and operated” business, or one owned by investors, companies that operate ESOPs are owned by their employees. This is a unique and expanding business model that gives workers the opportunity to share ownership in their employer.

SB 1174 is a modest step to encourage the development and expansion of ESOPs in California. The bill creates a bid preference, up to maximum of five percent, to ESOP companies that bid on Caltrans construction projects that are 100% state funded. The bid preference is scaled based on the level of ESOP ownership.

The legislature should work to expand and encourage worker ownership because they provide wealth and economic security for workers. In fact, ESOPs in California have distributed an estimated $11.2 billion in value to their employee-owners. These distributions represent meaningful wealth building outcomes for tens of thousands of California workers. […]

SUPPORT

California Employee Ownership Coalition (sponsor)

AmbroseAdvisors

BAPKO Metal

C. Wells Pipeline Materials Inc.

Caltrol, Inc.

Couts Heating and Cooling

Employee-owned S Corporations of America

Eureka Capital Partners, LLC

Ggg Demolition, Inc.

Griffith Company

Marina Landscape, Inc.

Mcguire and Hester

Murray Company

Pavement Coatings Co.

Pavement Recycling Systems

Prs Holdings, Inc.

Prs Logistics

Riverside Construction Company, Inc.

The ESOP Association

OPPOSITION

None received

RELATED LEGISLATION

Pending Legislation: None known.

Prior Legislation:

SB 713 (Valladares, 2025) would have required the Director of General Services to issue an ESOP contractor certificate to a qualified contractor that presents a valid and favorable ESOP determination letter from the Internal Revenue Service, as provided. SB 713 died in the Senate Appropriations Committee.

SB 1407 (Becker, Ch. 733, Stats. 2022) established the California Employee Ownership Program, within Office of Small Business Administration.

AB 2849 (Bonta, Ch. 808, Stats. 2022) established a panel o conduct a study regarding the creation of an Association of Cooperative Labor Contractors for the purpose of facilitating the growth of democratically run high-road cooperative labor contractors, as provided.

SB 553 (Wilk, 2019) would have required an entity awarding a contract pursuant to the State Contract Act to provide a 3 percent bid preference to a qualified ESOP bidder, as defined. SB 553 failed passage in the Senate Governmental Organization Committee.

PRIOR VOTES

Senate Transportation Committee (Ayes 12, Noes 0)

**************

1. Cal. Dept. of Trans., Disparity Study at p. 4, available at https://dot.ca.gov/programs/civil-rights/disparity-study. ↑

2. NCEO, ESOP Breakdowns by Industry 2026 Update, available at https://www.esop.org/infographics/esops-by-industry-sector.php. ↑

SENATE COMMITTEE ON TRANSPORTATION

Senator Dave Cortese, Chair

2025 - 2026 Regular

Bill No: Hearing Date: 4/7/2026

SUBJECT:

DIGEST: This bill requires the State Department of Transportation (Caltrans) to provide certain bid preferences to a contractor with an employee stock ownership plan (ESOP) that bids on a state-funded construction contract, as specified.

ANALYSIS:

Existing law:

1. Establishes Caltrans and provides the Department with various powers and duties, including but not limited to, planning, designing, constructing, operating, and maintaining the State’s highway system, as specified.
2. Authorizes Caltrans to enter into any contracts required for the performance of its duties, as provided.
3. Establishes bid preferences in public contracting for certain types of bidders, including, but not limited to, small business and microbusiness bidders.

This bill:

1. Requires Caltrans, on or after January 1, 2028, to provide certain bid preferences to a contractor with an ESOP that bids on a state-funded construction project, as specified.
2. Provides various definitions as they pertain to the provisions specified in this bill.
3. Specifically, requires Caltrans to provide a bid preference to qualified contractors for state-funded construction contracts, as follows:
4. Two percent to a qualified contractor with 30 to 49 percent of the entity owned by its ESOP.
5. Three percent to a qualified contractor with 50 to 99 percent of the entity owned by its ESOP.
6. Four percent to a qualified contractor with 100 percent of the entity owned by its ESOP.
7. An additional one percent for qualified contractors that include employees covered by a collective bargaining agreement or master labor agreement.
8. Specifies that the bid preference shall not be awarded to a noncompliant bidder and shall not be used to achieve any applicable minimum requirements.
9. Provides that it is unlawful for a person or contractor to willfully or knowingly carry out a number of actions pertaining to fraud, providing false statements, and / or impeding an investigation of qualifications as an ESOP contractor, as specified.
10. Imposes a variety of civil penalty fines for a person or contractor who is found in violation of the abovementioned actions, as specified.
11. In addition to civil penalty fines, a person or contractor who is found in violation of the abovementioned actions is required to be suspended from bidding or participating as either a contractor, subcontractor, or supplier, in any contract or project for Caltrans for a period between one month to one year, as specified.
12. Prohibits Caltrans from entering a contract with a person or contractor suspended for one of the abovementioned violations during the period of suspension, as specified.

COMMENTS:

1. Purpose of the bill. According to the author, “California law establishes several programs that provide preferences to several classes of businesses on public works construction. Those programs, however, are fundamentally flawed. They only assess the owners of those businesses which, in some cases, could only be one person. SB 1174 proposes a more equitable wealth distribution compared to other construction procurement preferences for construction contracting. One way to do that, which the legislature has recognized through the passage of AB  2849 (Bonta) and SB 1407 (Becker) both from 2022, is the promotion of employee-owned businesses. Government Code Section 12100.31(c) perfectly explains the benefits of those entities:

“Employees becoming owners would create opportunities for wealth-building and community stability. It would also help California create a more inclusive, equitable, and stable economy, supported by the studies of employee-owned businesses and their success and resiliency during the Great Recession and the COVID-19 pandemic.

“The most efficient way to achieve California’s policy objective, that is, to diversify ownership to a broader population, is to incentivize shared ownership through employee stock ownership plans (ESOPs). Rather than requiring each qualified individual to start up their own enterprise, this strategy would allow existing owners to extend ownership rights to employees via grants of stock through ESOP accounts, a process separate from the employee’s compensation. Given the current demographic breakdown of the California workforce on public infrastructure projects as documented by Caltrans in the 2024 Disparity Study, these Plans would directly distribute ownership to the intended populations on a much broader and more inclusive scale than existing policies. According to the study, 65.8% of California construction workers during the period of 2018 to 2022 were people of color. Modelled after California’s Small Business Enterprise and Disabled Veterans Business Enterprise programs, SB 1174, as proposed to be amended, establishes a scaled bid preference for construction companies that operate an ESOP program. This will build wealth for construction workers.”

1. Employee stock ownership plan. Ultimately, an ESOP is a retirement plan, in some ways similar to and governed by the same laws and regulations as a 401k plan, which provides a company’s workforce with an ownership interest in the company. To establish an ESOP, a firm forms a trust that purchases the shares of a company from the owner and allocates the shares to employees as part of their compensation. ESOP shares are part of an employee’s remuneration for work performed. Shares are allocated to employees and may be held in an ESOP trust until the employee retires or leaves the company. Once the employee retires or leaves the company, the shares are then either bought back by the company for redistribution or voided.

Most private U.S. companies operating as an ESOP are structured as S Corporations. S Corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. According to the IRS, to qualify for S corporation status, the corporation must meet a number of requirements, including being a domestic corporation and have no more than 100 shareholders.

1. Caltrans’ contracting. Caltrans has in place utilization goals and bid preferences for certified Disadvantaged Business Enterprises (DBE), Small Businesses (SB), and Disabled Veteran Business Enterprise (DVBE) when soliciting state contracts. Certified Small Businesses and DVBE can receive a 5% bid preference on applicable state solicitations. Additionally, Caltrans has established utilization goals of 25% for SBs, 5% for DVBEs, and 22.2% for DBEs.

The contractor certification process is managed by the Department of General Services (DGS). For example, in order to obtain certification as a small business for public works contracts, a company must meet the following requirements:

1. Be independently owned and operated;
2. Not dominant in field of operation;
3. Principal office located in California;
4. Owners, Officers, Members/Managers, Partners must be domiciled in California;
5. Average annual gross receipts of forty-three million dollars ($43,000,000) or less over the previous three (3) tax years, as biennially adjusted in accordance with Government Code section 14837, subdivision (d)(3). If the business or its affiliate(s) has been in existence for less than three (3) tax years, then the GAR will be based upon the number of years in existence; and,
6. A business with 200 or fewer employees (including affiliates).

The author introduced a slightly similar bill last year, SB 713, attempting to provide ESOPs similar bid preferences. That bill was held in the Senate Appropriations Committee. The provisions specified in this bill again attempt to align ESOP companies with a similar bid preference structure afforded to SBs and DVBEs. The author points to ESOP construction companies as businesses that provide more equitable wealth distribution for its employees in comparison to its DBE, SB, DVBE counterparts that are currently eligible for bid preferences. As a result, the author and sponsors of this bill claim that by offering similar bid preferences for ESOP companies, these companies will be incentivized to grow and in turn, provide greater financial opportunities for its shareholder employees. On the other hand, it’s important to note that providing a 2%-5% bid preference for ESOP construction companies may lead to increase project costs for Caltrans. However, at this time, as the total number of ESOP construction companies that may participate if this measure were to go into effect is unknown, an approximation of the fiscal impact is unclear.

1. Federal Regulations. It’s important to note that on October 3, 2025, the United States Department of Transportation (U.S. DOT) issued an Interim Final Rule (IFR), which took immediate effect revising / modifying DBE eligibility for state transportation programs. The IFR removes race- and sex-based presumptions from the definition of “socially and economically disadvantaged individual” as it pertains to DBE eligibility. Instead, majority owner(s) must now demonstrate on a case-by-case basis that the individual meets the criteria described in federal regulations (i.e. 49 CFR Section 26.671) to qualify as a DBE. Caltrans has informed current DBE eligible businesses, per federal law, that they must reapply for DBE eligibility with Caltrans and be reevaluated under the updated federal criteria. The author asserts that under the updated federal requirements, many businesses may be subject to losing their DBE status and ESOPs may serve as a viable alternative.
2. Double Referral. This bill has been double referred to the Senate Judiciary Committee.

Related/previous Legislation:

SB 713 (Valladares of 2025) – Would have required DGS to establish a process for an ESOP qualified contractor to be certified and further requires Caltrans to provide bid preferences for qualified ESOP companies beginning January 1, 2027, as specified. This bill was held in the Senate Appropriations Committee.

SB 1407 (Becker, Chapter 733, Statutes of 2022) – Established the California Employee Ownership Hub and a Hub Manager within the Office of Small Business Advocate within GO-Biz aimed at increasing awareness and understanding of employee ownership of businesses, assisting business owners and employees in navigating available resources, and streamlining and reducing barriers to employee ownership.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

POSITIONS: (Communicated to the committee before noon on Wednesday,

April 1, 2026.)

SUPPORT:

The California ESOP Owners Coalition (CEOC) (Sponsor)

Ambrose advisors
Bapko Metal
C. Wells Pipeline Materials INC.
California Employee Ownership Coalition
Caltrol, INC.
Couts Heating and Cooling
Eureka Capital Partners, LLC
Ggg Demolition, INC.
Griffith Company
Marina Landscape, INC.
Mcguire and Hester
Murray Company
Pavement Coatings Co.
Pavement Recycling Systems
Prs Holdings, INC
Prs Logistics
Riverside Construction Company, INC.

Sustainable Emulsions, LLC
The Esop Association

1,355 Individuals

OPPOSITION:

None received

-- END --