(1)Existing law creates within the Governors Office of Business and Economic Development the Office of Small Business Advocate in order to advocate the causes of small business and to provide small businesses with the information they need to survive in the marketplace to be led by the Small Business Advocate. The California Employee Ownership Act requires, upon appropriation by the Legislature, the Office of Small Business Advocate to establish the California Employee Ownership Hub (hub) and to appoint an Employee Ownership Hub Manager (manager) to administer the hub. The act authorizes the manager to be responsible for certain duties, including working with all California state agencies whose regulations and programs affect employee-owned companies, and businesses with the potential to become employee-owned, to enhance opportunities and reduce barriers.

This bill would require the Director of General Services (director) to issue an employee stock ownership plan (ESOP) contractor certificate to a qualified contractor, as defined, with an ESOP that meets certain criteria, including that at least an unspecified percentage of the qualified contractors employees participate in the ESOP, as specified. that presents a valid and favorable ESOP determination letter from the Internal Revenue Service. The bill would require the director to determine the percentage of ESOP ownership for an applicant and indicate the percentage on the certificate, as specified. The bill would require the director to require that the certificate be renewed every 3 years. The bill would additionally authorize the manager to be responsible for compiling and maintaining a comprehensive bidders list of qualified contractors that have received that the certificate from the Director of General Services. The

This bill would also require, beginning January 1, 2027, the Department of Transportation to ensure that an unspecified percentage of state funded construction contracts and construction-related procurements involve contractors who have received that certificate. provide bid preferences to qualified contractors that have received the certificate based on the percentage of the qualified contractor owned by its ESOP, whenever the department prepares a solicitation for a state-funded construction contract, as specified.

Existing law creates within the Governors Office of Business and Economic Development the Office of Small Business Advocate in order to advocate the causes of small business and to provide small businesses with the information they need to survive in the marketplace to be led by the Small Business Advocate. The California Employee Ownership Act requires, upon appropriation by the Legislature, the Office of Small Business Advocate to establish the California Employee Ownership Hub (hub) and to appoint an Employee Ownership Hub Manager (manager) to administer the hub. The act authorizes the manager to be responsible for certain duties, including working with all California state agencies whose regulations and programs affect employee-owned companies, and businesses with the potential to become employee-owned, to enhance opportunities and reduce barriers.

This bill would require the Director of General Services to issue an employee stock ownership plan (ESOP) contractor certificate to a qualified contractor, as defined, with an ESOP that meets certain criteria, including that at least an unspecified percentage of the qualified contractors employees participate in the ESOP, as specified. The bill would additionally authorize the manager to be responsible for compiling and maintaining a comprehensive bidders list of qualified contractors that have received that certificate from the Director of General Services. The bill would also require, beginning January 1, 2027, the Department of Transportation to ensure that an unspecified percentage of state funded construction contracts and construction-related procurements involve contractors who have received that certificate.

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anna Caballero, Chair

2025 - 2026 Regular Session

SB 713 (Valladares) - Employee stock ownership plans: contractors: certification: bid preferences

Bill Summary:

SB 713 establishes an Employee Stock Ownership Plan (ESOP) certification process to be administered by the Department of General Services (DGS) and, beginning January 1, 2027, requires the Department of Transportation (Caltrans) to provide a bid preference for state-funded construction projects of up to four percent to contractors that receive an ESOP certification. SB 713 additionally requires the Office of Small Business Advocate (OSBA), in its responsibilities in administering the Employee Ownership Hub, to compile and maintain a comprehensive bidders list of qualified contractors that have received an ESOP certificate.

Fiscal Impact:

• DGS reports significant start-up and ongoing costs of up to $1 million annually (General Fund). Applicant fee revenue may offset DGS’s ongoing costs to administer the certification program to some extent; however, DGS will still likely incur significant start-up costs. Ongoing costs to DGS after the certification program is established will depend on the number of ESOP applications the department receives and the number of qualifying construction projects that go to bid. It is unknown how many contractors will qualify or apply for an ESOP certificate.
• The Governor’s Office of Business and Economic Development (GO-Biz) reports significant ongoing administrative cost pressures ranging in the mid- to high-hundreds of thousands of dollars to address the expanded scope of responsibilities proposed in this bill and for OSBA’s continued administration of the Employee Ownership Hub.
• Unknown, potentially significant costs to Caltrans to update its internal contracting processes and the Contract Administration & Tracking System II, as well as incorporate an additional tracking system to monitor the percentage of state-funded construction contracts and construction-related procurements. Caltrans notes this implementation workload may necessitate additional limited-term or permanent staff.
• Unknown, potentially significant increased state contracting costs, to the extent awarding contracts to ESOP certified bidders reduces competition in the bid pool and results in higher contracting costs (General Fund and special fund). Actual increases in project costs will vary and depend on, among other things, the number of ESOP certified contractors, frequency of use, and the cost of the contracts awarded. Caltrans notes this bill would cover all state-funded contracts it enters into.

Background:

ESOPs. 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.

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.

Caltrans’ contracting. Caltrans currently has in place utilization goals and bid preferences for certified Disadvantaged Business Enterprises (DBE), Small Businesses (SB), and 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. For federally funded projects, Caltrans applies a DBE goal of 22.2%.

The contractor certification process is managed by 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).

OSBA Employee Ownership Hub. SB 1407 (Becker, Chapter 733, Statutes of 2022) established the California Employee Ownership Program, within OSBA. 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:

• Additionally requires OSBA, in its responsibilities in administering the Employee Ownership Hub, to compile and maintain a comprehensive bidders list of qualified contractors that have received an ESOP certificate.
• Requires the Director of DGS to issue an ESOP contractor certificate to a qualified contractor that present a valid and favorable ESOP determination letter from the Internal Revenue Service (IRS).
  • Provides the certificate will be valid for three years.
• Requires the Director of DGS to determine the percentage of ESOP ownership for an applicant based on its current and valid IRS Form 5500 and indicate that percentage on the certificate.
  • Authorizes an applicant to request a revision to the percentage indicated on the certificated no more than once per year.
  • Authorizes DGS to establish a fee for an applicant that covers the costs to administer the certification program.
• For state-funded construction contracts, requires Caltrans to provide a bid preference to a qualified contractor with an ESOP certificate as follows:
  • If 30 to 74 percent, inclusive, of the qualified contractor is owned by its ESOP, one of the following may apply:
    • In solicitations where an award is to be made to the lowest responsible bidder meeting specifications, the preference to the qualified contractor shall be two percent of the lowest responsible bidder meeting specifications.
    • 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 qualified contractor shall be two percent of the highest responsible bidder’s total score.
  • If 75 to 99 percent, inclusive, of the qualified contractor is owned by its ESOP, one of the following may apply:
    • In solicitations where an award is to be made to the lowest responsible bidder meeting specifications, the preference to the qualified contractor shall be three percent of the lowest responsible bidder meeting specifications.
    • 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 qualified contractor shall be three percent of the highest responsible bidder’s total score.
  • If 100 percent of the qualified contractor is owned by its ESOP, one of the following may apply:
    • In solicitations where an award is to be made to the lowest responsible bidder meeting specifications, the preference to the qualified contractor shall be four percent of the lowest responsible bidder meeting specifications.
    • 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 qualified contractor shall be four percent of the highest responsible bidder’s total score.
• Provides that an additional one percent to the bid preferences specified above for a qualified contractor with an ESOP certificate shall be provided to a qualified contractor that include employees covered by a collective bargaining agreement or master labor agreement.
• States the Caltrans bid preference provisions of the bill become operative on January 1, 2027.

Related Legislation:

SB 1407 (Becker, Chapter 733, Statutes of 2022) established the Employee Ownership Program within OSBA, with the goal of supporting businesses transitioning to employee ownership in a variety of aspects including, but not limited to, education and outreach, technical assistance, and policy development.

Staff Comments:

GO-Biz notes that this bill builds on the Employee Ownership Program established by SB 1407. SB 1407 required OSBA, upon appropriation by the Legislature, to establish the California Employee Ownership Hub, to be administered by an Employee Ownership Hub Manager. Although SB 1407 requirements were subject to a legislative appropriation, at the time of implementation an appropriation was not made to OSBA. Instead, OSBA leveraged existing staff and resources to support businesses’ ESOPs and never received the budget authority or resources to hire an Employee Ownership Hub Manager to administer the program.

GO-Biz notes that the expanded scope of responsibilities in administering the Employee Ownership Hub as required in this bill is likely absorbable; however, OSBA does not currently have the dedicated staff to continue to support the goals established in SB 1407. A previous fiscal analysis of SB 1407 by GO-Biz noted administrative costs could run between $430,000 and $700,000 annually (General Fund). GO-Biz notes that it would also require these resources to meet the requirements of this bill.

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SENATE COMMITTEE ON TRANSPORTATION

Senator Dave Cortese, Chair

2025 - 2026 Regular

Bill No: SB 713 Hearing Date: 4/28/2025

SUBJECT: Employee stock ownership plans: contractors: certification

DIGEST: This bill requires the Department of General Services (DGS) to establish a process for an Employee Stock Ownership Plan (ESOP) qualified contractor to be certified and further requires the State Department of Transportation (Caltrans) to provide bid preferences for qualified ESOP companies beginning January 1, 2027, as specified.

ANALYSIS:

Existing law:

1. Establishes the California Office of Business and Economic Development (GO-Biz) within the Governor's office for the purpose of serving as the lead state entity for economic strategy and marketing of California on issues relating to business development, private sector investment and economic growth.
2. Requires the Governor to appoint a Small Business Advocate who is Director of the Office of Small Business Advocate (OSBA) and outlines the duties and functions of the Small Business Advocate, as specified.
3. Requires OSBA to establish the California Employee Ownership Hub (EO Hub), administered by a Program Manager who may be responsible for: working with all California state agencies whose regulations and programs affect employee-owned companies, and businesses with the potential to become employee owned, to enhance opportunities and reduce barriers; partnering with grantee partners, and other relevant private, nonprofit, and public organizations including, but not limited to, professional and trade associations, financial institutions, unions, Small Business Development Centers, economic and workforce development organizations, and nonprofit entities to promote employee ownership benefits and succession models; making available materials regarding employee ownership benefits and succession models; providing a referral service to help business owners find appropriate legal, financial, and technical employee ownership resources and services; and working with the California Infrastructure and Economic Development Bank, the California Pollution Control Financing Authority, and related entities to shape and implement guidance on lending to broad-based employee ownership vehicles.

1. Designates DGS as the lead agency implementing the state Small Business Procurement and Contract Act, and administrator of the Office of the Small Business and Disabled Veteran Business Enterprise (DVBE) Services, which includes certifying and implementing targeted preference programs for certified small businesses, microbusinesses, and DVBEs, as defined. Requires state agencies to set a small business participation goal consistent with guidelines set by the DGS Office of Small Business and DVBE Procurement.
2. Establishes the Contractors State License Board (CSLB) under the jurisdiction of the Department of Consumer Affairs (DCA) to license and regulate contractors, as specified.
3. Requires a public works contractor to be registered with the Department of Industrial Relations (DIR) to be qualified to bid on, be listed in a bid proposal or engage in the performance of any public work contract and defines qualification for registration as a public works contractor.
4. Requires a public works contractor to be licensed by the CSLB, if applicable.
5. 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.

This bill:

1. For purposes of the ESOP, modifies the definition of “Qualified contractor” to delete the requirement that a business has a valid license issued by the CSLB and keeps the provision that requires a contractor to be currently registered with DIR as a public works contractor.
2. Requires the Director of DGS to issue an ESOP contractor certificate to a qualified contractor with an ESOP that provides a valid and favorable ESOP determination letter from the Internal Revenue Service, as specified, and further requires the certificate to be renewed every three years.
3. Requires the Director of DGS to determine the percentage of the ESOP ownership, as specified.
4. Requires Caltrans, when it prepares a solicitation for a state funded construction contract, including the alteration, demolition, repair or improvement for state facilities, to provide a bid preference to qualified contractors, as follows:
5. Two-percent to a qualified contractor with at least 30 percent of the entity owned by its ESOP.
6. Three-percent to a qualified contractor with at least 75 percent of the entity owned by its ESOP.
7. Four-percent to a qualified contractor with 100 percent of the entity owned by its ESOP.
8. An additional one-percent for qualified contractors that include employees covered by a collective bargaining agreement or master labor agreement.
9. Specifies that the total amount of a bid preference shall not exceed five-percent and that the bid preference shall not be awarded to a noncompliant bidder and shall not be used to achieve any applicable minimum requirements.

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 713 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, at no charge to the employee. 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 713, 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. OSBA. Under Go-Biz, OSBA directly serves the small business community through hosting summits, forums, and interagency meetings; maintaining resources for technical assistance, financing, and state procurement; holding webinars, and other outreach methods. OSBA oversees the Capital Infusion Program, which enables the California Small Business Development Center Networks to expand their one-to-one, no-cost, confidential consulting to small business owners. In 2022, the Governor signed SB 1407 (Becker, Chapter 733, Statutes of 2022) which established the California Employee Ownership Program, within OSBA. 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.
2. Caltrans’ contracting. Caltrans currently has in place utilization goals and bid preferences for certified Disadvantaged Business Enterprises (DBE), Small Businesses (SB), and 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. For federally funded projects, Caltrans applies a DBE goal of 22.2%.

The contractor certification process is managed by 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 provisions specified in this bill aim 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 assert 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. Double Referral. This bill was double referred to Senate Businesses, Professions, and Economic Development Committee where it passed out of that committee on an 11-0 vote at their April 21^st hearing.

Related/Previous Legislation:

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 23, 2025.)

SUPPORT:

Employee-owned S Corporations of America
Marina Landscape, INC.
Mcguire and Hester
Murray Plumbing & Heating Corporation
Riverside Construction Company Inc.
Southern California Contractors Association
The Esop Association

375 Individuals

OPPOSITION:

None received

-- END --

1. 2024 Disparity Study, California Department of Transportation. Chapter 4, Page 4, Figure 4-2. December 2024. ↑

SENATE COMMITTEE ON

BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT

Senator Angelique Ashby, Chair

2025 - 2026 Regular

Bill No: Hearing Date: April 21, 2025

Subject:

SUMMARY:

Establishes a process for an Employee Stock Ownership Plan (ESOP) qualified contractor to be certified and beginning January 1, 2027, requires the Department of General Services (DGS) to ensure that a yet to be defined percent of state funded construction contracts and construction-related procurements involve contractors who have received a ESOP contractor certificate.

NOTE: This bill is double-referred to the Senate Committee on Transportation, second.

Existing law:

1. Establishes GO-Biz within the Governor's office for the purpose of serving as the lead state entity for economic strategy and marketing of California on issues relating to business development, private sector investment and economic growth. (Government Code (GC) §§ 12096 et. seq.)
2. Requires the Governor to appoint a Small Business Advocate who is Director of the Office of Small Business Advocate (OSBA) and outlines the duties and functions of the Small Business Advocate, including, but not limited to:
3. Representing the views and interests of small businesses before other state agencies whose policies and activities may affect small businesses;
4. Collaborating with the Office of Small Business and Disabled Veteran Business Enterprise Services in their activities under the Small Business Procurement and Contract Act, including, but not limited to, promoting small business certification and undertaking reasonable means to assist state agencies in improving small business participation. Among other activities, the advocate shall maintain, publicize, and distribute an annual list of persons serving as a small business advocate, designated pursuant to Section 14846, throughout state government;
5. Collaborating with the California Disabled Veteran Enterprise Program Advocate, regarding the implementation of the California Disabled Veteran Business Enterprise Program, including, but not limited to, promoting disabled veteran business enterprise certification to veteran entrepreneurs and veteran-owned small businesses and undertaking reasonable means to assist state agencies in improving small business and disabled business enterprise procurement participation. (GC §§ 12098-12098.7)
6. Establishes the California Small Business Development Technical Assistance Expansion Act of 2018, which creates the California Small Business Technical Assistance Expansion Program within the Governor’s Office of Business and Economic Development, to assist small businesses through free or low-cost one-on-one consulting and low-cost training by entering into grant agreements with one or more federal small business technical assistance centers, as prescribed. (GC § 12100.60 et seq.)
7. Requires OSBA to establish the California Employee Ownership Hub (EO Hub), administered by a Program Manager who may be responsible for: working with all California state agencies whose regulations and programs affect employee-owned companies, and businesses with the potential to become employee owned, to enhance opportunities and reduce barriers; partnering with grantee partners, and other relevant private, nonprofit, and public organizations including, but not limited to, professional and trade associations, financial institutions, unions, Small Business Development Centers, economic and workforce development organizations, and nonprofit entities to promote employee ownership benefits and succession models; making available materials regarding employee ownership benefits and succession models; providing a referral service to help business owners find appropriate legal, financial, and technical employee ownership resources and services; working with the California Infrastructure and Economic Development Bank, the California Pollution Control Financing Authority, and related entities to shape and implement guidance on lending to broad-based employee ownership vehicles; issuing an annual report on program activities including recommendations for improvement; and reporting employee ownership transition related concerns and recommendations to the Director of GO-Biz. (GC §12100.33)
8. Designates DGS as the lead agency implementing the state Small Business Procurement and Contract Act and administrator of the Office of the Small Business and Disabled Veteran Business Enterprise (DVBE) Services, which includes certifying and implementing targeted preference programs for certified small businesses, microbusinesses, and DVBEs, as defined. Requires state agencies to set a small business participation goal consistent with guidelines set by the DGS Office of Small Business and DVBE Procurement. (GC § 14839)
9. Establishes the Contractors State License Board (CSLB) under the jurisdiction of the Department of Consumer Affairs (DCA) to license and regulate contractors and home improvement salespersons (HIS), and sunsets the CSLB on January 1, 2029, and its authority to appoint a registrar. (Business and Professions Code (BPC) § 7000 et seq.)
10. Prohibits a person who is not licensed pursuant to this chapter may advertise for construction work or a work of improvement covered by this chapter only if the aggregate contract price for labor, material, and all other items on a project or undertaking is less than one thousand dollars ($1,000) and the person states in the advertisement that the person is not licensed under this chapter. (BPC § 7027.2)
11. Requires a public works contractor to be registered with the Department of Industrial Relations to be qualified to bid on, be listed in a bid proposal or engage in the performance of any public work contract and defines qualification for registration as a public works contractor. (Labor Code (LC) § 1725.5)
12. Requires a public works contractor to be licensed by the CSLB, if applicable. (LC § 1725.5 (a)(2)(B))

This bill:

1. For purposes of the EO Program, defines “Qualified contractor” as a business that has a valid license issued by the Contractors State License Board and is currently registered with the Department of Industrial Relations as a public works contractor.
2. In addition to other duties the Program Manager may be responsible for, specifies compiling and maintaining a comprehensive bidders list of qualified contractors that have received a certificate from the Department of General Services (DGS) as an Employee Stock Ownership Plan (ESOP) qualified contractor.
3. Requires the Director of DGS to issue an ESOP contractor certificate to a qualified contractor with an ESOP that meets all of the following criteria:
4. The ESOP has an independent ESOP trustee.
5. The ESOP has a trustee, person, or entity that has completed education on ESOP trustee best practices.
6. The ESOP employs at least a total of ____ full-time workers.
7. The ESOP has a valid and favorable ESOP determination letter from the Internal Revenue Service.
8. At least ____ percent of the qualified contractor’s employees participate in the ESOP without any single employee owning more than ____ percent of the total value of the outstanding shares.
9. Beginning January 1, 2027, requires DGS to ensure that at least ____ percent of state funded construction contracts and construction-related procurements involve contractors who have received a ESOP contractor certificate.

FISCAL EFFECT:

Unknown. This bill is keyed fiscal by Legislative Counsel.

COMMENTS:

1. Purpose. This bill is sponsored by Pavement Recycling Systems, Inc. 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. The legislature should consider more equitable wealth distribution when it comes to construction contracting…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 would be 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, at no charge to the employee. 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. Modeled after California’s Small Business Enterprise and Disabled Veterans Business Enterprise programs, SB 713 establishes a participation goal for construction companies that operate employee stock ownership plans which, in turn, will build wealth for construction workers.”
2. Background.

Employee Stock Ownership Plans (ESOPs). 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.

ESOPs are the most common form of employee ownership in the United States; they are more or less retirement plans within Employee-Owned Companies because they provide income to employees through the sale of their stock when they retire. In order for an ESOP to work, the company must first establish a trust where it can make annual share contributions to qualifying employees. The company can then use the ESOP trust fund to purchase stock from the selling shareholder or leaving owner. The company can also use the ESOP trust to borrow money for funding a share, sale, or transfer. An owner who wants to transfer ownership will sell their shares to the ESOP trust fund; these shares go to qualified employees and are held safely in the trust. To earn these benefits, a qualified employee must become vested in the program by working in the company for a certain number of years. Qualified employees can only receive benefits when they have become partially or 100% vested.

In this way, ESOPs are a business succession plan for founders and owners because it is a way of transferring company stock to employees without requiring sale of the business to a third party. Not only that, but by ensuring a business succession plan, business owners ensure long-lasting jobs in communities, rather than layoffs when companies close or sell to another company. Additional benefits of ESOPs are: helping to motivate and retain employees to work in and for the company because of employee ownership in company stock; and encouraging employees to support everyone’s success, given that when the company does well financially, everyone does well financially. However, setting up an ESOP can be expensive, with some estimates between $60,000 and hundreds of thousands of dollars, even back in 2015.

Other state and cities have embraced the use of ESOPs in their small business communities. Colorado, Massachusetts, Iowa, and other states all have offices or hubs to facilitate (at the very least) the passage of information regarding ESOPs to business owners. For instance, according to its website, the Colorado Employee Ownership Office “establishes a network of technical support and service providers for businesses considering employee ownership structures. The office brings together partners including employee-owned businesses, attorneys, lawmakers, financial and accounting professionals, rural leaders, and other employee ownership organizations.” It goes on to say, “Employee-owned businesses promote a higher quality of life for employee-owners including higher wages, less turnover, access to better benefits, and job security. For the business owner, they get the benefit of a more engaged workforce, a guaranteed succession plan, and a way to attract and retain top talent.”

In 2022, the Governor signed SB 1407 (Becker, Chapter 733, Statutes of 2022) which established the California Employee Ownership Program, within OSBA.

GO-Biz. In February 2010, the Little Hoover Commission undertook a review of the state's economic and workforce development programs. In its final report, Making up for Lost Ground: Creating a Governor's Office of Economic Development, it analyzed the status and effectiveness of current programs since the 2003 demise of the Technology, Trade and Commerce Agency and recommended the creation of a new governmental entity to fill the void left by the dismantled agency.

The report called for a single entity that would promote greater economic development, foster job creation, serve as a policy advisor and deliver specific services (i.e., permitting, tax, regulatory, and other information) directly to the California business community. In April 2010, Governor Schwarzenegger issued Executive Order S-05-10 as a means to operationalize the report recommendations, including the creation of the Governor's Office of Economic Development (GOED).

In October 2011, the Governor signed AB 29 (John A. Pérez, Chapter 475, Statutes of 2011), which effectively codified GOED and changed its name to GO-Biz. Since its inception, the office has served thousands of businesses, 95 percent of which are small businesses. The most frequent types of assistance include help with permit streamlining, starting a business, relocation and expansion of businesses, and regulatory challenges.

In March 2012, Governor Brown initiated a reorganization process to realign the state's administrative structure. Key changes include dismantling of the Business, Transportation and Housing Agency and the shifting of a number of key programs to GO-Biz including the Small Business Loan Guarantee Program, the California Travel and Tourism Commission, the California Film Commission, the Film California First Program, and the Infrastructure and Economic Development Bank (IBank). Currently, GO-Biz administers the following programs and units:

• Made In California program for the purpose of encouraging consumer product awareness and to foster the purchases of products manufactured in California.
• The California Inclusive Innovation Hub Program (iHub2) to incubate and/or accelerate technology and science-based firms, with a focus on underserved regions and communities.
• The California Competes Tax Credit Program under which “businesses who want to come to California or stay and grow in California” can receive an income tax credit.
• The California Business Investment Services Unit, which provides no-fee, tailored site selection services to employers and others who may be considering California for relocation or expansion.
• The California Business Portal, which provides information to California businesses about common questions, permitting, financial options, and more.
• The California Community Reinvestment Grants Program, which was included in Proposition 64, authorized GO-Biz to award grants to local health departments and certain nonprofit organizations to support communities disproportionately affected by the War on Drugs.
• OSBA which provides information and assistance to small businesses.
• The Zero Emission Vehicles (ZEV) Infrastructure Unit which works to accelerate the deployment of ZEV infrastructure.
• The International Affairs and Business Development Unit, which serves as California’s primary point of contact for expanding international trade and investment relations. This unit focuses on foreign direct investment (services for foreign investors, foreign investment technical assistance, and the EB-5 Investor Visa Program), international trade promotion (STEP program, trade missions, export assistance, and the California-China Trade Office), and international agreements.

Office of Small Business Advocate. Since its inception, GO-Biz has served thousands of businesses, 95 percent of which are small businesses. The most frequent types of assistance include help with permit streamlining, starting a business, relocation and expansion of businesses, and regulatory challenges. In addition to economic development programs, GO-Biz is responsible for specialized assistance to small businesses through the OSBA. OSBA directly serves the small business community through hosting summits, forums, and interagency meetings; maintaining resources for technical assistance, financing, and state procurement; holding webinars, and other outreach methods. OSBA oversees the Capital Infusion Program, which enables the California Small Business Development Center Networks to expand their one-to-one, no-cost, confidential consulting to small business owners. From its inception in 2014 to 2016, the Capital Infusion Program resulted in roughly $379 million in documented capital infusion and served over 20,000 small business owners across the state. In 2015, GO-Biz launched a new California Business Portal; the site includes a Business Navigator feature, which provides custom information regarding permits, licenses, and incentives that relate specifically to the user’s business. OSBA also provides emergency preparedness resources on its website, and is involved in facilitating disaster relief financing efforts for small businesses due to California wildfires.

1. Arguments in Support. Riverside Construction Company, Inc. writes that “as an employee owner in the construction industry in California, this bill would allow me, my coworkers and thousands of other employee owners in California to experience the benefits and advantages currently provided to the few company owners who qualify for a DBE or similar gram.”
2. Proposed Author’s Amendments. The bill is currently silent on many key provisions necessary for implementation. As such, the Author intends to make numerous changes, including:

• Deleting the requirement currently in the bill that a qualified contractor have a valid license from the CSLB to expand the definition of a qualified contractor to include non-CSLB licensed businesses which could be material and service suppliers on construction projects or street sweepers.
• Specifying that a qualified contractor must have an IRS determination to receive a state certification.
• Requiring DGS to determine the percentage of the ESOP ownership.
• Replacing the undefined participation goal for ESOP in state contracts with a requirement for DGS, when it prepares a solicitation for a state funded construction contract, including the alteration, demolition, repair or improvement for state facilities, to provide a bid preference to qualified contractors, as follows:
• Two-percent to a qualified contractor with at least 30 percent of the entity owned by its ESOP.
• Three-percent to a qualified contractor with at least 75 percent of the entity owned by its ESOP.
• Four-percent to a qualified contractor with 100 percent of the entity owned by its ESOP.
• An additional one-percent for qualified contractors that include employees covered by a collective bargaining agreement or master labor agreement.
• Specifying that the total amount of a bid preference shall not exceed five-percent and that the bid preference shall not be awarded to a noncompliant bidder and shall not be used to achieve any applicable minimum requirements.

SUPPORT AND OPPOSITION:

Support:

Riverside Construction Company, Inc.

Opposition:

None received

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