Small Business Contracting: New ESOP Act Lowers Employee Ownership Bar from 100% to 30%

The new Empowering Small-business Ownership Participation Act (ESOP Act) is short, but it makes a significant tweak to an existing federal pilot program designed to steer government contracts toward employee-owned businesses. Think of it as opening the door wider for mid-sized companies.

The 100% Problem Gets a Reality Check

This bill directly amends Section 874 of the National Defense Authorization Act for Fiscal Year 2022. That section created a pilot program to incentivize federal agencies to contract with employee-owned companies. The catch? To qualify for this incentive, the business had to be 100% wholly-owned by its employees. That’s a high bar, often limiting participation to a very specific type of company.

The ESOP Act lowers this qualifying threshold dramatically. To participate in the pilot program now, a business only needs to be at least 30% owned by its employees. This is the main event of the entire bill (Sec. 2).

Why 30% Matters for the Real World

For a lot of companies looking to transition to employee ownership, hitting 100% ownership right out of the gate is difficult. It takes time, complex financing, and often requires existing owners to completely step away. By dropping the requirement to 30%, the federal government is saying, “We want to reward significant employee ownership, even if you’re still in transition or have other investors.”

This change immediately expands the pool of eligible businesses. Imagine a mid-sized engineering firm, currently 40% owned by its Employee Stock Ownership Plan (ESOP), that was previously locked out of this incentive. Now, that firm can qualify (Sec. 2). This means more competition for government contracts and potentially more stability for the employees in those newly eligible companies.

Who Wins and Who Doesn’t

The clear winners here are the businesses that have adopted meaningful employee ownership—say, 30% to 99%—but couldn't access the federal contracting incentive before. For employees in these companies, accessing these typically stable, long-term government contracts could mean better job security and a healthier bottom line for their company, which directly benefits their retirement accounts.

It’s worth noting that this change shifts the focus slightly. While the original program was clearly aimed at fully worker-controlled entities, the new rule incentivizes a broader range of companies. The bill also makes necessary administrative updates, replacing the term “Wholly-owned” with simply “Owned” in the relevant section headings to reflect the new, lower threshold (Sec. 2). It’s a small, technical change that acknowledges the new reality of the pilot program.