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Socialism: say plainly whether a member's profit share is pay, law by law

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Co-Authored-By: Claude Opus 5.5 <[email protected]>
Claude-Session: https://claude.ai/code/session_01QWPs69B8nQZjtPEUXMKzZx
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2026-09-25 12:07:07 -06:00
co-authored by Claude Opus 5.5
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@@ -44,6 +44,24 @@ There's a way out for the profit share. A written profit-sharing plan that pays
Time at a required meeting counts as working time under federal law ([29 CFR 785.27](https://www.law.cornell.edu/cfr/text/29/785.27)). So members are paid for general meetings they're expected to attend and for time on the board and committees, as [When People Don't Stay Long](high-turnover.md#unions-stay) already requires. That also keeps governance from costing low-paid members a shift.
### Is the profit share pay?
Members get two kinds of money: wages, paid through payroll at no less than the going rate, and a share of the profit, split by hours worked once the year's books close. The model's position is that **a member's profit share is an owner's share of profit, not pay.** It depends on the whole co-op making money, it's declared only after the year ends, and wages always come first ([How a Locked Co-op Is Taxed](taxes.md#wages-first)). But each law asks its own question, and some of the model's own rules point the other way. The share is split by hours, it grows with years of service, and workers who chose not to join get one too, in cash ([How a Locked Co-op Is Taxed](taxes.md#one-rate-per-hour-for-everyone-who-works)). For them it's simply a bonus. So the answers differ by law:
- **Tax.** The model argues it's a patronage dividend, which is how co-op tax law pays owners, and that it doesn't carry payroll tax. That's unsettled ([How a Locked Co-op Is Taxed](taxes.md#payroll-tax-on-profit-shares)).
- **Overtime.** Federal overtime law counts almost everything an employer pays, so the co-op adds the share into the overtime rate, as above. Its definition is broader than the tax law's, so this doesn't settle the tax question either way.
- **Pension law.** Members' accounts are designed to stay outside it even if the share were counted as pay ([Member Capital Accounts](capital-accounts.md#why-not-pay-it-out-when-you-leave)).
- **State laws on paying wages.** This is the hard one. Many states require wages to be paid on time and in full, forbid employers from taking any back, require final pay within days when someone leaves, and don't let workers sign those rights away. California's definition of wages covers "all amounts for labor performed by employees," however they're calculated ([Cal. Labor Code § 200](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=LAB&sectionNum=200)). It's unlawful there for an employer "to collect or receive from an employee any part of wages theretofore paid" ([§ 221](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=LAB&sectionNum=221)), and no private agreement can set those rules aside ([§ 219](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=LAB&sectionNum=219)). If a credit in a member's account counted as wages there, holding it for years, charging losses to it and pausing it in a bad year could all be illegal, for members who stay as well as those who leave.
State co-op law supports the owner's-share reading, but it doesn't settle it. Massachusetts, California and Washington each have a law for worker co-ops that lets a member's share of profit be paid in "cash, credits, written notices of allocation, or capital stock," lets the bylaws "permit the periodic redemption of written notices of allocation," and forbids payouts that would make the directors personally liable ([Mass. Gen. Laws ch. 157A, §§ 8–9](https://malegislature.gov/Laws/GeneralLaws/PartI/TitleXXII/Chapter157A/Section9); California's is Corporations Code § 12317, [added in 2015](http://www.leginfo.ca.gov/pub/15-16/bill/asm/ab_0801-0850/ab_816_bill_20150812_chaptered.html); Washington's is [RCW 23.78.090](https://lawfilesext.leg.wa.gov/Law/RCW/RCW%20%2023%20%20TITLE/RCW%20%2023%20.%2078%20%20CHAPTER/RCW%20%2023%20.%2078%20.090.htm)). Those laws say how the money can be paid. None of them says it isn't wages, and a wage law's ban on signing rights away is the more specific rule. How far each state's wage law reaches pay that depends on the whole business's profit differs from state to state and isn't settled. So:
- **Where it's unclear, the co-op doesn't bet on it.** The bank publishes a checked entry for each state, signed by a lawyer licensed there and reviewed every year, saying whether its wage law could reach account credits. Before lending in a state, the bank asks the state's labor agency for its view. Where the answer is "could," co-ops in that state don't use members' accounts. The members' share is paid all in cash, and a co-op that wants more money to invest sends more of its profit to the permanent reserve instead. Members there don't build savings in the co-op until the state's law changes.
- **The model state law fixes it at the source.** It amends the state's wage-payment law itself, not only its co-op law: a written share of profit that a business allocates to its owners, under a formula set in advance and only after every worker has been paid at least the going rate, isn't wages for that law. It applies to any business that does this, not only co-ops, so it isn't a favor to one kind of firm. It sits in the short law that already recognizes locked co-ops ([Making It Last](durability.md#federal-test-state-copies)).
- **Every credit comes with a written notice.** Each year, each person gets a notice showing the amount credited and when it's scheduled to be paid, which is what those co-op laws describe. It also says plainly that the credit isn't a wage, that it can be reduced by losses or paused until it's paid, and where to file a wage claim if they think wages are owed.
- **The going rate is checked.** The owner's-share argument only holds if wages really come first. So the co-op's auditor certifies each year that every worker was paid at least the going rate, against the public benchmark in [the pay rule](the-long-run.md#the-rules), and any shortfall is paid as wages before any profit is shared.
**What members give up.** Calling the share an owner's share has costs. Unpaid wages get priority in a bankruptcy, up to $17,150 per worker ([11 U.S.C. § 507(a)(4)](https://www.law.cornell.edu/uscode/text/11/507)). Account credits don't, and they rank behind the co-op's lenders ([Member Capital Accounts](capital-accounts.md#protecting-the-co-op-and-the-people-who-stay)). Unemployment and injury benefits are figured from wages, so the share doesn't raise them. Federal limits on garnishment cover any "bonus" paid for work ([15 U.S.C. § 1672](https://www.law.cornell.edu/uscode/text/15/1672)), so a cash share probably gets that protection anyway. The [savings insurance pool](savings-guarantee.md) covers part of the bankruptcy gap for people who have left.
## Unemployment insurance: covered in most states, not all
Federal unemployment tax treats a corporation's officers as employees. But each state runs its own unemployment insurance, and several write owners or officers out of it ([US Department of Labor, *Comparison of State Unemployment Laws*, 2021, table 1-7](https://oui.doleta.gov/unemploy/pdf/uilawcompar/2021/coverage.pdf)). Examples: