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@@ -12,7 +12,7 @@ summary: Federal bankruptcy law would override the lock, so a failed co-op could
 This page explains why, what Congress already does for a similar kind of organization, and what the amendment would say. A few terms first:
 - **The lock-holder** is the independent organization that holds the co-op's *lock share*, a single share that pays nothing but can veto a sale ([The Lock](the-lock.md#how-the-lock-is-made-to-hold)).
- **A going concern** is a business sold whole and still running, with its customers, contracts and trained staff. It's usually worth much more than the same equipment sold off piece by piece.
+- **A going concern** is a business sold whole and still running, with its customers, contracts and trained staff. It can be worth much more than the same equipment sold off piece by piece.
 - **Creditors** are everyone the co-op owes: lenders, suppliers, workers, tax agencies, and anyone it has injured.
 ## Why bankruptcy breaks the lock
@@ -53,7 +53,19 @@ A locked co-op isn't a charity. It's a business that makes and shares profits. T
 **2. Old debts are protected.** A lender already secured on the co-op's assets when the lock is registered has to consent in writing before registration. For a business that converts to a co-op, that's part of the buyout deal ([When an Owner Wants to Sell to the Workers](buyouts.md)).
-**3. Creditors who never chose to lend are made whole for the lock's cost.** Some creditors never had a chance to price the lock in: people the co-op injured, tax agencies, and creditors whose unsecured claims came before registration. If the lock makes them recover less than they would have from an open sale, the federation fund pays them the difference. For co-ops outside a federation, the bank pays it. Locked co-ops must also carry standard liability insurance, so injured people are mostly paid by insurers anyway.
+**3. Creditors who never chose to lend are made whole for the lock's cost.** Some creditors never had a chance to price the lock in: people the co-op injured, tax agencies, and creditors whose unsecured claims came before registration (exactly who counts is below). If the lock makes them recover less than they would have from an open sale, the federation fund pays them the difference. For co-ops outside a federation, the bank pays it. Locked co-ops must also carry standard liability insurance, so injured people are mostly paid by insurers anyway.
 **How big that bill could be.** Counted in cases, usually nothing. Counted in dollars, the cost sits in a few large cases, and nobody has measured how often they happen.
 - **Most failed small businesses have little to fight over.** In one study of small firms liquidated under Chapter 7, creditors got back a median of 5.8% of what they were owed, and an average of 27% (Bris, Welch and Zhu, 2006, as summarized in [Corbae and D'Erasmo, NBER w23515](https://www.nber.org/papers/w23515)). Most small businesses that try to reorganize are liquidated in the end ([Morrison, 2007](https://ideas.repec.org/a/ucp/jlawec/v50y2007p381-419.html)). That's background, not an estimate. Those are firms nobody would buy whole, where the lock changes nothing. The fund pays in the other case: a business still worth more than it owes the bank, brought down by a debt nobody chose, like a large injury claim. That's also where the payment is biggest.
 - **The bank stands in front.** A failed co-op usually owes the bank more than the business is worth, and any extra an open sale would have brought goes to the bank first. The bank lent knowing about the lock. So the fund only pays when an open sale would have covered the bank and everyone else ranked ahead, with money left over.
 - **Who's covered.** People the co-op injured; state and local tax agencies; claims listed when the lock was registered, less whatever has since been paid; customers' deposits; and workers who don't join a new co-op, for what they're owed beyond the part bankruptcy law puts first, including damages for late wages and missing layoff notice. Federal tax claims aren't covered, because the federal government chose the lock when it passed the law. Nor are insiders, the parties to a buyout, or anyone tied to them. A court judgment counts only if the fund was told about the case in time and could defend it. Where someone is personally liable for a tax the co-op didn't pay over, like taxes withheld from wages, the fund takes over the claim against them.
 - **The comparison changes only the price.** Both sides of the comparison use the same list of claims, in the same order, with the same costs of the case, and the insurance pool keeps its place in both. Workers' handed-over claims count as paid in full. The open-market price is taken after the costs a normal sale would have had. Anything a buyer of the pieces pays back under point 8 is subtracted.
 - **An example.** A co-op owes the bank $100,000, its workers $30,000 of wages the pool paid, and $60,000 in state taxes, and it lost a $400,000 injury lawsuit beyond its insurance. The case costs $40,000. Sold whole on the open market, the business would bring $500,000: after costs, the bank, the wages and the taxes, the injured person would get $270,000. The workers' co-op pays $200,000, so the taxes get $30,000 and the injured person nothing. The fund owes $300,000. A co-op that owed the bank more than the business was worth would owe nothing.
 - **The open-market figure has to be earned.** Nobody can test it with a real sale, and everyone involved has a reason to bend it: the buyers want the price low, the covered creditors want the gap high, and the payer wants it small. So the court picks the appraiser, and neither the fund nor the bank takes part in choosing. The payer and the covered creditors can each ask for a second appraisal, paid by the fund. The court also invites conventional buyers to make offers. They can't win, but an offer backed by a deposit sets the open-market figure. Otherwise the court decides between the appraisals.
 - **The buyer pays it back.** The gap is the discount the new co-op got. So the new co-op owes the fund what it paid out, repaid from profit within ten years, behind its bank loan and its debt to the insurance pool. The fund guarantees the creditors are paid now. Only what the new co-op can't repay is a cost the whole sector bears.
 - **Insurance, checked every year.** The payer, not the co-op, sets how much liability insurance each kind of co-op must carry. It covers claims from the years it was in force even after the co-op fails, and includes pollution cover where the work calls for it. A lapse counts as a default on the co-op's loan and triggers the early warning in [Paying for the workers' bid](#paying-for-the-workers-bid). Co-ops outside a federation pay the bank a premium based on their risk. In a buyout, the selling owner sets aside money for, or guarantees, the debts from before the sale that the co-op takes on.
 - **During the pilot, the bank pays,** because there's no federation fund yet. Those payments are reported case by case, with each failure's appraised gap, and count as the bank's losses in the losses that can stop its lending ([The Pilot, in Numbers](pilot-spec.md#the-decision-rule)).
 ### What can be sold, and to whom
@@ -72,12 +84,30 @@ A locked co-op isn't a charity. It's a business that makes and shares profits. T
 - **Only claims workers choose to hand over,** in writing. Workers who don't join the new co-op keep their claims.
 - **At full value, up to the amounts bankruptcy law already puts first:** unpaid wages and benefit contributions earned in the last 180 days, up to $17,150 per worker for wages ([11 U.S.C. § 507(a)(4) and (a)(5)](https://www.law.cornell.edu/uscode/text/11/507)). That's a deliberate transfer from other creditors to workers, capped per person, as Argentina chose.
- **The insurance pool's claims count too.** The [savings insurance pool](savings-guarantee.md) pays workers' final wages quickly. Normally, whoever pays a wage claim loses its priority ([§ 507(d)](https://www.law.cornell.edu/uscode/text/11/507)). Without a fix, that would leave workers nothing to bid with. So the pool keeps the priority, and it can hand the claims it paid to the workers' co-op for its bid, to be repaid by the new co-op over time.
+- **The legal minimum is paid in cash, not handed over.** Federal law requires minimum wage and overtime to be paid in cash or a cheque ([29 CFR 531.27](https://www.law.cornell.edu/cfr/text/29/531.27)), "finally and unconditionally" ([29 CFR 531.35](https://www.law.cornell.edu/cfr/text/29/531.35)), and workers can't waive them by private agreement ([*Brooklyn Savings Bank v. O'Neil*, 1945](https://www.law.cornell.edu/supremecourt/text/324/697)). A stake in a new company isn't cash. Wage claims are bought and sold in bankruptcy, and handing one over at its full value isn't a discount, so this might be allowed. But the usual way a court blesses giving up wage claims is by approving a settlement of a real dispute over them ([*Lynn's Food Stores v. United States*, 11th Cir. 1982](https://law.justia.com/cases/federal/appellate-courts/F2/679/1350/13398/)), and there isn't one here. So the model doesn't rely on it.
- **No last-minute claims.** Pay deferred by a vote in the 180 days before filing ranks as an ordinary claim, not a priority one, and can't be used to bid.
+  - **The protected part** is every unpaid hour at the highest minimum wage that applies, federal, state or local, plus all unpaid overtime at the worker's own overtime rate, taken from payroll records. For salaried staff whose hours weren't recorded, it's counted at 40 hours a week. Any damages the law adds for late wages stay with the worker.
  - **Some states protect more.** California bars employers from requiring a release of any wages due until they're paid, not just the minimum ([Cal. Labor Code § 206.5](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=LAB&sectionNum=206.5)), and no private agreement can get around its wage rules ([§ 219](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=LAB&sectionNum=219)). The bank's checked entry for each state ([Owners Are Still Workers](labor-law.md#is-the-profit-share-pay)) says which wages can be handed over there. Where it's unclear, only severance and benefit contributions can be.
  - **The pool pays first.** The [savings insurance pool](savings-guarantee.md) pays up to eight weeks of each worker's unpaid wages in full, as it always does, and what it pays counts against the protected part first. Any protected wages beyond that stay the worker's own claim, and the court can't approve a bid that uses handed-over claims until the buyer has set aside cash to pay them.
  - **Workers can hand over the rest:** wages beyond what the pool paid that the protected part doesn't cover, benefit contributions and severance, within the cap above.
  - **Handed-over claims buy savings, not votes.** In the new co-op, they become credits in each worker's [capital account](capital-accounts.md). Votes stay one per member, so a manager with a larger claim doesn't get more say than an aide whose wages were paid by the pool.
 - **The insurance pool's claims count too.** Normally, whoever pays a wage claim loses its priority ([§ 507(d)](https://www.law.cornell.edu/uscode/text/11/507)). Without a fix, most low-paid workers' claims would be paid by the pool and couldn't be used to bid. So the pool keeps the priority, and when a qualified workers' co-op bids, it hands the claims it paid to that co-op for its bid. The new co-op repays the pool over time. Each worker's own claims use the $17,150 priority first, and the pool's claim for that worker only ranks after them.
 - **No last-minute claims.** In the 180 days before filing, pay deferred by a vote, pay left unpaid for more than one normal pay period while others were being paid, and any increase in notice or severance terms rank as ordinary claims, not priority ones, and can't be used to bid.
 **8. If no qualified co-op buys it, the pieces go to anyone, but not the whole.** No buyer, together with anyone financially tied to it, may end up with substantially all of the business. The brand, the core technology or the main customer contracts count as substantially all, whatever their size, as the lock already says. A buyer of the pieces who hires more than a third of the members within two years owes the difference between what it paid and what the running business was worth, as set by the court's appraiser. The sale order says so up front. That money goes to the co-op's creditors, not the federation fund.
-**9. Lenders can't sell around it outside court either.** The same rules apply to any transfer of substantially all of a locked co-op's assets because it can't pay its debts: a lender's sale or taking of its collateral, a state receivership, an assignment for the benefit of creditors, or a tax sale. The [model state law](durability.md#federal-test-state-copies) adds that a sale following these rules counts as "commercially reasonable" under the UCC, so lenders aren't penalized for following them.
+**9. Lenders can't sell around it outside court either.** The same rules apply to any transfer of substantially all of a locked co-op's assets because it can't pay its debts: a lender's sale or taking of its collateral, a state receivership, an assignment for the benefit of creditors, or a tax sale. The [model state law](lock-state-law.md#what-the-model-law-does) writes these rules into state law too, and adds that a sale following these rules counts as "commercially reasonable" under the UCC, so lenders aren't penalized for following them.
 ### Paying for the workers' bid
 A workers' co-op can only use these rules if someone lends it the money in time, on terms a failed business can meet. The best-documented US case is New Era Windows in Chicago. Its workers had occupied their factory in 2008. When a later owner closed it in 2012, a group of them formed a co-op. They didn't buy a running business. The plant was shut, and they bought the equipment they wanted at the creditors' auction for $430,000, at salvage prices. They needed $850,000 in all, counting money to restart and run it, and put in about $20,000 themselves, $1,000 each. One mission lender, The Working World, provided the rest, in ten-year loans at 5% repaid only once the co-op made a profit ([Project Equity](https://project-equity.org/ownership-story/new-era-windows-deal-structure/)). The co-op opened in May 2013 ([The Working World](https://www.theworkingworld.org/us/new-era-windows/)). Money repaid only from profit is closer to ownership than to a loan, and a bank lending on past cash flow would probably have turned New Era down. So the case shows what kind of money a restart needs, and the rules below don't pretend the bank's ordinary test can supply all of it.
 - **Warning early, and privately.** Members and the lock-holder are told what these rules let them do at the first of: 60 days behind on a loan from the bank, a missed payroll, unpaid payroll taxes, deferred insurance pool premiums, loan terms eased to avoid a default, lapsed liability insurance, or a layoff notice. Members own the business, so they're told privately, through an adviser, not in a letter that reaches suppliers. Every worker, including temporary and agency staff, is told once a loan is called in or a case is filed, in the languages they speak.
 - **An adviser who works for the workers.** The workers pick one from a panel the [federation](federation.md) keeps. The adviser is paid from a small charge on all the bank's loans, not by the co-op's managers or by the bank case by case.
 - **Keeping it running.** A court can already approve new lending to a business in bankruptcy that ranks ahead of the case's other costs ([11 U.S.C. § 364(c)](https://www.law.cornell.edu/uscode/text/11/364)). It can't rank ahead of an existing lender's lien without that lender's protection being shown ([§ 364(d)](https://www.law.cornell.edu/uscode/text/11/364)). When workers run the business while it's up for sale (point 5), the bank may make such loans for day-to-day costs, on limits the statute sets: they can't rank ahead of wages earned while the workers run it, can't be used to pay off the bank's old loans or to pledge assets for them, and can't carry a deadline that forces a sale before the 90 days in point 6. If the workers' co-op wins, the loan can be folded into its purchase loan.
 - **A separate test for buying a failed co-op.** The bank's usual buyout test looks back at two or three years of checked cash flow ([When an Owner Wants to Sell to the Workers](buyouts.md#the-seller-shares-the-risk)), which a failed firm doesn't have. So the bank lends against what the assets would bring sold off piece by piece, as set by the court's appraiser, and no more. The rest of the price and the money to run it have to come from the workers' handed-over claims, the insurance pool's claims, another lender, or the federation's fund, which can lend on terms like New Era's, repaid only from profit, within the limits it sets in advance ([Investing for the Long Run](the-long-run.md#spending-it-badly)). That also stops the bank from raising the price, and its own recovery, with its own money.
 - **The same offer to every qualified bidder,** in writing. If the bank turns a bid down, it gives its reasons to the workers and the court. When two qualified bids are equal, the one whose members include more of the failed co-op's workers wins. People who managed the failed co-op in its last two years can join as members, but the bank won't lend to a bid they lead.
 - **Counted in the bank's record.** Nobody who worked on the failed co-op's loans decides on the new one. The failed co-op counts as closed ([Keeping zombies alive](pilot-safeguards.md#keeping-zombies-alive)). The failed loan's recovery counts only money that didn't come from the bank, and the new loan is reported together with it, as one lending decision. Any loss on the new loan in its first five years is added to the failed loan's loss, in the published recovery rate and in the losses that can stop the bank's lending ([The Pilot, in Numbers](pilot-spec.md#the-decision-rule)). So lending the workers the money to buy a failed co-op can't hide a loss.
 - **Repaying the insurance pool.** The pool chooses whether to hand over the wage claims it paid (point 7), under a test it publishes in advance. If it does, the new co-op owes it that amount at the one-year Treasury rate plus two points, the rate members' accounts earn, secured by a lien behind the bank's. That's below what a lender would charge a restarted business, a subsidy from the other co-ops' premiums, and it's stated as one. The co-op repays within ten years, which the pool can extend once. Each year's payment comes before any pay above the going rate and before any profit share paid in cash beyond what members need for tax.
 ### When the co-op reorganizes
@@ -86,6 +116,7 @@ A locked co-op isn't a charity. It's a business that makes and shares profits. T
 - **Only working members hold votes.** A plan can give creditors new debt, or voteless claims on the terms in [Capital, After](capital.md), but never ownership, and no loan terms giving a lender approval over the co-op's management or strategy. The rule requiring a ban on voteless shares doesn't apply.
 - **Small co-ops follow the ordinary small-business rule.** In Subchapter V, owners of any small business can keep it by paying creditors all of its disposable income for three to five years. A co-op gets the same deal, no better. To stop members shrinking that income by paying themselves more, disposable income is worked out with members' pay at the going rate ([Investing for the Long Run](the-long-run.md#the-rules)), and raises in the two years before filing are reversed.
 - **Larger co-ops pay creditors the business's full value.** If a group of creditors votes against the plan, they must get at least what the business would sell for on the open market, as if the lock didn't exist, in cash, new debt or voteless claims. That's what the absolute priority rule protects in any company. Members can keep a co-op they can't sell, but not at their creditors' expense.
 - **That value is tested, not just appraised.** The Supreme Court held in 1999 that owners can't keep a business over a creditor group's objection through a deal nobody else could compete for, because "the best way to determine value is exposure to a market" ([*Bank of America v. 203 North LaSalle Street Partnership*](https://www.law.cornell.edu/supremecourt/text/526/434)). It left open what kind of market test is enough. Here the test is weaker than a real one, because a conventional buyer can never win. So when members propose to keep a co-op over a creditor group's objection, the court picks the appraiser, as in point 3, and invites offers for the business. Offers have to be in binding form, with a deposit the offeror loses if the offer turns out to be unfinanced or is withdrawn, and creditors and anyone tied to them can't make them. The fund pays reasonable costs of checking out the business to offerors who make one. The highest such offer sets the floor. If none comes in, the floor is the higher of the two appraisals. Any creditor can also propose a competing plan, including a sale to another qualified co-op, and the members lose their exclusive right to propose a plan. Whether that satisfies the courts is untested. Small co-ops under Subchapter V aren't affected: the absolute priority rule doesn't apply there, and only the debtor can propose a plan ([§ 1181(a)](https://www.law.cornell.edu/uscode/text/11/1181)). That's also a way around the test, so a co-op facing injury claims above its yearly sales can't use Subchapter V.
 - **Members' own accounts go first.** What members have in their capital accounts is wiped out before creditors lose anything. Members were taxed each year on those allocations, so this is a real loss, and it's the cost of being an owner ([Member Capital Accounts](capital-accounts.md#protecting-the-co-op-and-the-people-who-stay)).
 ### Everything else
@@ -94,15 +125,52 @@ A locked co-op isn't a charity. It's a business that makes and shares profits. T
 **12. The lock-holder can go to court, carefully.** The lock-holder can take part in the case. If the trustee declines to challenge a deal the co-op made with insiders before it failed, the lock-holder can ask the court's permission to challenge it, and pays the other side's costs if the court finds the challenge frivolous.
 **13. Leased equipment, licenses and sold invoices.** A co-op doesn't own what it leases or licenses, or the unpaid invoices it has sold to a lender (called factoring), so the lock can't hold them directly. A business that rents its shop, leases its machines and licenses its software could be taken apart by the people it rents from. So the lock sets terms for the things a co-op can't run without.
 - **In bankruptcy, many leases can go with the business.** The trustee can keep a lease and hand it to the buyer, even if the lease forbids transfers, as long as rent that's behind and the lessor's other money losses are made good and the buyer shows it can pay ([§ 365(b) and (f)](https://www.law.cornell.edu/uscode/text/11/365)). There are big exceptions. A commercial lease the landlord ended before the filing can't be revived. Where other law lets the other side refuse to deal with anyone new, as it usually does for patent, software, trademark and franchise licenses, the license can't be handed on without consent, and in several circuits the co-op can't even keep it (§ 365(c)(1)). Credit lines, including a factoring line, end at filing (§ 365(c)(2)).
 - **Deadlines are held open, and the user pays the rent.** In a liquidation, leases of equipment and other ongoing contracts count as ended if they aren't kept within 60 days (§ 365(d)(1)). A commercial property lease ends after 120 days, extendable once by 90, and after that only with the landlord's written consent (§ 365(d)(4)). The co-op sale can outlast those deadlines. So the amendment holds them open until the co-op sale ends, which has its own time limit (point 6). The rent in the meantime is paid by the workers' co-op running the business under point 5 if there is one, and otherwise by the federation fund, or the bank in the pilot, not by the other creditors. The lessor can still ask the court to protect its property from damage.
 - **Essential leases and licenses carry the lock's terms from the start.** The things a co-op can't run without are its premises, its main production equipment, the software that holds its customer and operating records, and its brand or franchise. Any lease or license of one of those has to:
  - consent in advance to being handed on to a locked co-op that takes over the business, including the workers' own new co-op under point 5, on the same terms and with no transfer fee or rent increase. The lessor must accept that co-op if the federation fund, or the bank in the pilot, guarantees its first 12 months of payments. Advance written consent is what the bankruptcy exception for licenses requires;
  - not let the lessor end it just because the co-op is insolvent or in bankruptcy, only for real default after notice and a chance to fix it;
  - for premises, give a co-op successor the same renewal rights the co-op had; for software, let the co-op export its own data in a usable form.
  The lock-holder checks these clauses when the lease is signed. Where the only supplier of something is a large firm that won't negotiate, like a mass-market software service, the lock-holder can waive the clauses if the co-op can move its data and switch to a comparable supplier. Some lessors will charge more for these terms, or refuse to deal.
 - **A sale-leaseback is a sale.** Selling something the co-op owns and leasing it back counts toward the lock's limit on selling a quarter of the business in three years ([The Lock](the-lock.md#closing-the-back-doors)), and it's borrowing for [the second-opinion rule](the-long-run.md#spending-it-badly). Selling and leasing back the premises or main equipment needs the lock-holder's consent, whatever its size, and the lease has to carry the terms above.
 - **Nobody can reassemble the business through the back door.** Point 8 already charges a buyer of the pieces who hires more than a third of the members within two years. The same goes for anyone who, within two years, gets the use of property the co-op leased, licensed or financed, by buying, leasing or licensing it, and runs the same business with more than a third of the co-op's former workforce, members or not, or takes over its main customer contracts. A lessor that re-leases to a new company is caught through that company. What's owed is the value of the running business, less the fair value of the property the payer already owned or paid for. In bankruptcy it goes to the creditors, as in point 8. Outside bankruptcy it goes to the federation fund, as the lock's matching rule says.
 - **A "lease" that's really a loan is the co-op's property.** If the co-op can't end the lease early and has to pay for the equipment's whole useful life, or can own it at the end for a token price, the law treats the deal as a loan secured on the equipment ([UCC § 1-203](https://www.law.cornell.edu/ucc/1/1-203)). Then the equipment is the co-op's, still subject to the lender's claim, and a lender's sale of it follows point 9. Lessors can easily write leases that stay on the right side of that test, so this catches only careless ones.
 - **Selling invoices is limited, not banned.** Selling invoices one at a time is a common way for small firms to get paid sooner, and it doesn't move the customers, workers or equipment. Some deals go further. A merchant cash advance buys a share of future sales, takes daily withdrawals from the bank account, and often comes with a blanket claim on everything the firm owns and a signed confession of judgment. So, as part of the lock, for as long as it lasts:
  - buying a share of future sales counts as outside money, on the terms in [Capital, After](capital.md), or as a loan;
  - a buyer of invoices can have a claim only on the invoices it bought, never on everything the co-op owns;
  - no confessions of judgment;
  - no clause barring the co-op's customers from dealing with a successor co-op.
  Selling invoices counts as borrowing for the second-opinion rule, and it's reported to members each year alongside new leases. While the co-op owes the bank, it needs the bank's consent, which is given automatically while the invoices sold and not yet collected are under a tenth of a year's sales.
 - **It's measured.** The pilot publishes how much of its co-ops' premises, equipment and software is leased or licensed, what the rent costs as a share of what the co-op produces, and how concentrated the lessors are, so if this becomes a way around the lock, it shows.
 **14. Customers and people hurt later.** A buyer of a bankrupt business usually takes it "free and clear" of the old company's debts. That's the ordinary rule, not the lock's. But a workers' co-op that buys a failed co-op is often the same people, making the same things under the same name. Outside bankruptcy, state law can make a buyer answer for the seller's debts when it's a "mere continuation" of the seller, and a few states, like California, make a buyer that carries on the same product line answer for injuries from the seller's products ([*Ray v. Alad Corp.*, 1977](https://static.case.law/cal-3d/19/cases/0022-01.json)). How far a bankruptcy sale cuts those claims off is unsettled for people who are hurt only after the sale. When GM was sold in 2009, the appeals court later held that the sale order couldn't bind people who bought used Old GM cars after the sale, since they'd had no dealings with Old GM ([*In re Motors Liquidation Co.*, 2d Cir. 2016](https://cases.justia.com/federal/appellate-courts/ca2/15-2844/15-2844-2016-07-13.pdf)). Points 3 and 6 already stop members from using a failure to shed claims people have now: the fund pays the covered creditors what the lock cost them, and the new co-op pays the fund back. This point covers the people who aren't in the case yet.
 - **Whoever carries on the business takes on a minimum.** GM's buyer agreed to answer for accidents after the sale, to make repairs under the old company's written warranties, and to answer for lemon-law claims. That was a negotiated deal, under political pressure, and most buyers in bankruptcy sales don't take on injury claims. The lock requires it. These obligations bind a co-op that buys the whole business under point 6, a co-op whose members keep it through a plan under point 10 or Subchapter V, and anyone caught by the back-door rules in points 8 and 13, in court or out of it:
  - injuries after the sale caused by products the old co-op made or work it did. In a plan, these aren't wiped out by the discharge;
  - repairs or replacements under the old co-op's written warranties. Money claims for breaches before the sale stay in the case;
  - household customers' deposits for things not yet delivered: the business delivers, or refunds the deposit, up to the amount bankruptcy law already puts ahead of other unsecured claims per person ([§ 507(a)(7)](https://www.law.cornell.edu/uscode/text/11/507)). A delivery or refund cancels that customer's claim in the case and any payment for it under point 3, so nobody is paid twice. Business customers' deposits stay in the case.
  These are a minimum. The amendment doesn't cut off any claim against a buyer that state law would allow.
 - **Who pays for it.** In a sale, these come on top of the cash price, which still has to meet the floor in point 6, so the bidders price them in. In point 3's comparison, the open-market sale carries only what the appraiser finds buyers usually take on in such sales, like warranty repairs and deposits, not future injuries. So protecting people hurt later doesn't shrink what the fund pays people hurt already. The bank's bid lending counts the estimated cost too.
 - **Insurance carries most of it.** Injuries from the old co-op's products and completed work have to be insured, on the terms the payer sets for all co-ops (point 3). The estate can buy that cover, called tail or discontinued-products insurance, before creditors are paid, or the buyer can. Where nobody sells it at a sane price, the buyer sets aside a reserve from its profit instead, sized by the representative below and backed by the federation fund.
 - **The limits.** Beyond insurance, what the lock requires lasts ten years after the sale or the state's own limit on product suits, whichever is longer. It's capped, in total for all such claims, at the business's open-market value found under point 3. There's no cap or time limit where insiders hid a defect they knew about, or where a known claimant didn't get notice. If the new co-op is later sold, the next buyer takes on what's left.
 - **Someone speaks for people who aren't hurt yet.** Where the old co-op built, made or handled something that could injure people years later, like buildings, machinery, food or chemicals, the court appoints a representative for future claimants. The idea is borrowed from asbestos cases ([§ 524(g)(4)(B)(i)](https://www.law.cornell.edu/uscode/text/11/524)), where the representative's job is bargaining over a trust. Here it's narrower: the representative can object to the sale, the plan, the insurance, the reserve and the value. Known claimants get notice by mail, not just by publication. The GM ruling held that people the old company knew or should have known about, and who didn't get real notice, weren't bound by the sale.
 - **Outside bankruptcy, state law still applies.** When a lender sells a failed co-op under point 9, there's no court order cutting off old debts, and state successor-liability law applies in full, on top of the minimum above. It's one more reason a workers' bid will usually go through the court.
 **What it doesn't do.** Unlike charities, locked co-ops *can* be forced into bankruptcy by their creditors, and a failed reorganization *can* be turned into a liquidation. A business that can't pay its debts shouldn't be able to shelter behind the lock. The amendment only decides who can buy it, not whether it can fail.
 ## What it costs, and who pays
 - **Lenders get back less when a co-op fails.** The whole business can only go to a co-op, so it may sell for less than on the open market. Lenders who lend after the lock is registered know that, and they'll charge for it, in higher rates or more collateral.
 - **The bank bears it first.** The bank is usually the biggest lender, so the pilot publishes its recovery rate on failed loans ([The Pilot, in Numbers](pilot-spec.md#what-gets-measured)). That shows what the lock costs.
- **The federation fund bears the rest.** Creditors who never chose to lend are paid the lock's cost from the fund. That's a real call on money the co-ops put in.
+- **The federation fund bears the rest.** Creditors who never chose to lend are paid the lock's cost from the fund. Most failures cost it nothing, but a single case with a large uninsured claim could cost it hundreds of thousands of dollars or more, until the co-op that bought the business pays it back. That's a real call on money the co-ops put in.
 - **Other lenders may lend less, or not at all.** Some banks will refuse locked co-ops, or lend only against equipment they can take back. Lenders willing to fund a failing co-op through a rescue may be harder to find, because they can't sell the business to anyone. That's a real cost, and it's part of why the model needs its own bank.
 - **Workers' claims come ahead of other creditors when workers bid.** That's a choice to favor keeping a business running in its workers' hands. It's capped per worker, and it's paid for by other creditors.
 - **Low-paid workers bring less of their own to the bid.** Their unpaid wages are mostly the legal minimum, which is paid in cash rather than handed over, so more of the bid rests on the pool's claims and on better-paid workers' claims. Whether the rule is needed at all depends on a legal question nobody has tested: whether a worker can freely hand over a wage claim at full value.
 - **Some viable businesses will still be broken up.** When no co-op can buy a failed co-op whole, a conventional buyer who would have kept it running and kept the jobs can't. While the co-op sector is small, this will happen. Whether to allow a conventional buyer as a last resort, with any surplus going to the federation fund, is an open question ([Open Problems](open-problems.md)).
 ## Draft text
@@ -115,19 +183,25 @@ For readers who want to see what this could look like in the statute, here is a
 >
 > **Sec. 363(q).** In a case in which the debtor is a locked cooperative, (1) the trustee may use, sell, or lease property under subsection (b) or (c), including under subsection (f), only in accordance with the nonbankruptcy law governing locked cooperatives; (2) the rights of a lock-holder under that law are not an interest that may be sold free and clear under subsection (f); and (3) section 365 does not permit rejection of any agreement required by that law.
 >
-> **Sec. 507(d) (amended).** Insert at the end: "except that an insurance pool established under [the bank's authorizing act] that pays a claim of a kind specified in subsection (a)(4) or (a)(5) is subrogated to the holder's right to priority."
+> **Sec. 365(p) (new).** In a case in which the debtor is a locked cooperative, (1) no period under subsection (d)(1) or (d)(4) shall end before the close of any sale of the debtor's business under the nonbankruptcy law governing locked cooperatives, and the obligations of the debtor under such contract or lease arising during the extended period shall be paid as provided in that law and shall not be an administrative expense of the estate; and (2) consent given in a contract or lease to assignment to a locked cooperative that acquires the debtor's business is consent for purposes of subsection (c)(1)(B).
 >
 > **Sec. 507(d) (amended).** Insert at the end: "except that an insurance pool established under [the bank's authorizing act] that pays a claim of a kind specified in subsection (a)(4) or (a)(5) is subrogated to the holder's right to priority, but such priority is subordinate to any claim of the same individual under subsection (a)(4) or (a)(5) that the pool has not paid."
 >
 > **Sec. 1123(e).** Notwithstanding subsection (a), a plan for a debtor that is a locked cooperative (1) may not provide for any transfer of property, merger, consolidation, or amendment of the debtor's charter except as permitted by the nonbankruptcy law governing locked cooperatives; and (2) need not comply with subsection (a)(6) as to any nonvoting interest permitted by that law.
 >
 > **Sec. 1129(a)(17).** If the debtor is a locked cooperative, (A) all transfers of property under the plan are made in accordance with the nonbankruptcy law governing locked cooperatives; and (B) no equity security carrying voting power is issued to any entity other than members who work for the reorganized debtor.
 >
-> **Sec. 1129(b)(2)(B)(iii).** In a case in which the debtor is a locked cooperative, membership in the reorganized debtor held by persons who work for it is not property received or retained on account of a junior interest, if each holder of a claim of the class receives or retains under the plan property of a value, as of the effective date of the plan, not less than the amount such holder would receive if all of the debtor's property were sold as a going concern without regard to section 541(g).
+> **Sec. 1129(b)(2)(B)(iii).** In a case in which the debtor is a locked cooperative, membership in the reorganized debtor held by persons who work for it is not property received or retained on account of a junior interest, if each holder of a claim of the class receives or retains under the plan property of a value, as of the effective date of the plan, not less than the amount such holder would receive if all of the debtor's property were sold as a going concern without regard to section 541(g), as determined under the nonbankruptcy law governing locked cooperatives after the court has invited binding offers for the debtor's business and has permitted any party in interest to file a competing plan, and not less than the highest such offer.
 >
 > **Sec. 1121(f) (new).** In a case in which the debtor is a locked cooperative, if the debtor files a plan under which members retain membership over the objection of an impaired class, any party in interest may file a plan.
 >
 > **Sec. 1182(1) (amended).** Insert at the end: "A locked cooperative is not a debtor under this subchapter if unliquidated claims for personal injury or wrongful death against it exceed its gross receipts for the preceding year."
 ## What this doesn't solve
 - **It needs Congress, and a later Congress can undo it.** The lock's other layers hold if the bank's law is repealed. This one doesn't ([Making It Last](durability.md)).
 - **Courts will test it.** Treating membership as something other than property the owners keep is new in bankruptcy law. The draft ties it to paying dissenting creditors full open-market value, which answers the fairness point, but the first cases will still be fought.
- **Reaching lenders' sales outside court is a federal reach into state law.** It rests on Congress's power over commerce, not bankruptcy, and it will be challenged. States that adopt the model law make it much safer.
+- **Reaching lenders' sales outside court is a federal reach into state law.** It rests on Congress's power over commerce, not bankruptcy, and it will be challenged. States that adopt the [model law](lock-state-law.md#what-the-model-law-does) make it much safer.
- **Lenders can route around it.** A co-op that leases its equipment, or sells its unpaid invoices to a lender, doesn't own those assets, so the lock doesn't cover them. Co-ops already report new leases to their members ([Investing for the Long Run](the-long-run.md#running-it-down)). How much of a co-op's business can sit outside the lock this way isn't limited.
+- **Renting leaves the co-op exposed.** Essential leases and licenses have to allow a co-op successor (point 13), but a landlord can still refuse to renew when a lease runs out, and raise the rent to whatever the market will bear. A co-op that rents most of what it uses is paying a lot of its surplus to owners outside it, and nothing in the lock stops that. Only buying its premises and equipment does. The terms above will also make some lessors charge co-ops more, or refuse them, and mass-market software can't be made to follow them at all.
- **Workers still have to find the money fast.** Keeping the business running and counting workers' claims toward the price help. But a new co-op still needs a lender within a few months, and whether the bank or federation will stand ready isn't settled.
+- **The money only comes if the numbers work.** Many businesses fail because they can't pay their way, and a lower price doesn't always fix that. The bank lends only up to what the assets would bring sold off, so the rest has to come from patient money. In the pilot's early years there's no federation fund to provide it, and where nobody does, the business is sold in pieces. And the bank, usually the biggest lender to the failed co-op, also decides whether to lend to its workers' bid. The rules above keep those decisions apart. They can't make the bank neutral about its own losses.
 - **The register has to exist and be trusted.** It's a new federal job, and every lender to a co-op will have to check it.
@@ -32,7 +32,15 @@ So light help is cheap and fades, and heavier help might work but hasn't been te
 ### The draw
-The reviewers, not the bank, draw half the groups by lottery, using a method filed in advance. The draw is balanced by industry, region, and the founders' gender, race and wealth. As with the support lottery, groups agree to the lottery when they apply, and an independent research ethics board approves the design. Groups that weren't drawn are offered the same help once the two-year comparison window ends.
+The reviewers, not the bank, draw half the groups by lottery, using a method filed in advance. The draw is balanced by industry, region, the founders' wealth and prior earnings, and which sponsor, if any, applied for the group. No one sponsor can enter more than a set share of the groups. As with the support lottery, groups agree to the lottery when they apply, and an independent research ethics board approves the design. Groups that weren't drawn can apply for a loan at any time, and are offered the same help after the year-four measurement if the pilot's help budget has money left. Offering it sooner would give the comparison half help before year four and blur the result the [cost ceiling](#the-cost-ceiling) depends on.
 **The draw doesn't use race or gender.** The rule across the model is that race and sex can be used to measure results, never to decide who gets anything, and the draw decides who gets help. Balancing a lottery on them is ordinary research practice. Federal law even requires government-funded medical research to include women and minorities ([42 U.S.C. § 289a-2](https://www.law.cornell.edu/uscode/text/42/289a-2)), and nobody's odds would change: every group has the same even chance. But a court might still treat it as sorting people by race. The Supreme Court reviews government "distributions of burdens or benefits based on individual racial classifications" under its strictest test ([*Parents Involved v. Seattle School District*, 2007](https://www.law.cornell.edu/supremecourt/text/05-908)), including when a policy "may be said to burden or benefit the races equally" ([*Johnson v. California*, 2005](https://www.law.cornell.edu/supremecourt/text/543/499)), and in 2023 it said "eliminating racial discrimination means eliminating all of it" ([*SFFA v. Harvard*](https://www.law.cornell.edu/supremecourt/text/20-1199)). No court has ruled on a research lottery balanced this way, and sharper statistics are unlikely to count as the compelling reason that test asks for. Sex gets a lighter test, and balancing on it would be easier to defend; it's left out so the rule is the same for both. With about 500 groups, a plain draw rarely leaves the halves more than a few points apart on any group that's a sizable share of applicants, so little precision is lost.
 - **Wealth and earnings are there for their own sake.** They predict whether a group gets a co-op running, and helping founders without money is what this lottery is for. They're taken from tax and wage records where founders allow it, not only from what they say.
 - **Answering is optional.** Founders' race and gender are asked on a separate form, with "prefer not to say," and the answer changes nothing about the group's chances. The form goes to a separate custodian and stays sealed until the draw has been run on coded IDs and its results published. Refusal rates are reported for each half.
 - **One draw, no reruns.** The random seed is committed publicly before sign-ups open, and the draw is run once. Mistakes are fixed case by case under a rule filed in advance, never by drawing again.
 - **The analysis is fixed in advance.** The main result is adjusted for the same things the draw was balanced on, and nothing else, whatever the draw looks like. Results by race and gender are published as estimates, next to the smallest difference each could detect, which for a group making up a fifth of applicants is about 25 points. So they describe who was reached; they can't settle whether help works better for one group than another. A group counts toward a category if at least half its founders report it; mixed groups are reported as their own category.
 - **Never targets.** No group's odds, help or verdict depends on its founders' race or sex, and none of these figures is a goal.
 ### What the helped groups get, for up to a year
@@ -60,10 +68,29 @@ About 250 groups in each half, so $10 million for the help. With groups that siz
 - **Are they running a co-op?** The main result: the share of all groups in each half that have a co-op operating two years after the draw, with at least three members and a minimum level of sales, however it was financed. It's measured from government business records by the reviewers, not decided by the bank. So the result can't come from helped groups simply being coached to pass the bank's own underwriting.
 - **Are they still running at year four?** The share of all groups in each half with a co-op still open and paying fairly four years after the draw. That counts every group, so help that pushes weak groups into launching and failing shows up as a cost, not a benefit.
- **What did it cost?** The public cost for each extra co-op the help created, and for each extra co-op still open at year four. At the smallest effect the lottery can detect, about 30 extra co-ops for $10 million, that's roughly $330,000 each. A ceiling is filed in advance. Above it, the help isn't recommended for any larger program, however many co-ops it creates.
+- **What did it cost?** The public cost for each extra co-op the help created, and for each extra co-op still open at year four. At the smallest effect the lottery can detect, about 30 extra co-ops for $10 million, that's roughly $330,000 each. A ceiling is set in advance, [below](#the-cost-ceiling). Above it, the help isn't recommended for any larger program, however many co-ops it creates.
- **Who did it reach?** Founders' prior earnings, wealth, gender, race, immigration status and language, in each half.
+- **Who did it reach?** Founders' prior earnings, wealth, gender, race, whether they were born abroad, and language, in each half, from the optional form.
 - **Where else did groups get help?** Groups report other help and funding they used, so any effect from help found elsewhere, or co-ops simply moving from other lenders to this one, can be estimated.
 ### The cost ceiling
 **What counts as the cost.** Everything the public spends in the helped half beyond what it spends in the other half, by year four: the help itself, running the draw and the specialist panel, the help co-ops get after their first loan, and the bank's net result on their loans, losses minus interest earned above the Treasury rate. That's divided by how many more co-ops the helped half has still open and paying fairly ([as the pilot defines it](pilot-spec.md#what-gets-measured)) at year four. Comparing whole halves means nobody has to guess which co-ops were the "extra" ones. The minimum level of sales a co-op needs to count is filed before the draw.
 **The ceiling: $400,000 per extra co-op still open at year four,** in today's dollars, rising with inflation. There's no good benchmark, so here is what the number rests on:
 - **New York City's program** spent about $280,000 for each co-op launched in 2021 ([above](#what-we-know)). That figure is rough both ways. Some of the money went to existing co-ops, which makes it too high. But it counts co-ops at launch, not still open four years later, and it can't tell which would have started anyway, which makes it far too low as a cost per extra co-op. It shows the scale of what a city has spent, not what the help is worth.
 - **Business tax breaks.** The economist Timothy Bartik finds that state and local tax breaks typically cost about $200,000 for each job that wouldn't have come to the area without them. He puts infrastructure and services in struggling places, counting jobs at local suppliers and shops, at $30,000 to $100,000 a job ([Bartik, 2024](https://eig.org/wp-content/uploads/2024/07/TAWP-Bartik.pdf)). A co-op needs at least three members to count, so $400,000 is about $133,000 per member in the smallest one. That's between his two figures. It isn't a like-for-like comparison: most members would have worked somewhere else, and co-ops' main benefit is ownership and a say, not jobs.
 **It's hard to meet, and that's said now.** With about $11 million spent before the first loan and roughly $50,000 of later help for each co-op, the helped half needs something like 32 or more extra co-ops still open at year four, out of about 250 groups. That's more than the smallest effect the lottery is built to detect, which is about 30 extra co-ops running at year two, before any have closed.
 **Three possible verdicts, set in advance.** With about 250 groups in each half, the estimate will be uncertain, so the report uses a range filed before the draw:
 - **Worth it:** even the high end of the range is under the ceiling. Only then is the help recommended for a larger program.
 - **Not worth it:** even the low end is over the ceiling.
 - **Not settled:** anything else. The report says so and gives the size of trial that could settle it, but it doesn't recommend the help.
 **Reported by group, judged as a whole.** The cost per extra co-op is also published by founders' wealth, race and whether they were born abroad, and for struggling areas against the rest. Help that works mainly for low-wealth founders may be worth more than a single national line admits. But the verdict uses the one ceiling, so a favorable slice can't be picked out afterward. The cost is reported again at year six, since the effects of help often fade.
 The co-ops from both halves count in the main test, and the main result is also reported without the helped half's extra co-ops. So help can't quietly change what the main test measures.
 ## Should founders put in money of their own?
@@ -45,26 +45,63 @@ So should [the bank](the-bank.md) lend for these sales? This page's answer is **
 - **Only healthy businesses.** At least three years of profits, with the latest year audited by an outside accountant and every year matching the tax returns. Sales to the seller's own other businesses or relatives don't count toward those profits. The seller must have owned the business for at least three years, and it can't be in bankruptcy or behind on taxes. Rescues stay out, as they do for [the rest of the pilot](pilot-spec.md#who-can-borrow).
 - **The owner starts it, in writing.** The bank never approaches an owner, and neither do the advisers or groups the pilot pays. The owner can back out at any time before closing.
- **No new tax break.** American law already lets some owners put off capital gains tax when they sell to an ESOP or a worker co-op. It applies to one kind of corporation (a "C corporation"), requires the workers to end up owning at least 30%, and requires the seller to reinvest the money in other American companies ([26 U.S.C. § 1042](https://www.law.cornell.edu/uscode/text/26/1042)). This model leaves that rule alone and adds nothing to it. The bank's only offer is that it will lend. That keeps out most owners who are only after a tax deal, and it keeps the cost to the public from growing the way Britain's did.
+- **No new tax break.** The bank's only offer is that it will lend. That keeps out most owners who are only after a tax deal, and it keeps the cost to the public from growing the way Britain's did. An old tax break already covers some of these sales. The model leaves it alone, but counts its cost against the track ([below](#the-tax-break-that-already-exists)).
- **Private lenders go first.** The bank lends alongside a private or community lender that takes at least a quarter of the main loan, on the same terms. If no lender will join, the bank can lend alone only after two lenders have turned the deal down in writing. Those deals are marked and reported separately. If private lenders join almost every deal, that's a sign the bank isn't needed for buyouts, and the results will show it.
+- **Private lenders go first.** The bank lends alongside a private or community lender, such as a bank, a credit union or a community development lender like the co-op loan funds, that takes at least a quarter of the main loan, on the same terms and in the same place in line. That's demanding, and it's meant to be. In the conversions Project Equity reviewed in 2017, the main loan was usually shared among several lenders, often led by a small co-op loan fund, and some bigger lenders would join only in the safest, first-paid slice of the larger deals ([Project Equity, 2017](https://www.project-equity.org/wp-content/uploads/2023/06/Addressing-the-Risk-Capital-Gap-for-Worker-Coop-Conversions_Strategies-for-the-Field_Project-Equity.pdf)). The bank won't take the riskier slice behind a private lender, because that would put the public's money where the private money should be.
 - **The private quarter has to be really private.** It counts only as far as the lender keeps it at risk: not guaranteed or bought in part by a state or federal program, and not sold on, for the whole life of the loan, certified each year. Only new money counts, so a seller's existing lender can't join at a quarter while the sale pays off its old, bigger loan. A lender funded by the bank itself doesn't count. Every lender says in the deal file where its own money comes from, and the bank reports each year how much of the private share came from ordinary banks and credit unions and how much from mission lenders, some of which are partly funded by public programs or charities.
 - **The lenders share alike.** A written agreement among the lenders, published with the deal, splits fees, collateral and any early repayment in proportion. The bank or a neutral party manages the loan, so the private lender can't collect first or push a piecemeal sale that suits it, and every step in a default follows [the lock](the-lock.md).
 - **When no private lender will join.** The bank can lend alone only after two lenders with no ties to the deal have turned down an equal quarter share on the standard form, naming the terms they would have accepted. Deals the bank makes alone are reported separately, with their own loss rate, and can't be more than a third of the track's loan money. If that cap is reached, the bank stops lending alone and says so. The bank expects many deals to need it, because an equal place in line is a strict rule. A high share of solo deals would say more about how strict the rule is than about whether the co-ops can pay. If private lenders join almost every deal, that's a sign the bank isn't needed for buyouts, and the results will show that too.
 ### The tax break that already exists
 Since 1984, federal law has let an owner put off capital gains tax on selling a company's shares to an ESOP or a worker co-op ([26 U.S.C. § 1042](https://www.law.cornell.edu/uscode/text/26/1042)). The rules:
 - **The company** has to be an ordinary "C corporation" whose shares aren't publicly traded, and the sale has to be of its shares, not its assets.
 - **The seller** has to have held the shares for three years, and the co-op has to own at least 30% of the company right after the sale.
 - **The money** has to be reinvested in shares or bonds of other American operating companies, between three months before the sale and a year after it. Only the part reinvested in that window is covered.
 - **The tax** comes due when the seller sells that replacement investment. Giving it away doesn't trigger the tax. If they hold it until they die, their heirs inherit it at its value then, and the tax is never paid. Sellers commonly buy long-term bonds as the replacement and borrow against them, so they get the cash without the tax ([CSG Partners, 2023](https://www.csgpartners.com/esop-resources-news/1042-rollovers-capital-gains-taxes-esop); [26 U.S.C. § 1014](https://www.law.cornell.edu/uscode/text/26/1014)).
 **The limit to C corporations is weaker than it looks.** An owner of an S corporation, the more common kind among small companies, can drop that status before the sale, even the day before ([Wiener, 2021](https://jrwiener.com/updated-section-1042-tax-benefits/)). The cost is waiting five years to switch back ([NCEO](https://www.nceo.org/employee-ownership-faq/who-qualifies-for-the-section-1042-tax-deferral-esop)), and a locked co-op is a C corporation anyway ([How a Locked Co-op Is Taxed](taxes.md)).
 **It has barely been used for co-ops.** A guide for owners posted in 2011 said that "as far as the we can determine, that provision has never been used" for co-ops, though sales to ESOPs use it routinely ([Britton & Stewart, NoBAWC](https://nobawc.org/wp-content/uploads/2011/11/Selling-to-Your-Employees-through-a-Worker-Cooperative.pdf)). That's old and hedged, and nobody seems to have counted since. The authors think a company can turn itself into a co-op and buy back the owner's shares, and still count as a sale to a co-op. That hasn't been tested either. A bank that lends for co-op buyouts could make the break far more common, and that makes its cost part of what the track costs.
 **The co-op takes on risks too.** To give the seller the break, the co-op has to sign a statement agreeing to two federal penalty taxes (§ 1042(b)(3)):
 - **10% of the sale price** if it sells the shares it bought within three years and its holding falls ([§ 4978](https://www.law.cornell.edu/uscode/text/26/4978)). A forced sale after a default in those years could trigger it.
 - **50%** if any of those shares, or the benefit of them, goes to the seller, their relatives or anyone owning a quarter of the company ([§ 4979A](https://www.law.cornell.edu/uscode/text/26/4979A)). A seller or relative who works there can still be a member on the same terms as anyone else, but shouldn't get any of the shares the seller sold ([Britton & Stewart](https://nobawc.org/wp-content/uploads/2011/11/Selling-to-Your-Employees-through-a-Worker-Cooperative.pdf)). How that fits with members' capital accounts is a question for each co-op's lawyer.
 A share sale also brings every old debt and lawsuit of the company along, and the co-op doesn't get the higher tax value on its equipment that buying the assets would give it, which means more tax later.
 **What the model does about it:**
 - **It doesn't forbid it, or reward it.** The model doesn't change tax law in either direction. The bank can't refuse or reprice a deal because the seller takes the break, or because they don't.
 - **The co-op decides with its own lawyer.** Before it signs the statement, the co-op gets written advice from its own lawyer on the penalty taxes and the share-sale risks, paid from the help budget. Any penalty tax the co-op owes because of the seller's break comes out of the seller's paid-last share first. The co-op can sign only at closing, with a copy to the bank. Signing later without telling the bank breaks the loan terms.
 - **The seller proves it.** A seller who takes the break sends copies of the election and the proof of reinvestment within 15 months of the sale. Part of their paid-last share is held back until they arrive. The reviewer checks them.
 - **It's counted as tax not collected, in the pass test.** The cost is the federal tax the seller would have owed on the sale without the election, at the seller's own rate, leaving out gain another rule already excuses, such as the small-business stock exclusion ([§ 1202](https://www.law.cornell.edu/uscode/text/26/1202)). It's counted as never paid. It goes into the track's [money test](#why-a-separate-track) like any other cost, because the track is what makes it happen. Lost state tax is reported beside it but not counted, since it isn't federal money.
 - **The deal file shows it next to the price.** Workers and their advisers see what the seller's tax saving is worth before the vote. They can bargain over it. The model doesn't set a split. It's also in the seller's line in [Where the money went](#who-buyouts-are-compared-against).
 **How big it could be.** Take the track's typical $2.5 million sale, where about $2 million is paid at closing and the rest through [the seller's share](#the-seller-shares-the-risk). If the owner started the business, nearly all of the price is gain. At the top rate of 23.8% (20% capital gains plus the 3.8% investment income tax), the tax put off on the closing money is about $475,000. It's up to about $600,000 if the seller reinvests other money to cover the rest. That's a third or more of the bank's roughly $1.5 million loan. If every one of 50 to 60 deals used it, that's roughly $25 million to $35 million, a quarter or more of the track's money. If many sellers take the break, the track will probably fail its money test. That's the honest answer to whether these buyouts paid the public back. Nobody knows how many will take it, because almost nobody has.
 ### A fair price
 - **Appraisers come from a panel, in rotation.** An independent appraiser, drawn in turn from a panel the bank keeps and paid by the bank, values the business under standard professional rules. The value is what the business is worth on its own, to a buyer who'll run it as it is. It doesn't include the premium a competitor might pay to combine it with their own business, since the workers can't get that value out of it.
 - **Profits are checked, not taken on trust.** Before the appraisal, an outside accountant restates the profits as they'd look under new owners. The owner's own job is counted at a normal salary for that work. Upkeep and equipment the owner put off are counted as costs. One-off gains are taken out.
- **The seller can challenge it.** The seller can order a second appraisal from the panel. If the two are more than 10% apart, a third panel appraiser settles it, and that figure is final. The price can't be higher than the final figure.
+- **The seller can challenge it.** The seller can order a second appraisal from the panel, at the seller's own cost, so asking again isn't free. If the two are within 10% of each other, their average is the final figure. If they're further apart, a third panel appraiser settles it, and that figure is final. The third appraisal is paid for by whichever side's appraisal it lands further from, and if it lands nearer the seller's, the bank also pays back the seller's second appraisal. The price can't be higher than the final figure.
 - **Appraisers are checked too.** One deal in ten, picked at random, is re-appraised after closing by a different appraiser. Appraisers whose values run consistently high are dropped from the panel.
 - **Everything the seller gets counts as the price.** For five years after the sale, every payment to the seller, their family or their other companies counts toward the price: salary, consulting fees, rent, royalties, payments for not competing. The only exception is a payment set at a going rate by an independent appraiser. If the seller keeps the building, the co-op gets a lease of at least ten years at appraised rent and the right to buy it at appraised value. Patents, brands, customer lists and a normal level of working cash all come with the business.
 - **The seller tells the truth, in writing.** The seller discloses in writing any big customer or contract that's at risk, any lawsuit, and anything else a buyer would need to know. If the disclosure turns out to be false, the co-op can cut what it still owes the seller by the damage, and sue for more.
- **The workers get their own adviser**, chosen by the workers (or their union, if they have one) from a list the bank approves, and paid from the buyout track's own budget. The adviser explains the price, the debt and the risks in plain terms. The workers get at least 30 days with the full terms before they vote.
+- **The workers get their own adviser**, chosen by the workers (or their union, if they have one) from a list the bank approves, and paid a flat fee from the buyout track's own budget, the same whether or not the sale goes through. The workers can replace the adviser by majority vote. Each adviser's record, how many of their deals closed and how those firms fared, is published, and advisers aren't handed more work for closing more deals. The adviser explains the price, the debt and the risks in plain terms. The workers get at least 30 days with the full terms before they vote.
 ### The seller shares the risk
 - **At least 20% of the price is paid to the seller over time**, and only after the bank's loan payments are made. If the price was too high and the business struggles, the seller's payments stop before the workers' jobs do.
- **That share shrinks if the forecast was wrong.** If profits in the first three years come in more than 20% below what the appraisal assumed, the seller's share is cut by a formula written into the sale. That puts a price on selling just before a drop the seller saw coming.
+- **Nothing is paid on it for the first two years.** Interest builds up, but the seller's payments start only in year three. The workers here put almost nothing in up front, so the seller's waiting share, a loan paid last, is what stands between the lenders and a loss. It isn't the same as workers' own money. The SBA doesn't make sellers wait at all, but it counts a seller's loan as part of the buyer's own stake only if nothing is paid on it for the whole life of the SBA loan ([SBA SOP 50 10 8.1](https://legacy.sba.gov/sites/default/files/2026-09/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%2010.1.2026.docx)). Two years is far short of that, so this is a loan paid last, not a stand-in for workers' cash. Two years is meant to cover the first, riskiest stretch after the sale without asking a seller to wait ten. After that, the lenders' protection gets thinner each year as the seller is paid. The coverage test and the forecast cut below only partly make up for it: they check that the business can pay, but they aren't a cushion if it fails. What the lenders do have in front of them is a smaller loan. The main loan here is about 80% of the price, where an SBA lender can lend up to 90%. Anything else paid to the seller in those two years, such as adviser's fees, waits with it and is paid last too.
- **The seller is protected like a lender, and only like a lender.** The seller's share carries a legal claim on the business's assets, behind the bank's, and the right to be paid. It carries no say in how the co-op is run.
+- **The seller's loan has limits of its own.** Its interest rate can't be higher than the bank's own rate on the deal plus 4 points. That's a higher rate than the bank gets, because the seller is paid last and waits, but it's capped: any interest above the cap counts as part of the price, so it can't be used to slip past the appraisal cap. The deal file states what the seller's loan is really worth at a going rate for loans paid last, so everyone can see how much of the price is money now and how much is a promise. The loan is due within ten years of the sale, extended by any time its payments had to wait (below), with interest still building at the capped rate. A cut for a wrong forecast (next point) applies to the interest that has built up too, not just the original amount.
- **Pay isn't cut to pay the seller.** In any year the co-op cuts its members' pay rates below where they were before the sale (after inflation), the seller's payments wait. They're owed later, not cancelled.
+- **That share shrinks if the forecast was wrong.** If checked profits over the first three years average more than 20% below what the appraisal assumed, the price is treated as too high by the shortfall beyond 20%, and that amount comes off what's still owed to the seller, up to all of it. On a $2.5 million sale with $500,000 still owed, profits 30% below the forecast cut $250,000 (10% of the price); profits 40% or more below cut the whole $500,000. The cut is measured against the whole price, not just the seller's remaining share, because a seller who knew a drop was coming was paid most of the inflated price in cash at closing. There's no cliff, so a few dollars of profit either side of the line don't swing the seller's payout, and nobody on either side has much reason to nudge the books.
- **The debt has to fit the business.** The bank lends only if the business's checked profits cover all the loan payments, the bank's, the private lender's and the seller's, plus the cash members need to pay tax on their profit shares ([Member Capital Accounts](capital-accounts.md#where-each-years-profit-goes)), with a real margin to spare. The margin (for example, profits of at least 1.25 times the payments) is part of the lending standards filed before the first loan ([Making It Last](durability.md#what-a-new-board-cant-change)).
+- **Neither side can tilt the test.** Profits for the test are counted under the same accounting rules as the pre-sale restatement, with all pay, members' and managers' alike, held at pre-sale rates per unit of work (after inflation), and upkeep at its normal level. So the co-op can't shrink the seller's share by raising pay, hiring ahead, skipping repairs or moving costs into the test years. If profits jump back in year four, costs shifted into the test years are added back. The seller gets the audited accounts and the calculation, and either side can send a dispute to an accountant from the bank's panel, whose answer is final. The seller's payments due in year three wait in a separate account until the test is settled.
 - **Only half of an industry-wide fall is forgiven.** A fall that hits the whole industry is measured by a public index, chosen for each industry in the lending standards filed before the first loan, not picked deal by deal. Which industry a firm is in is fixed at signing, from the industry code on its last tax return before the sale. Half of that fall is taken out before the test, and half stays with the seller. A seller shouldn't carry all of a recession they couldn't have known about, but the workers shouldn't carry all of it either. The adjustment works both ways: if the industry grew, the forecast is raised by half the growth before the test.
 - **The seller is protected like a lender, and only like a lender.** The seller's share carries a legal claim on the business's assets, behind the bank's, and the right to be paid. It carries no say in how the co-op is run. The seller signs a written agreement with the bank and the private lender to be paid behind them, and can't demand early repayment or seize assets while the bank's loan is unpaid. If the seller sells the loan to someone else, every rule here, the wait, the cut and the pay protection, binds the new holder.
 - **Pay isn't cut to pay the seller.** In any year the co-op cuts its members' pay rates below where they were before the sale (after inflation), the seller's payments wait. They're owed later, not cancelled, and the due date moves back by the same time, so the waiting payments don't pile up into one lump at year ten.
 - **The debt has to fit the business.** The bank lends only if the business's checked cash flow, what's left after normal upkeep spending and taxes, covers all the loan payments, the bank's, the private lender's and the seller's, plus the cash members need to pay tax on their profit shares and the capital-account payouts that will come due ([Member Capital Accounts](capital-accounts.md#where-each-years-profit-goes)), with a real margin to spare: checked cash flow in each of the last two years, and on average over the last three, at least 1.25 times the payments in the heaviest year of the schedule. That's usually year three, when the seller's payments start on top of everything else, with the interest that built up during the wait. The SBA asks the same 1.25 times for a co-op or ESOP buying a business, under the rules that take effect in October 2026, measured on the last year or the average of the last two, with no credit for forecasts. It counts a seller's loan too, unless nothing is paid on it for the whole life of the SBA loan, and it treats a loan with a payment holiday as if it were repaid over ten years or less ([SBA SOP 50 10 8.1](https://legacy.sba.gov/sites/default/files/2026-09/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%2010.1.2026.docx)). So neither the margin nor counting the seller is unusual. The bank's test is stricter in three narrower ways. It counts cash left after upkeep and taxes, where the SBA starts from earnings before interest, taxes and depreciation, adjusted as the lender judges prudent. It tests the heaviest year of the schedule, not an average. And it counts the cash members need for tax on their profit shares and their account payouts. The SBA also caps all the debt for a purchase at the business's appraised value, as this track does. The margin is part of the lending standards filed before the first loan ([Making It Last](durability.md#what-a-new-board-cant-change)).
 ### The workers decide
@@ -79,7 +116,7 @@ So should [the bank](the-bank.md) lend for these sales? This page's answer is **
 - **One member, one vote, from day one.** A converted firm meets the full [co-op definition](worker-ownership.md), unlike a British trust. It can keep managers, but they answer to a board elected by the members. The first board election happens within 90 days of closing.
 - **The seller's control ends at the sale.** The seller can stay on as a paid adviser for up to two years, and the members can end that by vote at any time. If the seller works there, they can join as a member, with one vote like anyone else. Neither they nor their family or associates can sit on the board, hold a special share or choose who governs.
 - **Paying off the debt builds the members' accounts.** Loan payments come out of profit, but they aren't a cost in the co-op's books. So the profit that pays down the loan is still credited to members' [capital accounts](capital-accounts.md) under the usual split, and paid out on the usual schedule. The workers who pay for the business build up a claim on it.
- **Help with the change.** Moving from one owner to a members' democracy is hard. The French parliament's report calls support and training for newly elected leaders essential. Converted firms get governance training and the hands-on help that [the support lottery](pilot-spec.md#the-support-lottery) tests, paid from the buyout track's own budget.
+- **Help with the change.** Moving from one owner to a members' democracy is hard. The French parliament's report calls support and training for newly elected leaders essential. Every converted firm gets the standard help new co-ops get, including governance training for its elected leaders. Half, chosen by lottery, also get the intensive help that [the support lottery](pilot-spec.md#the-support-lottery) tests. Both are paid from the buyout track's own budget.
 - **Who benefits is published.** Who became a member, who sits on the board and how profit shares are split, by race, gender and job, the same as for [the startups](pilot-spec.md#what-gets-measured).
 ### Locked, like every co-op the bank funds
@@ -94,21 +131,110 @@ Buyouts would make the pilot's main result look better than it deserves. A busin
 So buyouts get:
- **Their own money.** $100 million, set aside in the same one-time charter, separate from the $350 million for new co-ops. That raises taxpayers' worst case from $350 million to $450 million, and the model says so. Up to $5 million of it pays for the workers' advisers and governance help. Buyout loans can never draw on the startup money or the startup help budget, so they can't shrink the main test.
+- **Their own money.** $100 million, set aside in the same one-time charter, separate from the $350 million for new co-ops. That raises taxpayers' worst case from $350 million to $450 million, and the model says so. $12 million of it pays for the workers' advisers, the checks on deals that don't close and the help after a sale ([What the help costs](#what-the-help-costs)). Buyout loans can never draw on the startup money or the startup help budget, so they can't shrink the main test.
 - **Their own limits.** The same $3 million lifetime limit, which covers every business owned by the same seller or group, so one owner can't split a company into pieces to get around it. The same caps on industries and places apply. With a private lender's share and the seller's share on top, that means companies priced up to about $5 million: small and mid-sized firms. Bigger sales can use the ESOP market that already exists.
 - **Their own test, judged at year 12 with the rest.** It has two parts, and both must pass:
-  1. **The money.** The buyout money has to earn at least the Treasury rate after all losses and costs, and its losses can't be higher than the loss rate the bank publishes before its first buyout loan.
+  1. **The money.** The buyout money has to earn at least the Treasury rate after all losses and costs, including the advisers' budget, the appraisals, the track's share of running the bank, and the federal tax sellers put off under the [old tax break](#the-tax-break-that-already-exists). Its losses can't be clearly higher than the loss rate the bank publishes before its first buyout loan ([below](#who-buyouts-are-compared-against)). Deals the bank made alone count, and so do loans restructured to keep them alive, under the same rules as the startup test ([Keeping zombies alive](pilot-safeguards.md#keeping-zombies-alive)).
-  2. **The pay.** Among converted firms still open, members' median pay per hour can't have fallen below where it was before the sale, after inflation. A track that gets repaid by cutting its members' pay hasn't passed.
+  2. **The pay.** The test follows everyone who was on the payroll at the sale, members or not, whether their firm is still open or not. Their median pay per hour, after inflation, can't have fallen below what it was over the last two audited years before the sale. Workers whose firm closed count at what linked government wage records show they earn now, and as below the line where no record can be found. A track that gets repaid by cutting pay, or by letting the lowest-paid go, hasn't passed.
  The two tracks pass or fail on their own. A good buyout record can't rescue a failing startup test, and a bad one can't sink a passing one.
-If the bank's share of a typical deal is about $1.5 million, half the limit, $100 million funds roughly 60 to 70 buyouts. That's too few for the tight survival comparison the startup test uses. So survival is published and compared, but as evidence, not as a pass-or-fail line. The comparisons are with similar businesses bought by conventional owners using government-backed small-business loans, and with ESOP buyouts, which federal pension filings make it possible to follow. The terms of every deal are published: the price, the appraisals, the loans and the seller's share.
+### Why not just use the SBA?
-**Expect opposition.** Business brokers and private equity funds, who make money when owners sell, may see a public lender as a competitor. Italy's main employers' association got part of its worker-buyout program suspended by the EU ([Has This Been Tried?](precedents.md#italys-co-op-funds-coopfond-and-the-marcora-law)). Keeping the bank at market rates with no tax break is the best defense, because it leaves little to call unfair. The rest is in [Making It Last](durability.md).
+The SBA can already back a loan for a co-op to buy a controlling share (51% or more) of a business. But its rules, including the revision that takes effect on October 1, 2026, treat a co-op worse than an ESOP in two ways that matter for a buyout ([SBA SOP 50 10 8.1](https://legacy.sba.gov/sites/default/files/2026-09/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%2010.1.2026.docx)):
 - **Cash up front.** Buyers in a change of ownership have to put in at least 10% of the cost themselves. An ESOP buying control is exempt. A co-op isn't. The 2026 rules let a lender cut or waive the cash for an "owner buyout," which can include current employees buying the business as individuals, but only if the buyers already have enough cash and working capital. A co-op buying control is its own category, with no waiver. And workers who bought as individuals would each be owners who have to guarantee the loan, which is the next problem. A seller's loan can cover up to half of that, but only if nothing at all is paid on it until the SBA loan is repaid. So the workers would still have to find at least 5% of the project's total cost in cash, including fees and any working capital, and more if the seller won't wait that long. For a $3 million business, that's $150,000 or more, from people most of whom don't have it.
 - **Someone has to guarantee it.** The SBA's rule is that owners of 20% or more guarantee the loan. For an ESOP, the rules say plainly that the workers don't have to. For a co-op there's no such exception, and a second rule applies: if nobody owns 20% or more, which is normal in a co-op with more than a handful of members, "at least one of the owners must provide a full unconditional guaranty." That means asking one worker to promise their house and savings for everyone's loan. Lenders have long asked the same of co-ops in practice, and co-op advocates and a House committee have pointed to it as a reason co-ops have rarely used the SBA since Congress opened it to them in 2018 ([The Pilot](pilot-spec.md#why-a-new-bank-not-existing-programs)).
 Since the 2026 rules, those two are close to the whole gap. The SBA now has a category for co-op purchases, asks them for the same margin as everyone else, and doesn't require an extra earnings review. For a $3 million business, what's left is about $150,000 of cash, roughly $5,000 each for 30 workers, and one member's signature. A narrower fix could close that: the rule change above, or a small public fund that gives the cash stake as a grant, or lends it on hold for the life of the SBA loan, which the SBA counts as the buyer's own money. The case for putting $100 million into this track rests on those fixes not coming, or on the SBA route still failing co-ops once they do. The track's yearly reports are meant to show which.
 Until then, the bank's track replaces both. The seller's waiting share, paid last, takes the place of the workers' cash. The bank lends without personal guarantees, relying instead on the seller's share, the coverage test and a private lender taking part, and pricing what's left of the risk into its rate. That's a real risk the SBA's rules are there to guard against, and the track's loss rate is how it's judged ([below](#who-buyouts-are-compared-against)).
 To make sure the bank isn't just taking deals the SBA would have done anyway:
 - **Its rates are published next to the SBA's.** Each year, the bank publishes its average rate on buyout loans alongside the typical rate on matched SBA change-of-ownership loans, taken from the SBA's own loan data. The bank will usually charge more. The gap is roughly what doing without the workers' cash and a worker's house costs, along with the bank's own costs.
 - **Ordinary lenders have to say no first.** Before the bank lends, the co-op must have asked two lenders with no ties to the deal and a real record of lending for business purchases, one of them a conventional lender and not only the SBA route, and been turned down on a standard form that says why. The forms are published with the deal file.
 - **It counts its own overlap.** The bank publishes each year how many of its deals could have met the SBA's terms, by a definition fixed in the lending standards before the first loan.
 - **It asks for the SBA fix first.** Both rules are the SBA's own policy, not written into law. Its regulation says only that owners of 20% or more "generally" guarantee ([13 CFR 120.160](https://www.ecfr.gov/current/title-13/section-120.160)). So the model asks the SBA to give co-ops buying control the same two exemptions ESOPs already have, and Congress if the SBA won't. If that happens, the buyout track lends only where the SBA route still can't serve the deal, says each year how many that is, and returns money it no longer needs to Treasury.
 ### Other public help that already exists
 The SBA isn't the only public program that can help. Two others already allow worker buyouts, in pieces. Both are as of 2026, and both can change:
 - **State programs paid for by Treasury.** The State Small Business Credit Initiative (SSBCI) gives states federal money to share the risk on small business loans: by buying part of a loan, guaranteeing part of it, or putting up cash to cover a shortfall in collateral. Its rules generally bar using that money to buy out an owner. But they make an exception for a sale to a worker co-op, ESOP or employee trust, as long as the workers end up owning a majority. The private lender has to keep at least 20% of the risk on each loan, and the borrower's own money doesn't count toward that. Treasury's rules ask for personal guarantees only in one narrow case, a loan to a company that just owns the building the business uses. Each state designs its own program, usually with the lender enrolling the loan, and not every state's is open to buyouts. The current round is mostly one-time money from 2021, released in stages, and much of it may be committed before the bank lends ([Treasury guidelines, 2024](https://commerce.mt.gov/_shared/business/MTSSBCI/docs/forms/SSBCI-Capital-Program-Policy-Guidelines-Revised-10.4.24.pdf); [Treasury fact sheet, 2023](https://home.treasury.gov/system/files/136/SSBCI-ESOP-Fact-Sheet.pdf)).
 - **USDA's rural business guarantees.** The Department of Agriculture guarantees business loans in rural areas. It asks for personal guarantees from anyone who owns 20% or more of the borrower, at least in proportion to what they own. In a co-op with more than a handful of members that's usually nobody, but USDA can also ask smaller owners to guarantee when it judges the risk high enough, and it can grant exceptions. Its loans for turning a business into a co-op or ESOP are capped at $600,000 and 10 years, and must come within five years of the first transfer of ownership, so they cover only a slice of a typical deal ([7 CFR 5001.204 and 5001.140(d)](https://www.ecfr.gov/current/title-7/subtitle-B/chapter-XLII/part-5001)).
 Neither gets around the SBA's rule. An outside guarantee fund doesn't meet it either, because the SBA asks for a guarantee from one of the *owners*. Where these programs do exist, the bank's track uses them, carefully:
 - **The state gets asked first.** Where a state's program is open to buyouts, the private lender is asked in writing to enroll the loan before the bank lends. If the state says no, or hasn't answered within 45 days, that counts as a no, so a slow agency can't run out a seller's clock. The bank steps back only if the private lender plus the state can do the whole deal with no personal guarantee, no more cash from the workers and no higher total cost. Deals it steps back from are reported, and followed, as a group of their own.
 - **Never with a personal guarantee.** The bank never joins a deal where any program requires a member to guarantee the loan personally.
 - **Help is counted as the public's money.** State or USDA help can sit alongside the bank's loan, for example to cover a collateral shortfall. It never counts toward the private quarter. The track's loss rate is measured before any state or USDA recovery, so moving a loss onto another public program can't make the bank look better. Guarantee fees and any payouts go into [the deal's ledger](#who-buyouts-are-compared-against) and the money test. And each deal's file shows the total public money and risk in it, across every program, not just the bank's.
 - **It's all published.** Each year the bank reports how many deals used a state or USDA program, how many the state turned down and why, and how many the bank stepped back from. Where Treasury's and USDA's deal records allow, co-op buyouts they supported elsewhere are reported next to the bank's own.
 - **It asks for these fixes too.** Alongside the SBA change, the model asks Treasury to encourage states to open their programs to worker buyouts, and USDA to raise its $600,000 cap for conversions. Where they do, the track shrinks, as it would for the SBA fix.
 These programs show that public help for worker buyouts already exists, state by state and in pieces. What the track can show is whether one lender, with the same rules everywhere, reaches good deals the patchwork doesn't.
 ### What the help costs
 An earlier version of this page set aside $5 million for help. Counted properly, that was too little.
 The best public benchmark is the ESOP sale. The National Center for Employee Ownership says setting one up costs "a low end of $200,000 to $500,000 for most deals," and that an outside trustee adds costs "in the mid-five figures per year" ([NCEO](https://www.nceo.org/employee-ownership-faq/how-much-does-setting-up-an-esop-cost)). The sales here are smaller than most ESOP deals, around $2.5 million, and a co-op doesn't need an ESOP's yearly trustee or yearly valuation. So this model's figures sit below NCEO's. They're its own estimates, not NCEO's:
 - **The appraisal**, $15,000 to $35,000. NCEO puts a first ESOP appraisal in the "low five figures and up."
 - **The profit check**, the outside accountant's restatement of profits, $10,000 to $30,000. No public price was found for firms this small, so this is a guess.
 - **The workers' adviser**, $30,000 to $60,000 for the whole sale. That's less than NCEO's figure for a trustee, because the adviser's job is one sale, not years of legal duty as a fiduciary.
 - **Help after the sale.** $15,000 of standard help for every firm, and about $70,000 of intensive help for the half who win the lottery ([The Pilot, in Numbers](pilot-spec.md#the-support-lottery)). That's about $50,000 a firm on average.
 - **Deals that fall through.** Some owners will get an appraisal and walk away, or the workers will vote no. Nobody knows how many. This model assumes one and a half to two deals get as far as an appraisal for every one that closes.
 Who pays for what:
 - **The seller pays for the checks.** Before the appraisal, the seller puts down a deposit that covers it and the profit check, a fixed amount set in advance that doesn't depend on the value found. It's kept at closing, since these are costs of selling. If the seller walks away, it's kept too, so an owner can't get a free valuation to use in some other sale. It's paid back only if the workers vote no or the bank turns the deal down. If the seller then sells the business to someone else within two years, they repay it. Nothing is added to the workers' loan, so the debt stays within the appraised value.
 - **The public pays for the rest:** the workers' adviser, the checks on deals that fall through for reasons that aren't the seller's doing, the re-appraisals in [one deal in ten](#a-fair-price), and the help after the sale. Deposits that are kept go back into the help budget.
 - **If money runs short, fewer deals, not thinner help.** Each deal's help is set aside when its loan is made, the same rule [the pilot](pilot-spec.md#the-support-lottery) uses.
 On those numbers, the public pays roughly $110,000 to $240,000 for each sale that closes. So $12 million is set aside. That covers the 55 to 60 sales the loan money allows unless costs run near the top of the range, where it covers only about 50. In that case the help budget, not the loan money, sets the number of deals, and any loan money left unlent goes back to Treasury.
 Because help is given to only half the firms by lottery, the results can show something about what it does. With about 30 firms in each group, that's only a rough signal, and it's reported alongside the startup lottery, not as a test of its own.
 **The money test counts all of it, with no exceptions.** Help is a cost the track has to earn back, just as it is in [the startup test](pilot-spec.md#the-support-lottery), and that makes the test hard to pass. A rough guide: loans go out over the first few years and are paid back over ten, so by year twelve each dollar lent has been outstanding for about five years on average. At 2 to 3 points more than the Treasury rate, $88 million lent that way earns something like $9 million to $14 million more than Treasury would have. Out of that come losses, $12 million of help and the track's share of running the bank. So the track passes only if its losses are low and its help costs sit near the bottom of the range. That's said now, before the first loan, so a failure can't be explained away afterward.
 ### How many deals
 After the $12 million for help, $88 million at about $1.5 million a deal, half the limit, would fund roughly 55 to 60 buyouts, and the help budget may hold it nearer 50. With a private lender and the seller's share on top, that typical deal is a business priced around $2.5 million. That's too few for the tight survival comparison the startup test uses. So survival is published and compared, but as evidence, not as a pass-or-fail line. The terms of every deal are published: the price, the appraisals, the loans and the seller's share. So is what happened to them: every cut to a seller's share, every year payments had to wait, and the losses on deals the bank made alone, reported apart from the rest from the start.
 ### Who buyouts are compared against
 Three groups of businesses can be followed. None of them makes a clean experiment, so the comparisons describe; they don't prove that worker ownership caused a difference. The reviewer publishes the matching rules, the code and every classification before the first buyout loan, so nobody can pick the comparison after seeing the results.
 **1. Businesses bought with government-backed small-business loans.** The SBA publishes every loan in its main program, including the borrower's industry, the loan size and term, the approval year, and whether the loan was paid off or written off. It also marks loans made for a "change of ownership" ([SBA loan data and its field list](https://data.sba.gov/dataset/7a-504-foia)). By this site's count of the SBA file as of June 2026, leaving out cancelled loans, there were about 4,600 to 6,900 a year from 2020 to 2025, and about 13,800 of $1 million or more since 2020.
 - **How they're matched.** On industry, approval year, the whole deal's debt (not just the bank's slice) and loan term. A long term usually means the loan bought a building too, and in these buyouts the seller often keeps it. Loans that look like partner buyouts or employee-ownership deals are dropped where they can be spotted.
 - **What's compared.** The share of money written off, at the same loan age on both sides. The SBA reports write-offs before anything is recovered afterward, so the bank's losses are counted the same way.
 - **The loss rate the test uses.** For change-of-ownership loans of $1 million to $5 million approved in 2015 to 2019, about 1.9% of the money lent, and 3.1% of the loans, had been written off by mid-2026. That's a floor, not a final figure. About 39% of those loans were still being repaid, and the SBA publishes nothing about them beyond that, not even whether they're behind. And in 2020 and 2021 the government made 6 to 14 months of payments on these loans for their borrowers ([15 U.S.C. 9011](https://www.law.cornell.edu/uscode/text/15/9011)), which kept some from failing. So the bank's rate comes from a formula the reviewer fixes in advance: the SBA write-off rate in dollars for the same industries, sizes and terms, at the same loan age, adjusted for the pandemic years in a way that's also published. The reviewer's job is to make sure it wasn't set high, since a high rate is the easy one to beat.
 - **Chance.** About 65 loans at a loss rate like that means two or three failures. One more or one fewer moves the rate a lot. So the published rate comes with a margin worked out in advance for how much it could miss by chance alone, and the test fails only if losses land above that margin. That means the test can catch a track that does much worse than SBA lending, but it can't show that buyouts do better. The report says so.
 - **The deals aren't built alike.** The bank's loans come after three audited years of profits, with a checked margin over the payments and a seller who waits to be paid behind the bank. SBA loans often have neither. Lower losses may just show that the screen and the seller's share work, not that worker ownership does, and the report says that too.
 **2. Businesses sold to an employee stock ownership plan (ESOP).** An ESOP is a retirement plan that owns company stock for the workers. Each such plan files a yearly return with the Labor Department that marks it as an ESOP, and separately as one that borrowed to buy the stock, gives the company's tax number and industry, and counts the plan's members ([Form 5500 instructions](https://www.dol.gov/sites/dolgov/files/ebsa/employers-and-advisers/plan-administration-and-compliance/reporting-and-filing/form-5500/2025-instructions.pdf)). A plan that ends files a final return.
 - **How they're matched.** By industry, state and size, starting from the first year a plan is marked as having borrowed to buy the stock, which is the closest the filings come to the date of the sale. ESOPs are expensive to set up and rare in companies this small, so the reviewer first reports how many matches exist. If there are too few, this comparison is dropped rather than stretched.
 - **What's compared.** Whether the firm is still open after 5 and 10 years, and whether it's still owned by its workers. A plan's member count includes some people who've left, so it's only a rough measure of jobs.
 - **Sales.** A final return doesn't say why the plan ended. The company may have closed, been sold, or merged the plan into another. Coders who don't know which firm is which sort each case using state business records, and every call is published. For survival, a sale counts as neither success nor failure, and then both ways, as in the startup test. For worker ownership, a sale counts as losing it, since that's the usual way ESOP ownership ends and exactly what the lock prevents.
 **3. Deals that almost happened.** Owners who applied but whose deals fell through: on the profit test, the payment margin, the appraisal or the workers' vote. They're the closest thing to the same businesses without a buyout. The reviewer follows them through the same records. Where a deal missed a line narrowly, like a vote decided by a few workers, it's close to a coin flip, and the reviewer reports those cases separately.
 **Pay and jobs.** Neither public record has pay. The track's pay test uses the co-ops' own payroll and linked government wage records ([The Pilot](pilot-spec.md#what-gets-measured)). The bank applies for access to those records before the first buyout loan. If access is refused, the report says so instead of leaving the comparison out quietly. Pay growth is also compared with pay in the same industry and county from public wage statistics.
 **Where the money went.** For each deal, and for the track as a whole, the report adds up 12 years of payments: to the seller, including everything counted as part of the price, interest to the private lender and to the bank, and what members got above their pay before the sale, in wages, profit shares and account balances. Passing the pay test only shows that workers weren't made worse off while they paid for the business. The ledger shows how much they gained, and how much went to the seller and the lenders. The seller's line includes any capital gains tax they put off ([above](#the-tax-break-that-already-exists)).
 **What none of this covers.** Most small businesses change hands with no SBA loan and no ESOP, through cash, private loans and seller financing, and those sales leave no public trail. So the comparisons show how buyouts do against two kinds of financed sale and against deals that fell through, not against every sale.
 **Expect opposition.** Business brokers and private equity funds, who make money when owners sell, may see a public lender as a competitor. Italy's main employers' association got part of its worker-buyout program suspended by the EU ([Has This Been Tried?](precedents.md#italys-co-op-funds-coopfond-and-the-marcora-law)). Keeping the bank at market rates with no new tax break is the best defense, because it leaves little to call unfair. Critics can still point to the old break, which is why its cost counts against the track. The rest is in [Making It Last](durability.md).
 ## What this doesn't solve
 - **The workers pay for what they helped build.** A fair price is a price for the owner's years of ownership, and the workers pay it out of profits their own work will produce. This model accepts that, because the alternative is taking the business, and it doesn't take anyone's business. The rules keep the price fair. They can't make it free.
 - **These loans have less behind them than ordinary ones.** Almost no cash from the buyers, no personal guarantees and a seller who waits two years, not ten. The coverage test and the seller's paid-last share carry the weight that cash and guarantees carry in an SBA loan. The cushion is also thinner than in past co-op buyouts: the main loan here is about 80% of the price, where the conversions Project Equity reviewed had 50–70% in main loans, with other lenders as well as the seller paid after them. If that isn't enough, it will show up as losses above the published rate, and the track fails its test.
 - **An old tax break rides along.** Sellers who qualify can put off, and often never pay, capital gains tax. The model counts its cost against the track but doesn't stop it. If many sellers take it, the track will probably fail its money test.
 - **The seller always knows more.** Written disclosures, checked profits and a shrinking seller's share make hiding problems costly. They can't make it impossible.
 - **A fair price is a matter of judgment.** Appraisals are estimates. The rules make overpaying harder and put the seller's own money behind the price, but they can't make valuation exact.
 - **The vote can be pressured.** A secret ballot, a neutral ballot and a majority of everyone eligible help. They can't stop a well-liked owner or manager from leaning on people in the break room.
@@ -35,8 +35,8 @@ Mondragon's original split was similar: 10% to education and the community, at l
 The members' share is then split again, between cash now and the account:
- **At least 20% of it is paid in cash right away.** Members owe income tax on their whole allocation in the year it's made, including the part that goes into the account. The cash is there so they can pay that tax. This is how US co-op tax law works ([Democracy at Work Institute guide](https://institute.coop/sites/default/files/resources/Internal-Capital-Accounts.pdf)). The default is half in cash.
+- **At least 20% of it is paid in cash right away.** Members owe income tax on their whole allocation in the year it's made, including the part that goes into the account. The cash is there so they can pay that tax. This is how the usual kind of co-op credit works under US tax law; a second kind, taxed only when paid out, is in [How a Locked Co-op Is Taxed](taxes.md#capital-accounts) ([Democracy at Work Institute guide](https://institute.coop/sites/default/files/resources/Internal-Capital-Accounts.pdf)). The default is half in cash.
- **Lower-income members can take it all in cash.** For a low-wage worker, being taxed on money they can't touch can cost them tax credits and health-care subsidies. So any member whose household income is under twice the poverty line can take their whole share in cash. If they leave some in their account, by default they aren't taxed on it until it's paid out ([How a Locked Co-op Is Taxed](taxes.md#capital-accounts)).
+- **Lower-income members can take it all in cash.** For a low-wage worker, being taxed on money they can't touch can cost them tax credits and health-care subsidies. So any member whose household income is under twice the poverty line can take their whole share in cash, or the standard split, with nothing in between, so nobody chooses how much to invest. They choose before the year starts, and one low year doesn't qualify. All cash is the default, and like everyone they're signed up for a retirement plan outside the co-op ([below](#saving-for-retirement)). Once the Labor Department has answered on pension law, those who take the standard split won't be taxed on the account part until it's paid out ([How a Locked Co-op Is Taxed](taxes.md#capital-accounts)).
 - **The rest goes into each member's account.**
 Members can also raise their own salaries instead of taking profit, but that doesn't get around the reserve. It takes its share of pay above the going rate too (see [Investing for the Long Run](the-long-run.md#the-rules)).
@@ -45,48 +45,102 @@ Members can also raise their own salaries instead of taking profit, but that doe
 ## How the account grows
- **Interest is set by formula, not by vote.** A current member's account earns the one-year Treasury rate plus two percentage points in years the co-op makes a profit, and the plain Treasury rate in loss years. Once a member leaves, their balance earns the plain Treasury rate. So does the slice of a current member's account that's protected by [insurance](savings-guarantee.md), since it's no longer at risk. If current members voted on the rate, they could set it to zero on accounts that mostly belong to people who've left. Or senior members could set it high to pay themselves out of the firm. A formula stops both.
+- **Interest is set by formula, not by vote.** A current member's account earns the one-year Treasury rate plus two percentage points, every year. It's credited after the co-op's tax on it, since the co-op can't deduct it ([How a Locked Co-op Is Taxed](taxes.md#interest-on-accounts)). Once a member leaves, their balance earns the plain Treasury rate. So does the slice of a current member's account that's protected by [insurance](savings-guarantee.md), since it's no longer at risk. If current members voted on the rate, they could set it to zero on accounts that mostly belong to people who've left. Or senior members could set it high to pay themselves out of the firm. A formula stops both.
- **Why the extra two points.** Money in a current member's account is at risk: it shares in losses and ranks behind lenders. If it only earned what a risk-free government bond pays, every member would take as much cash as they could, and the co-op would have less of its own money to invest. Once you leave, your balance stops sharing in losses, so it stops earning the premium. See [Investing for the Long Run](the-long-run.md#the-rules).
+- **Why the extra two points.** Money in a current member's account is at risk: it shares in losses and ranks behind lenders. If it only earned what a risk-free government bond pays, members would vote to pay out as much in cash as the rules allow, and the co-op would have less of its own money to invest. Once you leave, your balance stops sharing in losses, so it stops earning the premium. See [Investing for the Long Run](the-long-run.md#the-rules).
 - **Losses are shared.** In a year the co-op loses money, the loss is charged partly to the reserve and partly to members' accounts, in the same proportions as profits. Your account can go down, just like shares in any company.
 ## How it's paid out
- **Each year's credit is paid back after five years.** The money credited to your account for 2030 is paid to you in 2035, the 2031 credit in 2036, and so on, oldest first, each after that year's audited accounts are closed. Each co-op can set the wait anywhere from three to seven years in its bylaws. It's one of the two ways US worker co-ops already pay out accounts, called a "roll-over" ([Democracy at Work Institute guide](https://institute.coop/sites/default/files/resources/Internal-Capital-Accounts.pdf)). The co-op gets to use each year's credit for years, and nobody's savings are stuck until they retire.
+- **Each year's credit is paid back after five years.** The money credited to your account for 2030 is paid to you in 2035, the 2031 credit in 2036, and so on, oldest first, each after that year's accounts are closed and checked by an outside accountant ([What the Rules Cost a Small Co-op](compliance.md#what-a-review-can-and-cant-stand-in-for)). Each co-op can set the wait anywhere from three to seven years in its bylaws. It's one of the two ways US worker co-ops already pay out accounts, called a "roll-over" ([Democracy at Work Institute guide](https://institute.coop/sites/default/files/resources/Internal-Capital-Accounts.pdf)). The co-op gets to use each year's credit for years, and nobody's savings are stuck until they retire.
- **The wait is fixed when the credit is made.** A vote to change it applies only to credits made starting the year after the vote, so senior members can't speed up their own money or slow down anyone else's.
+- **The wait is fixed when the credit is made.** A vote to change it applies only to credits made starting the year after the vote, so senior members can't speed up their own money or slow down anyone else's. For credits that aren't taxed until paid, it applies only to profit from years that start after the vote ([How a Locked Co-op Is Taxed](taxes.md#credits-taxed-later-the-deferred-pay-rules)).
 - **Leaving doesn't change the schedule.** When you leave, your balance is fixed at the end of that year, after that year's profit or loss is counted, so nobody can quit just ahead of a bad year and escape it. After that it stops sharing in losses, earns the plain Treasury rate, and each year's credit is still paid on its own date.
 - **Small balances are paid early, for everyone.** Once anyone's whole balance is under $2,000, member or not, it's paid at the next payout date. That keeps a co-op from tracking small sums for years, and since it doesn't depend on leaving, nobody gains by quitting.
 - **There's no penalty for leaving.** Mondragon used to cut the payout by up to 30% for people who quit. This model doesn't, because a core promise of [the tenure cap](worker-ownership.md) is that you can change jobs without losing what you've built.
 - **Accounts are capped at one year's pay,** measured as the highest pay in the last three years, so nobody can cut their own pay to get their money sooner. Anything above that is paid out every year in cash, which a member can put in their own retirement account and invest in anything. Nobody should end up with most of their savings tied to the same company that pays their wages.
- **Any payout can be spread out.** Members get 90 days' notice of each payout and can ask for it in up to 12 monthly payments, so one check doesn't push a family over a limit for public benefits ([How a Locked Co-op Is Taxed](taxes.md#benefits)).
+- **Any payout can be spread out.** Members get 90 days' notice of each payout and can take it at once or in up to 12 monthly payments, whichever works better with the public benefits they get ([How a Locked Co-op Is Taxed](taxes.md#benefits)). For credits that aren't taxed until paid, that choice is made before the year the credit is earned, and the payments all fall in one calendar year ([How a Locked Co-op Is Taxed](taxes.md#credits-taxed-later-the-deferred-pay-rules)).
 - **On death, the account goes to the person you name,** your spouse unless you name someone else with their written consent, on the normal schedule.
 - **In a divorce, a court can split the account.** The former spouse gets a separate account of their own, with no vote, paid out on the normal schedule.
 - **Every year, each person gets a statement** showing each credit, any losses charged to it, and the date it will be paid. Former members get one too. A dispute gets a written answer within 90 days and can go to an outside arbitrator from the federation's list, or to court.
 ### Why not pay it out when you leave?
-Mondragon pays members their accounts when they retire or leave, and so do some US co-ops. This model doesn't, because of a federal pension law. Under the Employee Retirement Income Security Act (ERISA), any program an employer runs that holds back workers' income "for periods extending to the termination of covered employment or beyond" is a pension plan ([29 U.S.C. 1002(2)(A)](https://www.law.cornell.edu/uscode/text/29/1002)). The Labor Department's rule says the same about bonuses "systematically deferred to the termination of covered employment" ([29 CFR 2510.3-2(c)](https://www.law.cornell.edu/cfr/text/29/2510.3-2)). Members are the co-op's employees ([Owners Are Still Workers](labor-law.md)). There's a case that a co-op's profit allocations are an owner's share, not an employer's bonus, but the model doesn't stake members' savings on winning it.
+Mondragon pays members their accounts when they retire or leave, and so do some US co-ops. This model doesn't, because of a federal pension law. Under the Employee Retirement Income Security Act (ERISA), any program an employer runs that holds back workers' income "for periods extending to the termination of covered employment or beyond" is a pension plan ([29 U.S.C. 1002(2)(A)](https://www.law.cornell.edu/uscode/text/29/1002)). The Labor Department's rule says the same about bonuses "systematically deferred to the termination of covered employment" ([29 CFR 2510.3-2(c)](https://www.law.cornell.edu/cfr/text/29/2510.3-2)). Members are the co-op's employees ([Owners Are Still Workers](labor-law.md)). The model treats profit allocations as an owner's share, not an employer's bonus, but it doesn't stake members' savings on winning that argument. In states where wage law could reach account credits, co-ops don't use accounts at all until the law changes ([Owners Are Still Workers](labor-law.md#is-the-profit-share-pay)).
 A pension plan would break the account. Its money has to be held in a trust, apart from the business ([29 U.S.C. 1103](https://www.law.cornell.edu/uscode/text/29/1103)), and the plan can't lend to the employer ([29 U.S.C. 1106](https://www.law.cornell.edu/uscode/text/29/1106)). The whole point of the account is that the co-op uses the money.
-**A fixed schedule is designed to stay outside the law's definition, but that isn't settled.** In 1995 the Labor Department said a company's profit-based program wasn't a pension plan because it didn't "expressly provide for a deferral of income to the termination of covered employment." But that program paid nothing to people who quit, and the Department pointed to that. It also warned that a program can still become a pension plan "as a result of surrounding circumstances," such as "an inordinate percentage" of participants being near retirement age when payments arrive ([Advisory Opinion 95-23A](https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/advisory-opinions/erisa-section-3-3-employee-pension-benefit-plan-advisory-opinion-1995-23a.pdf)). Here, people who leave are still paid afterward, on the same dates as everyone else. A court could count that against the design. So:
+**A fixed schedule is designed to stay outside the law's definition, but that isn't settled.** In 1995 the Labor Department said a company's profit-based program wasn't a pension plan because it didn't "expressly provide for a deferral of income to the termination of covered employment." But that program paid nothing to people who quit, and the Department pointed to that. It also warned that a program can still become a pension plan "as a result of surrounding circumstances," such as "an inordinate percentage" of participants being near retirement age when payments arrive ([Advisory Opinion 95-23A](https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/advisory-opinions/erisa-section-3-3-employee-pension-benefit-plan-advisory-opinion-1995-23a.pdf)). Here, people who leave are still paid afterward, on the same dates as everyone else. A court could count that against the design.
 **Courts weigh the facts differently.** Two federal appeals courts have found pension plans in programs that called themselves deferred compensation, let employees choose to put off part of their pay, and paid it when they left. The Fifth Circuit did in 2014 ([*Tolbert v. RBC Capital Markets*, 758 F.3d 619](https://www.courtlistener.com/opinion/2683548/brenda-tolbert-v-rbc-capital-markets-corp/)) and the Sixth in 2019 ([*Wilson v. Safelite*, 930 F.3d 429](http://www.opn.ca6.uscourts.gov/opinions.pdf/19a0148p-06.pdf)). Both read "results in a deferral" literally. But the Fifth Circuit's own earlier rule still stands: "the mere fact that some payments under a plan may be made after an employee has retired or left the company does not result in ERISA coverage" (*Murphy v. Inexco Oil*, 1980, quoted in *Tolbert*). In April 2026 the Fourth Circuit held that awards paid eight years after they were granted were a bonus program, not a pension plan, partly because 92% of the payments went to people still working there ([*Milligan v. Merrill Lynch*](https://www.govinfo.gov/content/pkg/USCOURTS-ca4-25-01385/pdf/USCOURTS-ca4-25-01385-1.pdf)). It listed six things courts can weigh:
 1. whether everyone takes part, or only some
 2. whether it's paid for with money workers would otherwise get now
 3. whether money is really set aside
 4. whether workers can choose to put payment off until they leave
 5. whether it's presented as retirement savings
 6. whether the firm's results change what's paid
 **The model's argument, and its fallback.** First, nothing is put off until anyone leaves. Each credit is paid on a date fixed when it's made, the same for everyone, whether or not they've left. Members are taxed on it that year as if they'd received it, which counts against any "deferral of income." And it's members' capital in their own co-op, not an employer's plan for holding back pay. If a court treats the credit as pay anyway, the fallback is the Labor Department's rule: a share of profit on top of wages is a bonus for work, and it isn't systematically put off until people leave. That fallback concedes, for pension law only, that the share is a bonus. That sits uneasily with the model's position under tax and wage law that it's an owner's share, not pay ([Owners Are Still Workers](labor-law.md#is-the-profit-share-pay)).
 **Two things weaken it.** One is the lower-income option. Credits that aren't taxed until paid, chosen by the member in advance and run under the tax rules for deferred pay, look most like the plans in *Tolbert* and *Wilson*. The other is that nobody loses their account for leaving, so a lot of it is paid to people who've left. If a tenth of members leave each year, about 40% of each five-year credit belongs to someone who's gone by the time it's paid, and about 27% with a three-year wait. It's less by dollars, since people who leave tend to be newer, with smaller credits. In home care, where even co-ops lose about 38% a year ([When People Don't Stay Long](high-turnover.md)), it's most of it. So:
 - **Nothing about the payout depends on leaving:** not the date, not the amount, not the small-balance rule.
 - **The wait is short and the same for everyone,** at most seven years, not tied to age or retirement.
- **The account isn't sold as retirement savings.** A co-op that wants to help members save for retirement does it the ordinary way, with a regular retirement plan held outside the business.
+- **Credits taxed later wait for the Labor Department.** Until the Department answers, co-ops don't offer them. Lower-income members choose between all cash, the default, and the standard split, taxed now ([How a Locked Co-op Is Taxed](taxes.md#credits-taxed-later-the-deferred-pay-rules)).
- **The first pilot co-ops ask the Labor Department for an advisory opinion on their real bylaws, and the bank pays.** An opinion only covers the co-op that asked, on its own facts, so the bank also asks the Department for a rule any employer could use, for profit-sharing paid on a short fixed schedule. It doesn't ask Congress for an exemption only co-ops would get.
+- **Most of what's paid goes to people still working there.** The federation's software reports each year what share of a co-op's account payouts, in dollars, went to people who weren't working there, counting small balances and payments to heirs. It also reports the share paid to people at or near retirement age. If more than a third went to people who weren't working there, averaged over three years, the co-op shortens the wait for new credits to three years. If it's still over a third after that, it stops making new credits, and the members' share is paid in cash. A third is the model's own number, far looser than the 8% in *Milligan*, so the request to the Department asks where the line is. Stopping new credits doesn't change the status of old ones, which are still paid on schedule.
 - **The account isn't written or sold as deferred pay or retirement savings.** The bylaws describe it as members' capital under state co-op law. Retirement saving happens the ordinary way, in a separate plan held outside the business ([below](#saving-for-retirement)).
 - **The same rules apply everywhere.** Under ERISA a suit can be brought where the plan is run, where the breach took place, or wherever a defendant can be found ([29 U.S.C. 1132(e)(2)](https://www.law.cornell.edu/uscode/text/29/1132)). A former member who moves can take the case with them, so a rule based on where the co-op sits wouldn't protect it.
 - **The first pilot co-ops ask the Labor Department for an advisory opinion on their real bylaws, and the bank pays.** An opinion only covers the co-op that asked, on its own facts, so the bank also asks the Department for a rule any employer could use, for profit-sharing paid on a short fixed schedule. The Fourth Circuit held that the Department acted within its power to define the law's terms when it wrote its bonus rule ([29 U.S.C. 1135](https://www.law.cornell.edu/uscode/text/29/1135)). Other circuits don't have to agree. It doesn't ask Congress for an exemption only co-ops would get.
 **The cost is capital.** Money paid back after five years is money the co-op can't keep using for fifteen. So a co-op that wants to invest more has to keep more in its permanent reserve, and that weakens the model's answer to the horizon problem ([Investing for the Long Run](the-long-run.md#who-pays-for-an-investment-and-when)).
 ### Saving for retirement
 Every co-op also offers an ordinary retirement plan, held outside the business, to everyone who works there, members or not. It's a normal benefit, not a replacement for the account. But it matters most for people who don't build savings in the co-op: members of co-ops that have stopped making credits, and lower-income members who take their share in cash. They're mostly the lowest-paid.
 - **A plan the federation doesn't run.** Employers that share "a common interest other than having adopted the plan" can't form their own pooled plan, and co-ops in one federation probably do ([29 U.S.C. 1002(43)](https://www.law.cornell.edu/uscode/text/29/1002)). So each co-op joins an open pooled 401(k) run by a provider registered with the Labor Department, which takes on most of the paperwork and legal duties. The federation compares providers and recommends one. No part of the federation, the bank or its software company is paid from plan money, and fees are a flat amount per person, published every year.
 - **Everyone is signed up, as the law requires.** A 401(k) plan started since 2023 has to sign up every eligible worker at 3% to 10% of pay, raised by a point a year to at least 10%, unless the worker chooses otherwise. For the first 90 days they can take their own contributions back ([26 U.S.C. 414A](https://www.law.cornell.edu/uscode/text/26/414A)). Co-ops under three years old or with ten or fewer workers are exempt but use the same rules. The default starts at 3%, and changing it or opting out takes one step. When one large company started signing new workers up automatically, 86% took part, against 37% before ([When People Don't Stay Long](high-turnover.md)).
 - **The co-op puts in 3% for everyone, not a match.** A match would come out of shared profit and go only to people who can afford to save, so members who opt out because they need the cash would pay for those who don't. Instead the co-op adds 3% of wages for every eligible worker, whether they save or not, and it's theirs at once. That's one of the law's standard "safe harbor" designs ([26 U.S.C. 401(k)(12)(C)](https://www.law.cornell.edu/uscode/text/26/401)). It also spares the co-op the yearly tests comparing what owners and other workers get, which matters because in a co-op with fewer than 20 members, each member holds more than 5% of the vote, and tax law may treat each one as an owner.
 - **The federal match.** From 2027, the Saver's Match adds 50% of up to $2,000 a year that a lower-income person saves for retirement, paid by the Treasury into a non-Roth account. It shrinks as income rises and is gone at $35,500 for a single filer, $53,250 for a head of household and $71,000 for a married couple, before inflation adjustments ([26 U.S.C. 6433](https://www.law.cornell.edu/uscode/text/26/6433)). It's paid the year after, only to people who file a tax return and claim it, so the co-op's [benefits check](taxes.md#benefits) includes help filing. Money taken out within about two years reduces it. The default is the ordinary pre-tax option. Many low-paid workers owe almost no income tax, so after-tax Roth savings would often suit them better, but the Treasury hasn't said yet whether Roth savings earn the match.
 - **No withdrawals or loans while working there.** SSI doesn't count a retirement fund as savings if the worker has to leave the job to get any of it ([SSA POMS SI 01120.210](https://secure.ssa.gov/poms.nsf/lnx/0501120210)). Hardship withdrawals or loans would probably make it count. So the plan allows neither, beyond the 90-day refund the law requires. Once someone leaves, their balance can be cashed out, so it counts for SSI then, and cashing out early costs a 10% tax penalty. A member on SSI can stop their own savings, though the co-op's 3% still goes in. Balances roll over directly to a new plan or retirement account unless the worker chooses otherwise.
 An example: a home care aide who heads a household and earns $30,000 saves 3%, or $900. The co-op adds $900, and the Treasury $450 the next year, so $2,250 goes into an account that nobody can take from her if the co-op fails. She's just under the income where the Treasury's match starts to shrink, so a raise or other household income would reduce it. The co-op's 3% is a cost, paid before any profit is shared, and in thin-margin work that's real money. But it counts as pay under the Medicaid rule for home care ([When People Don't Stay Long](high-turnover.md#when-medicaid-decides-how-much-goes-to-pay)), and it's within the 6% of pay that [the pay rule](the-long-run.md#the-rules) leaves alone.
 ### Are accounts securities?
 Securities law covers far more than stock. Its definition includes any "note," any "evidence of indebtedness," and any "participation in any profit-sharing agreement" ([15 U.S.C. 77b(a)(1)](https://www.law.cornell.edu/uscode/text/15/77b)). An account credit is a promise to pay a set amount, with interest, on a set date. If credits counted as securities, a co-op would need an exemption from registering them, and anything misleading it told members about them could be grounds for a lawsuit.
 **The case that they aren't:**
 - **Members don't buy them.** Credits come out of each year's profit share, by one split the bylaws set for everyone. The Supreme Court held that a pension plan workers didn't pay into wasn't a security, because an employee "is selling his labor primarily to obtain a livelihood, not making an investment" ([*Teamsters v. Daniel*, 1979](https://www.law.cornell.edu/supremecourt/text/439/551)).
 - **Membership isn't like stock.** The Court held that shares in a housing co-op weren't securities. They paid no dividends from profit, couldn't be sold or pledged, gave no extra votes for extra shares, and couldn't rise in value ([*United Housing Foundation v. Forman*, 1975](https://www.law.cornell.edu/supremecourt/text/421/837)). Membership here is the same: one vote per member, and a buy-in of at most $1,000 held apart from the account at its face value, earning nothing ([When People Don't Stay Long](high-turnover.md#joining-costs-nothing-up-front)). The profit share comes from hours worked, not from the membership.
 **The case that they might be:**
 - **Notes are presumed to be securities.** In 1990 the Court held that a farm co-op's notes to its members and others were securities. It looked at why the co-op issued them and why people held them, how widely they were offered, what the public would expect, and whether anything else protected the holders. It stressed that the co-op used the money for its business, and that the notes were "uncollateralized and uninsured" and would otherwise "escape federal regulation entirely" ([*Reves v. Ernst & Young*](https://www.law.cornell.edu/supremecourt/text/494/56)). An account is also an unsecured promise from the co-op, the co-op uses the money, and the extra two points of interest are there to make keeping it in worthwhile. The [savings insurance pool](savings-guarantee.md) covers only part of it.
 - **This model gives up the protection *Daniel* relied on.** The Court said workers didn't need securities law there because pension law already protected them. Accounts here are designed to stay outside pension law.
 - **A former member is simply owed money** by a company they no longer work for, and a payout paused for two years becomes a new debt to them (below).
 **So the model keeps accounts on the safe side of each test:**
 - **Nobody can put money in.** Accounts are filled only from profit shares. No member can choose to leave more in. Lower-income members can take everything in cash or the standard split, nothing in between.
 - **Accounts can't be sold, pledged or borrowed against** (below), and they aren't offered as an investment. A co-op can't advertise account interest to recruit workers, and statements describe accounts as "partly covered by a private insurance pool with no government backing," not as insured savings.
 - **Members get the facts.** Every account holder, former members included, gets the yearly statement and the co-op's checked accounts. Anything misleading in them could be grounds for a claim either way, so the federation writes the model statements and buys directors' liability insurance for member co-ops as a group. That's a cost [What the Rules Cost a Small Co-op](compliance.md) doesn't count yet.
 - **The bank asks the SEC for a general answer.** The first pilot co-ops ask the SEC's staff to confirm they won't treat credits as securities, and the bank pays. A staff letter binds no court, no state and no member who sues, so the bank also asks the SEC for a rule that covers profit allocations paid on a short fixed schedule, as it does with the Labor Department.
 - **State law too.** Each state has its own securities law. The bank's checked entry for each state ([Owners Are Still Workers](labor-law.md#is-the-profit-share-pay)) covers it, alongside wage law. California, for example, exempts "credits to a member's capital" in co-ops formed under its co-op law, for voting members, and doesn't count patronage dividends toward its $1,000 limit on what a member puts in ([Cal. Corp. Code § 25100(r)](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP&sectionNum=25100)). That shows how a state can handle credits. It doesn't settle federal law, and it doesn't cover former members, who no longer vote.
 **The fallback has a price.** If credits did count as securities, the nearest federal exemption covers securities a company issues to its employees under a written compensation plan, up to the largest of $1 million, 15% of its assets, or 15% of that kind of security outstanding, each year ([17 CFR 230.701](https://www.law.cornell.edu/cfr/text/17/230.701)). But using it means calling credits pay, in writing. The tax, pension and wage-law positions elsewhere all rest on credits being an owner's share, not pay ([Owners Are Still Workers](labor-law.md#is-the-profit-share-pay)), and the IRS or a state wage agency could point to that document. It also doesn't cover a paused payout that becomes a new debt to a former member, who isn't an employee anymore. So the model doesn't plan on it. It's a last resort, and the conflict is listed in [Open Problems](open-problems.md).
 ## Protecting the co-op, and the people who stay
 A payout system can also be used to strip a failing firm. People who see trouble coming leave first and get paid in full, while everyone who stays absorbs the loss. So:
 - **Every payout must pass a solvency test.** No payment may push the co-op below its loan requirements or a minimum cash level set in its bylaws when it's founded. Members can't lower that minimum without the bank's consent.
 - **If payouts fail the test, they're paused, all together, for at most two years.** Credits from the same year are treated the same whether their owner still works there or not, and the oldest are paid first when money allows. Paused amounts earn the Treasury rate plus two points, since the people waiting are carrying extra risk. While any payout is paused, **current members get no cash profit share, no bonuses and no raises above the going rate.** Nobody gets paid ahead of the people who are waiting.
 - **Credits that aren't taxed until paid follow stricter rules.** Lower-income members' nonqualified credits are paused only if an accountant finds that paying them would put the co-op at risk, not just for the loan terms or the cash minimum. They're paid as soon as it wouldn't, even ahead of the note below. That's an exception to treating the same year's credits the same, because federal rules on deferred pay require it ([How a Locked Co-op Is Taxed](taxes.md#credits-taxed-later-the-deferred-pay-rules)).
 - **After two years, a pause becomes a debt with a schedule.** Whatever is still unpaid becomes a note the co-op repays in equal parts over five years, still behind its lenders, and the [insurance pool](savings-guarantee.md) covers former members' insured amounts if the co-op fails. So the worst case for a member who leaves is a long wait: up to seven years for the last credit, plus the pause, plus the note. The co-op's bylaws have to say so in plain words.
 - **Losses are spread evenly.** When a loss is charged to members' accounts, it's charged to every year's credits that haven't been paid yet, in proportion, not to the newest or the oldest first. So the timing of payouts can't be used to dodge a loss.
- **Payouts rank behind the co-op's lenders.** In a bankruptcy, members' accounts are paid only after the co-op's creditors. That's the honest cost of being an owner, and it's the main reason for the one-year-of-pay cap.
+- **Payouts rank behind the co-op's lenders.** In a bankruptcy, members' accounts are paid only after the co-op's creditors. That's the honest cost of being an owner, and it's the main reason for the one-year-of-pay cap. The tax relief on a lost account is slow, too: members were taxed on the credits in full, but can probably deduct only $3,000 a year of the loss, unless Congress passes the fix the model asks for ([How a Locked Co-op Is Taxed](taxes.md#if-the-co-op-fails)).
- **The co-op doesn't lend to members against their accounts.** That would just be an early withdrawal by another name. Members can use their account as collateral with an outside lender.
+- **Accounts can't be cashed in early, sold, pledged or borrowed against,** from the co-op or anyone else. That would just be an early withdrawal by another name. It also keeps the account from counting against public benefits' savings limits before it's paid ([How a Locked Co-op Is Taxed](taxes.md#benefits)). The only transfers are to a named person on death and a court's division in a divorce.
 - **Savings are insured, up to a point.** Every locked co-op belongs to a members' savings insurance pool, paid for by the co-ops. It covers workers' final unpaid wages, former members' unpaid payouts up to $50,000, and a protected slice of current members' accounts. See [Protecting Members' Savings](savings-guarantee.md).
 - **No other savings in the co-op.** A co-op can't take deposits from its members or sell them bonds. A member's only money in the co-op is their account.
@@ -104,16 +158,17 @@ That's intentional. It's what the lock is for. But it means a co-op member who h
 Here's what a member who joined a successful co-op in its third year has received by year 15, on top of their salary, in four kinds of business. The numbers come from a simple model with these assumptions:
- A one-year probation, then a profit share that grows from 20% to 100% over five years.
+- A three-month probation, the standard bylaws' default ([When People Don't Stay Long](high-turnover.md#a-short-probation)), paid at the starting share. Then a profit share that grows from 20% to 100% over five years.
- 60% of profit goes to members.
+- 60% of profit goes to members, minus the founding share in the first ten years ([The Founder Problem](founder-problem.md#the-tools)). This member started in year three, so they get a small part of it too. The part of a share a newer member doesn't get yet goes to the reserve, not to other members, as tax law requires ([How a Locked Co-op Is Taxed](taxes.md#the-tenure-ramp)).
 - The workforce grows steadily to the size shown, as on the next page.
 - Money received later counts for less than money received now. It's discounted at 5% a year, the rate used in the founder study on the [next page](founder-problem.md).
 | Kind of business | Profit per worker (after salaries) | Size at year 15 | **What the member received** |
 | --- | --- | --- | --- |
-| Care work (home care, cleaning) | $3,000 | 40 people | about **$14,000** |
+| Care work (home care, cleaning) | $3,000 | 40 people | about **$12,000** |
-| Main Street (trades, services) | $15,000 | 40 people | about **$68,000** |
+| Main Street (trades, services) | $15,000 | 40 people | about **$60,000** |
-| Strong (skilled services, light manufacturing) | $40,000 | 80 people | about **$200,000** |
+| Strong (skilled services, light manufacturing) | $40,000 | 80 people | about **$160,000** |
-| Very high margin (a firm like Conservice) | $150,000 | 200 people | about **$780,000** |
+| Very high margin (a firm like Conservice) | $150,000 | 200 people | about **$600,000** |
 In a conventional firm, all of that goes to the owners.
@@ -21,4 +21,13 @@ There is one limit, though. A claim that takes 90% of the profits for 40 years i
 **The consequence, priced in.** Capital charges for risk. An instrument with equity-like downside and a terminating upside gets funded last, or demands a bigger profit share. Revenue-based financing already exists in today's market and stays niche for exactly this reason. It bites hardest on brand-new ventures and barely at all on mature, profitable firms.
 **Investors are buying securities.** A share of profits sold to an investor is a "participation in any profit-sharing agreement," which federal law lists as a security ([15 U.S.C. 77b(a)(1)](https://www.law.cornell.edu/uscode/text/15/77b)). A co-op raising outside money has to register the offering or fit an exemption, and it answers for anything misleading it tells investors. The usual routes for a small business:
 - **Crowdfunding:** up to $5 million a year through a registered online portal. Most investors have a yearly limit. If either their income or their net worth is under $124,000, it's the greater of $2,500 or 5% of whichever of the two is larger ([17 CFR 227.100](https://www.law.cornell.edu/cfr/text/17/227.100)).
 - **Selling locally:** only to residents of the co-op's own state, under that state's rules ([17 CFR 230.147A](https://www.law.cornell.edu/cfr/text/17/230.147A)), or up to $10 million a year under each state's own rules where it's sold ([17 CFR 230.504](https://www.law.cornell.edu/cfr/text/17/230.504)). Both leave the co-op to state review.
 - **Wealthier and experienced investors:** any amount, to investors who meet the federal wealth or income test, plus up to 35 others who are experienced in business ([17 CFR 230.506](https://www.law.cornell.edu/cfr/text/17/230.506)). States can't require these offerings to be registered, so it's often the cheapest route, though not one for a co-op's neighbors.
 - **One large investor:** a parent co-op funding a [spin-off](growth.md), or a lender joining the bank, can invest privately without a public offering ([15 U.S.C. 77d(a)(2)](https://www.law.cornell.edu/uscode/text/15/77d)).
 Each route costs legal and filing fees, which weigh most on small raises. The federation keeps standard offering documents for these claims, with a standard warning about the risks: the claim can't be sold easily, it ranks behind the bank, and it can be worth nothing. So each co-op doesn't pay a lawyer to write its own. The co-op's directors, often members who earn an ordinary wage, answer for anything misleading in an offering, so the federation's group liability insurance covers them. A co-op that just wants to borrow can also take an ordinary loan with fixed payments, which courts usually don't treat as a security. Members' own [capital accounts](capital-accounts.md#are-accounts-securities) are a different case.
 This rule applies only to co-ops. Conventional firms keep conventional equity. That makes the cost-of-capital question an empirical one: [the test](the-test.md) will show whether co-ops can raise enough on these terms, alongside the bank, to grow.
@@ -0,0 +1,154 @@
 ---
 title: What the Rules Cost a Small Co-op
 section: The Co-op
 order: 32
 summary: The model's checks, from audits to the lock-holder's reviews, are scaled to a co-op's size and done once a year in one package, with audits by lot to deter cheating, though even the lighter package costs a small co-op real money.
 ---
 # What the Rules Cost a Small Co-op
 Every page of this model adds a check. Someone has to confirm that members were paid the going rate, that the job titles are honest, that the equipment isn't wearing out unreplaced, that nobody is being pushed out before they'd join. Each check makes sense on its own. Together, they could cost a small co-op more than it earns.
 That matters for two reasons. Rules a small firm can't afford end up existing only on paper, or they quietly keep co-ops out of small, low-margin work, which is where [the model most wants them](who-gets-loans.md). This page says what's checked, by whom, how often, and who pays.
 ## What gets checked
 Across the model, a locked co-op is asked to do these things every year:
 | Check | Where it comes from |
 | --- | --- |
 | Year-end accounts, closed and checked by an outside accountant | [Capital account payouts](capital-accounts.md#how-its-paid-out), [savings cover pricing](savings-guarantee.md) |
 | Every worker paid at least the going rate for their job, by occupation code | [The pay rule](the-long-run.md#the-rules), [Is the profit share pay?](labor-law.md#is-the-profit-share-pay) |
 | A sample of timesheets matched to payroll records | [What counts as an hour](taxes.md#what-counts-as-an-hour) |
 | Direct care job titles checked, where Medicaid's 80% rule applies | [When Medicaid decides how much goes to pay](high-turnover.md#how-a-co-op-meets-it) |
 | Overtime recalculated once the profit share is set | [Overtime and the profit share](labor-law.md#overtime-and-the-profit-share) |
 | Pay ratio and pay bands, by job, gender and race | [Who Sets the Pay](pay.md#everyone-sees-the-bands) |
 | Warnings, hearings and dismissals, plus an anonymous workload survey | [When a member won't do the work](free-riding.md#when-a-member-wont-do-the-work) |
 | Hires, and people let go before they could join | [No pushing people out](high-turnover.md#no-pushing-people-out-before-theyd-join) |
 | Spending on buildings and equipment next to how much they wore out | [Running it down](the-long-run.md#running-it-down) |
 | Big expansion proposals and how members voted | [When Growing Means Sharing](growth.md) |
 | A statement to each member of their account | [Member Capital Accounts](capital-accounts.md) |
 | Contracts with insiders, priced like deals with strangers | [The hidden boss](pilot-safeguards.md#the-hidden-boss) |
 | Members' share of all work hours, counting agency and contractor hours | [The hidden boss](pilot-safeguards.md#the-hidden-boss) |
 Most of this is data a co-op already has in its payroll and bookkeeping. The expensive part is having an outside accountant check it.
 ## What outside checking costs
 Outside accountants offer three levels of checking. A **compilation** just puts the books into proper form, with no checking at all. A **review** asks questions and looks for numbers that don't make sense, without testing the records underneath. An **audit** tests the records and gives a formal opinion. There's also a fourth kind of job, **agreed-upon procedures**, where the accountant runs a fixed list of tests and reports what they found, without giving an opinion on the accounts as a whole. It's billed on top of a review, not inside it.
 For very small firms, the gap between a review and an audit is large. When the SEC wrote its rules for small companies raising money online, it estimated a review at about $1,500 to $18,000 and an audit at about $2,500 to $30,000. The average audit for companies with under $1 million in both market value and revenue was about $20,000 in 2014 ([SEC, 2015](https://www.federalregister.gov/documents/2015/11/16/2015-28220/crowdfunding)). By 2020, commenters and industry sources the SEC cited put a review of a small company at roughly $1,500 to $6,000, and one said at least $6,000 for a company with two years of history ([SEC, 2021](https://www.federalregister.gov/documents/2021/01/14/2020-24749/facilitating-capital-formation-and-expanding-investment-opportunities-by-improving-access-to-capital)).
 Take a cleaning co-op with six members and $400,000 in sales. A yearly audit at $20,000 could be most of its profit. The model's own rough estimate for the package below is more like this, per year:
 | Item | Rough cost |
 | --- | --- |
 | Review of the accounts | $3,000 to $6,000 |
 | The fixed list of extra tests | $1,500 to $3,000 (the model's guess; no good public data) |
 | Lock-holder's review, every two years | $500 to $1,000 a year (the model's guess) |
 | Staff time | 20 to 40 hours |
 That's roughly $5,000 to $10,000, or 1.25% to 2.5% of sales. In cleaning, where profit might be 5% of sales, that's a quarter to half of the profit. The package is cheaper than yearly audits, but it isn't cheap, and the page doesn't pretend otherwise.
 ## How others do it
 **Italy** has checked every co-op for decades. The law requires a "cooperative revision" at least once every two years, or every year where a special law says so. If the co-op belongs to one of the national federations, the federation does it; if not, the government does. The revision has two jobs: to advise the board on running the co-op and on internal democracy, and to confirm the co-op is real. It checks that the members are real, that they take part, and that the co-op qualifies for its tax breaks, and it checks that worker-members are treated as the co-op's own rules say. A co-op that fails can be struck off the co-op register, put under a government-appointed manager, or dissolved ([Legislative Decree 220/2002, articles 2, 4 and 12](https://www.parlamento.it/parlam/leggi/deleghe/02220dl.htm)).
 It's paid for by a fee on a published scale. For 2025–26, the smallest co-ops pay €330 for the two years, but only if they have at most 100 members, at most €5,160 in share capital *and* at most €75,000 in sales. Going over any one of those puts a co-op in a higher band. The top band, for co-ops with over €2 million in sales, is €2,740 ([Ministry decree of 12 February 2025, as reported by Fisco7](https://www.fisco7.it/2025/06/contributo-revisione-cooperative-2025-2026-in-vigore-i-nuovi-importi/)).
 **Italy is also a warning.** Cheap checking by the co-ops' own federations has lived alongside a long-running problem of "false co-ops," firms that use the co-op form to underpay workers. In the first three months of 2016, labor inspectors who went looking for them inspected 934 co-ops and found more than half breaking the rules, with 3,768 workers affected ([Italian Ministry of Labour, 2016](https://www.lavoro.gov.it/stampa-e-media/comunicati/pagine/ministero-del-lavoro-vigilanza-sulle-cooperative-spurie)). Those were targeted inspections, not a random sample, so they don't show how common false co-ops are. They do show that a federation checking its own members isn't enough on its own.
 **Mondragon's bank** asked every co-op for monthly financial reports, and gave each a full audit every four years ([Has This Been Tried?](precedents.md)).
 ## The rules
 ### Checking is scaled to size
 Three sizes. Size is measured by sales and by full-time-equivalent workers, counting hours worked through agencies and contractors, so taking on contractors or part-timers doesn't keep a co-op small. Co-ops that are related, in the sense [the pilot already uses](pilot-safeguards.md#splitting-one-borrower-into-many) (a shared founder, manager, landlord, franchisor or major supplier), are counted together, so splitting a firm in two doesn't either. A co-op moves up a size when it passes either line two years running.
 - **Small: under $2 million in sales and under 25 full-time equivalents.** A yearly review by an outside accountant, plus the fixed list of extra tests (below). No scheduled audit.
 - **Middle: $2 million to $10 million, or 25 to 100 full-time equivalents, or any co-op owing the bank more than $750,000.** A yearly review with the extra tests, and a full audit every other year.
 - **Large: over $10 million, or over 100 full-time equivalents.** A full audit every year.
 Every co-op also sends the bank its quarterly payroll tax filings, which it already has, so the bank sees hours and pay four times a year at almost no cost.
 ### What a review can and can't stand in for
 Wherever the model says "the co-op's auditor," it means whichever outside accountant does that year's review or audit. But a review isn't an audit, and a few rules need the real thing:
 - **Capital account payouts** can go ahead on reviewed accounts. If a later audit finds profit was overstated, the extra credits are taken back out of members' unpaid credits, the same way [losses are shared](capital-accounts.md#how-its-paid-out).
 - **Savings cover** starts only after the pool itself audits the co-op, at the pool's cost. After that, premiums can be priced on reviewed accounts, and the pool can audit any covered co-op at any time ([Protecting Members' Savings](savings-guarantee.md)).
 - **Spreading the cost of a big project**, under [the long-run rule](the-long-run.md#the-rules), still needs an independent audit. A review doesn't count. A small co-op that wants to use the rule has to pay for one.
 ### One package, done once a year
 - **The extra tests are the same everywhere.** The accountant runs a fixed list published by the bank and the federations before the first loan:
  - every contract with an insider (a founder, manager, member's family, or a company they own), checked against what strangers would pay, the main way [a hidden boss](pilot-safeguards.md#the-hidden-boss) gets paid;
  - members' share of all work hours, checked against payroll *and* against agency and contractor invoices;
  - every worker's pay against the going rate for their occupation code, and, in co-ops under 25 full-time equivalents, every worker's code, with a sample in larger ones;
  - a sample of timesheets against payroll;
  - job titles where the Medicaid rule applies;
  - the overtime recalculation.
 - **One problem widens the check.** If a sample turns up anyone underpaid, the test is widened to every worker. Everyone underpaid, member or not, gets the difference with interest, and the co-op gets a full audit.
 - **The list can't quietly grow.** Adding a test to the package requires publishing what it will cost co-ops, and the whole package's cost is reported every year.
 - **The data comes from payroll.** Pay bands, the pay ratio, hires and departures, and members' statements come out of the standard payroll service the model already uses for overtime ([Owners Are Still Workers](labor-law.md#overtime-and-the-profit-share)). The co-op doesn't build them by hand.
 - **One report.** Every yearly report on the list above goes on one standard form, filed once, with the lock-holder, the bank and the members. None of the model's own bodies asks a co-op for the same number twice. Government agencies like Medicaid or the IRS will still ask for their own.
 - **Small groups are protected from the public, not from the members.** Where a published figure would reveal one person's pay or discipline, the public sees only the total. Members still see everything [the pay rule](pay.md#everyone-sees-the-bands) gives them, including managers' actual pay. The accountant and the lock-holder see the figures person by person, and a gap in pay or discipline between groups is a flag for the lock-holder's review.
 - **The federation does the templates.** Standard bookkeeping, the report form, the occupation codes and the benchmark for the going rate are supplied centrally, so a small co-op isn't paying an accountant to invent them. Clean books also make the review cheaper.
 ### The accountant isn't the co-op's to pick freely
 - **From an approved list.** The co-op chooses its accountant from a list the bank approves, and changes firms at least every seven years.
 - **The lock-holder picks the samples**, so the co-op can't steer which timesheets or pay records get tested.
 - **The report goes straight to the lock-holder and the bank**, as well as to the members.
 - **Changing accountants is a warning sign.** If an accountant resigns or is replaced, the outgoing one writes to the bank saying why, and the co-op gets a full audit.
 ### Audits by lot, and when something looks wrong
 Scaling checks down leaves more room to cheat in small co-ops. Three things close part of that gap:
 - **One in twenty, by lot, after year-end.** Each year, after the books close, the pilot's outside reviewers draw one small co-op in twenty for a full audit, by a method published in advance, the same way they run [the support lottery](pilot-spec.md#the-support-lottery). At least half the draw is purely random. The rest is weighted toward co-ops with warning flags: heavy use of agency or contractor hours, a lot of insider contracts, or high turnover. The auditor is assigned, not chosen. What the audits find is published every year. Once a co-op has repaid the bank, the lock-holders run a narrower draw instead, of insider deals only ([Deals with insiders](the-lock.md#deals-with-insiders)).
 - **Warning signs trigger an audit.** A small co-op gets a full audit if:
  - its accounts are late, or its accountant resigns, is replaced or qualifies its report;
  - the extra tests find a problem;
  - it loses money two years running;
  - equipment spending stays below wear long enough to call in [the inspector](the-long-run.md#running-it-down);
  - payments to insiders grow faster than sales;
  - its payroll tax filings don't match its accounts;
  - members' share of work hours falls toward the minimum, or many hires are let go before they could join;
  - it ends a year below Medicaid's 80% pay ratio, where [that rule applies](high-turnover.md#when-medicaid-decides-how-much-goes-to-pay);
  - a labor or anti-discrimination agency makes a finding against it;
  - it falls behind on the bank's loan;
  - or before any sale of a large part of the business under [the lock](the-lock.md#closing-the-back-doors).
 - **Anyone who works there can complain.** Members, non-members and anyone who left in the last two years can complain anonymously, in their own language, to the lock-holder or straight to the bank. They're protected by the same rule that protects members who report problems ([When a member won't do the work](free-riding.md#when-a-member-wont-do-the-work)). An upheld complaint leads to a targeted check of what it's about, not a full audit, so it can't be used just to run up a co-op's costs. Either side can appeal the lock-holder's decision to a different approved lock-holder.
 The bank pays for audits by lot and for triggered audits, as part of its cost of lending, counted in its results like any lender's monitoring. When an audit finds fraud, the co-op pays it back.
 ### The lock-holder's review, every two years
 - **Like Italy's revision, with more workers in it.** At least once every two years, the lock-holder checks that the members are real and do most of the work, that the membership rules and the insider-deal rules are followed, and that working conditions and discipline follow the co-op's own rules. It talks privately with a random group of workers, members and non-members, including people who left in the last two years, with an interpreter where needed. Its report goes to the members' meeting and the bank, not just the board.
 - **Advice is separate and optional.** A co-op can buy advice from its lock-holder or federation, but the person who checks a co-op can't be its paid adviser in the same years.
 - **A fee set from the real cost.** Lock-holders charge on a scale set by size, but the scale is approved by the bank from what a real review costs, not set by the lock-holders themselves. A fee too low to pay for a real review would just buy a weak one. Where the federation holds the lock, the fee is part of its dues and isn't charged twice.
 - **Switching lock-holders is allowed, but not to escape a check.** A co-op can move to another approved lock-holder by a members' vote, but not while an audit, an unresolved finding or a vote the lock-holder can veto is open, and not in the 12 months before a review is due. The old lock-holder's file goes to the new one, and the review clock doesn't restart.
 ### What happens when a co-op fails a check
 In steps, and each step can be appealed. A finding comes with a deadline to fix it. If it isn't fixed, payouts to board members and managers stop, new savings cover is suspended, and the bank can treat it as a breach of the loan. A co-op that refuses to be reviewed or audited is in breach of the loan and of the lock, and the lock-holder can go to court. None of this gives the lock-holder power to run the co-op.
 ### Who pays at the start
 The bank's first loan can include the first three years of checking costs as working capital, so a new co-op doesn't have to find them in its first thin years. The pilot's business-help budget pays only for the shared pieces: the templates, the report form and the payroll service's setup.
 ### The cost is measured, and it can move the rules
 Before the first loan, the bank and the federations publish what they expect the whole package to cost a co-op of each size. The pilot then records what it actually costs each co-op, as a share of its sales and of its profit, and publishes it by size and industry, along with what the audits by lot find.
 The goal is under 1% of sales for small co-ops. The estimate above already misses it. If the typical small co-op spends more than 1% of sales for two years running, *and* the audits by lot are finding little, the lightest-value checks are cut back in an order published in advance: the group pay figures to every other year first, then the timesheet sample, then the review itself to every other year, with a compilation in between. If the audits are finding a lot, the checks stay, and the report says what honest checking costs in low-margin work.
 ## What this doesn't solve
 - **Less checking means more room to cheat.** A reviewed small co-op is checked less deeply than an audited one. Audits by lot, warning signs and complaints make cheating risky, not impossible. Italy's false co-ops are the warning.
 - **It costs real money in the work that can least afford it.** At 1% to 2.5% of sales, the package could take a large part of a cleaning or home care co-op's profit. The model has no way to make honest checking free, only cheaper.
 - **The cost numbers are rough.** Two of the four lines in the estimate are guesses. There's no good US data on what small firms spend on outside accounting as a share of sales. The pilot's own numbers will be the first.
 - **Checkers can be captured.** The co-op still pays its accountant, and lock-holders depend on the co-ops they check. The approved list, rotation, samples picked by the lock-holder, draws by outside reviewers and the limits on switching are meant to limit that. Italy has the same tension.
 - **Fees don't cover staff time.** Filling in a form and answering an accountant's questions takes hours in a firm with no office staff. Payroll data and templates cut that down. They don't remove it.
@@ -85,7 +85,7 @@ Whether co-ops can grow on those terms is exactly what [the test](the-test.md) i
 ## Who would have received less
-**The founders.** As members, they would have had a founding share, their accounts, and executive pay while they ran it. They would never have sold. In the model's 200-person example, a co-op founder ends up with about $2 million against $29 million to $38 million for a conventional owner ([The Founder Problem](founder-problem.md#the-numbers)). Conservice was valued at $2.66 billion in 2020, so at its scale the gap would be far wider. What the founders actually received hasn't been published.
+**The founders.** As members, they would have had a founding share, their accounts, and executive pay while they ran it. They would never have sold. In the model's 200-person example, a co-op founder ends up with about $980,000 against $29 million to $38 million for a conventional owner ([The Founder Problem](founder-problem.md#the-numbers)). Conservice was valued at $2.66 billion in 2020, so at its scale the gap would be far wider. What the founders actually received hasn't been published.
 The model's aim is for that value to stay with the people who keep producing it. But that raises the question the whole model rests on: **would these founders have started this company as a co-op?** Nobody knows. The founder problem isn't solved, and this example doesn't solve it.
@@ -0,0 +1,92 @@
 ---
 title: When Work Runs Short
 section: The Co-op
 order: 23
 summary: When a co-op's business falls off, the model has everyone share the cut before anyone loses their job, with profit shares first, then fewer hours across the board, and layoffs only last, by a vote and in an order written down in advance that treats members and non-members alike.
 ---
 # When Work Runs Short
 Every business has bad years. A conventional company usually answers with layoffs: the owners decide, and the people let go have no say. A co-op's members decide for themselves, and that cuts both ways. They can choose to share the pain. Or a majority can vote to keep its own pay and let the newest people go.
 The founding plan says the federation's shared fund helps a co-op through a bad year ([The Federation](federation.md)). It doesn't say what the co-op itself does first. This page sets that order.
 ## What co-ops actually do
 **They cut pay before jobs.** A study of Italian firms from 1982 to 1994, using records that match workers to their employers, found worker co-ops paid 14% less on average than conventional firms, and that their pay went up and down more while their employment went up and down less ([Pencavel, Pistaferri and Schivardi, 2006](https://econpapers.repec.org/RePEc:sae:ilrrev:v:60:y:2006:i:1:p:23-44)). A study of every co-op in Uruguay's social security records from 1996 to 2005 looked at the same question ([Burdín and Dean, 2009](https://ideas.repec.org/a/eee/jcecon/v37y2009i4p517-533.html)). Later researchers summarize it as finding the same pattern. I couldn't open the full paper to check.
 **Mondragon moved people instead of firing them.** When Fagor, its appliance maker, went bankrupt in 2013, other Mondragon co-ops had taken on 417 of its members within two months, and around 300 more could retire early ([CECOP, January 2014](https://www.cecop.coop/works/the-mondragon-corporation-has-already-relocated-417-worker-members-from-fagor-electrodomesticos)). Two sympathetic writers reported at the time that Mondragon's own insurer, Lagun Aro, would pay members 80% of their pay for two years while it looked for places for them. They also noted that Fagor had about 2,000 workers in the Basque Country and about 3,500 more in factories in France, China, Poland and Morocco who weren't members, and that what would happen to those workers was "unclear" ([Hanna and Alperovitz, 2013](https://geo.coop/story/mondragon-and-system-problem)). Protecting members can mean pushing the cut onto everyone else.
 **America already has a tool for sharing the cut.** Under work sharing, an employer cuts everyone's hours instead of laying some people off, and the state's unemployment insurance pays part of the lost wages. If your week goes from 40 hours to 32, you get 20% of the weekly benefit you'd have received if you'd been laid off. The Department of Labor lists 33 states with it in law, 30 of them running it ([fact sheet](https://oui.doleta.gov/unemploy/docs/factsheet/STC_FactSheet.pdf)). Under federal law it pays only for cuts in hours, not in the rate of pay, the cut has to be between 10% and 60% of the week, the state has to approve the employer's written plan first, and any health and retirement benefits the employer provides have to continue on the same terms as for everyone else ([26 U.S.C. § 3306(v)](https://www.law.cornell.edu/uscode/text/26/3306)).
 **What the evidence can't settle.** The studies are averages over many co-ops. They don't say whether pay cuts drove away the people with the best outside offers, or whether jobs kept in bad years were worth the lower pay in good ones. The 14% gap may partly be the price of that security.
 ## The order
 Every locked co-op's charter sets this order. A co-op can go further, but it can't skip a step.
 1. **Profit shares fall first.** That happens on its own: when profit falls, so do the shares, and so do team bonuses that depend on results ([Does Sharing the Profit Mean Less Effort?](free-riding.md#team-bonuses-the-members-design)).
 2. **Then everyone shares the cut.** Before any layoff, the co-op cuts across the board.
   - **Pay above the going rate goes first.** Every worker has to be paid at least the going rate for their job for the hours they work ([How a Locked Co-op Is Taxed](taxes.md#wages-first)). So a cut in the *rate* of pay can only come out of pay above the going rate. Everything beyond that is a cut in hours.
   - **Salaried staff share the cut the same way, set in advance.** Staff paid a fixed salary with no overtime, usually managers and professionals, have to get their full salary for any week in which they do any work ([29 CFR 541.602](https://www.law.cornell.edu/cfr/text/29/541.602)). A slowdown can still lower it, if the lower salary is set in advance for the length of the cut and isn't adjusted week to week ([Labor Department Fact Sheet #70](https://www.dol.gov/agencies/whd/fact-sheets/70-flsa-furloughs)). So:
     - **Less pay means less work.** Their salary falls by the same percentage as everyone else's hours, with a written shorter schedule to match. Or they take whole weeks off unpaid, which the law allows since no pay is owed for a week with no work. Their hours are recorded for as long as the cut lasts. Work beyond the shorter schedule needs a manager's approval in advance and is paid on top of the salary at the old rate, which the law also allows ([29 CFR 541.604](https://www.law.cornell.edu/cfr/text/29/541.604)).
     - **Their cut keeps pace.** If hours cuts deepen, theirs follows from the next pay period. Otherwise their salary changes only when the cut starts and ends.
     - **Below the floor, they're hourly.** If the cut takes someone's salary below the federal floor of $684 a week ([29 CFR 541.600](https://www.law.cornell.edu/cfr/text/29/541.600)), or below a higher state floor, they're treated like hourly workers for as long as the cut lasts, with overtime and every other rule that goes with it. California's floor, for example, is twice the state minimum wage for full-time work ([Cal. Labor Code § 515](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=LAB&sectionNum=515)), which comes to $70,304 a year in 2026, and hourly workers there also get daily overtime and meal and rest breaks.
   - **Hours cuts go through work sharing** where the state has it, so workers get part of their lost pay back from unemployment insurance, where the state covers them ([Owners Are Still Workers](labor-law.md#unemployment-insurance-covered-in-most-states-not-all)).
   - **The bottom never takes the bigger cut.** Nobody's weekly earnings can fall by a larger percentage than those of anyone paid more.
   - **Benefits stay.** Health cover and retirement contributions continue as before. That's the model's own rule, and it's also what work sharing requires.
   - **Only where the work fell off.** Where a co-op has separate lines of business that report their own results ([Investing for the Long Run](the-long-run.md#when-members-stop-investing-or-invest-badly)), the cut can be limited to the line that lost the work. Closing a whole line still needs the vote below.
 3. **Then the voluntary routes.** Before laying anyone off, the co-op offers unpaid leave with the right to come back, shorter hours for those who want them, and moves to other locked co-ops through the [federation](federation.md).
 4. **Only then layoffs,** in the order the bylaws set in advance (below).
 **The co-op can run at a loss to keep people.** Losses are shared between the reserve and members' [capital accounts](capital-accounts.md), like profits. But pay above the going rate in a loss year is charged back to the people who got it ([Investing for the Long Run](the-long-run.md#the-rules), rule 5), so a loss can't protect high pay at the reserve's expense.
 ## Who decides
 - **The board can act fast, once.** It can cut everyone's hours by 10% to 20% for up to 60 days without a vote, so the co-op isn't stuck waiting for a meeting while cash runs out. Salaried staff, the board's own members included, take the same percentage in the way set out above. The board can't set a different cut for itself. It can do that once in any 12 months. Anything after that needs the members. A board cut still counts in the test against [pushing people on probation out](high-turnover.md#no-pushing-people-out-before-theyd-join), whatever its size.
 - **Anything more goes to the members.** Cutting pay, cutting hours for longer or by more, and laying off anyone on the payroll, member or not, all need a vote of the members, by secret ballot, with at least 7 days' notice.
 - **A layoff always has an alternative on the ballot.** A plan that lays anyone off has to be voted on next to one that saves the same amount by cutting across everyone. The board costs both. The co-op's outside accountant checks the two costings, and the assumptions go out with the ballot.
 - **Choosing layoffs needs two majorities.** The layoff option passes only with a majority of all members and a majority of the lower-paid half, the same double vote [Who Sets the Pay](pay.md#two-majorities-not-one) uses. The lower-paid are the most likely to be let go, so they get a separate say. People on probation aren't members yet, so they don't vote, even though they're usually the first to go. Laying them off counts in the test against pushing people out before they'd join.
 - **If nothing passes, the shared cut happens.** If the board's 60 days run out with no option approved, the costed across-the-board cut takes effect, for salaried staff too. Doing nothing isn't an option when the money is running out.
 ## The layoff order
 Every co-op's bylaws must include a written layoff order before it has anyone to lay off. The standard bylaws use seniority within each kind of job, among people who can do the work that's left. A co-op can choose other criteria by vote. The charter sets the limits.
 - **Written ahead of time.** A change to the layoff order, or to how jobs are grouped for it, takes effect 12 months after it's adopted. So nobody can rewrite it, or regroup people's jobs, during a downturn to reach particular people.
 - **Members and non-members alike.** The same criteria apply to everyone on the payroll, and to the workers of any company the co-op controls while it's being merged in or converted ([The Lock](the-lock.md#when-a-co-op-owns-another-company)). Time counts toward seniority whether it was spent as a member, on probation or as someone who chose not to join, and so does time on medical, family or military leave. A co-op can't keep a layer of non-members to lay off first, outside the protections members get, the way Fagor's workers abroad were.
 - **Accommodation counts.** Whether someone "can do the work that's left" is judged with any reasonable change for a disability, as the law already requires.
 - **Agency and contract work ends first.** Where agency workers or contractors do the same work as people on the payroll, those contracts end before anyone on the payroll is laid off. Their hours already count in [the lock's](the-lock.md) test of who does the work, and a co-op can't use them to dodge it.
 - **The dismissal protections apply.** A layoff that doesn't follow the order can go to the same hearing and outside arbitrator as a dismissal ([Does Sharing the Profit Mean Less Effort?](free-riding.md#when-a-member-wont-do-the-work)). The rules on retaliation, disability and leave apply too. If someone laid off had organized, filed a complaint or led opposition in a vote within the last 12 months, the co-op has to show it followed the order.
 - **Notice.** At least 30 days' notice, or pay instead, or 14 days in a co-op of fewer than 15 workers. The law often requires more. Under federal law, employers with 100 or more full-time workers give 60 days' notice of large layoffs and closings, and cutting someone's hours by more than half for six months counts as a layoff ([29 U.S.C. § 2101](https://www.law.cornell.edu/uscode/text/29/2101), [§ 2102](https://www.law.cornell.edu/uscode/text/29/2102)). A long, deep work-sharing cut can trigger it. Some states require 90 days, including New York for employers with 50 or more full-time workers there ([Cooley, 2023](https://www.cooley.com/news/insight/2023/2023-08-03-new-york-state-amends-its-warn-act-regulations)) and New Jersey, which also requires severance ([Jones Day, 2023](https://www.jonesday.com/en/insights/2023/04/new-jersey-warn-act-amendments)).
 - **Severance** follows the bylaws, and never less than state law requires. When a co-op closes, notice pay and severance from different laws don't add up; the worker gets the largest of each ([Protecting Members' Savings](savings-guarantee.md#notice-pay-and-severance)). The standard bylaws pay one week per year worked, the same as New Jersey requires of larger employers in mass layoffs and closings. More than two weeks per year, or more than 26 weeks in all, counts as pay under [the pay rules](the-long-run.md#the-rules).
 - **Lopsided layoffs get checked.** Federal agencies treat a selection rate for any race, sex or ethnic group below four-fifths of the rate for the group doing best as a sign of possible discrimination ([29 C.F.R. § 1607.4(D)](https://www.law.cornell.edu/cfr/text/29/1607.4)). The model uses the same line for layoffs, and adds age. If the share of any gender, race or age group keeping their jobs falls below it, the co-op publishes a written explanation before the layoffs take effect, and anyone laid off can take it to the outside arbitrator. The check looks at the criteria, not at who they picked. A co-op can drop a criterion that isn't needed for the work, for everyone, but it can't change who's laid off because of their race, sex or age, which employment law forbids too ([*Ricci v. DeStefano*, 2009](https://www.law.cornell.edu/supremecourt/text/07-1428)).
 ## Coming back
 - **A right to be recalled for 12 months,** in reverse order of the layoff, to the same job at the same hours or more. Until everyone laid off from a job has been offered it back, the co-op can't hire anyone new into that job, under any title, or hand the work to a contractor. Someone who doesn't accept within 14 days drops to the back of the list.
 - **Membership comes back with them.** A member who returns within 12 months doesn't start probation again, and goes back to the same step on the [profit share ramp](worker-ownership.md).
 - **So do their savings.** A laid-off member's capital account is fixed and paid on the normal schedule, like anyone who leaves ([Member Capital Accounts](capital-accounts.md)). If they come back, whatever hasn't been paid out yet becomes their account again and counts toward the buy-in.
 ## Unemployment insurance
 People laid off from a co-op claim unemployment insurance like anyone else, where their state covers co-op members ([Owners Are Still Workers](labor-law.md#unemployment-insurance-covered-in-most-states-not-all)). Members can't lay themselves off in turns to collect it, except through the state's work-sharing program. That's the abuse some states cite for leaving co-op owners out, and the model gives it up to keep members covered. The outside accountant checks claims against the schedule. And like any employer, a co-op whose workers claim benefits pays a higher unemployment tax rate afterward.
 ## When cutting isn't enough
 Sharing the cut buys time. It doesn't save a business nobody wants to buy from. Help from the federation's fund comes with a recovery plan and a limit agreed before any crisis ([Investing for the Long Run](the-long-run.md#when-members-stop-investing-or-invest-badly)). Help for the workers, like finding them places in other co-ops, has no such limit. **No working on credit.** Once a co-op misses a payroll by more than five business days, it can't schedule more ordinary work until everyone is paid up, unless it files for bankruptcy protection or the federation's fund lends it the payroll. Safety, care and wind-down work goes on, paid by the pool. Federal law, and some states, can make officers and even members pay wages the co-op doesn't ([Owners Are Still Workers](labor-law.md#when-wages-go-unpaid-members-can-owe-them)), so this protects them as well as the people owed.
 If the co-op fails, [the insurance pool](savings-guarantee.md) covers workers' last paychecks and part of their savings, and [When a Co-op Goes Bankrupt](bankruptcy.md) covers what happens to the business.
 ## Measuring it
 The pilot publishes, for each co-op's bad years compared with matched conventional firms: changes in hours, pay and headcount; layoffs by member status, gender, race and age; how many people were recalled; and how many laid-off members found work in other co-ops. If co-ops turn out to protect members by letting non-members go, that shows up in the figures.
 ## What this doesn't solve
 - **Cuts drive some people away.** The people with the best outside offers leave first. Cuts to pay above the going rate fall on the better-paid, and in a loss year [rule 5](the-long-run.md#the-rules) charges them again, out of their accounts. A co-op can keep every job and still lose the skills it needs most.
 - **Sharing the cut can keep a dying business going.** Everyone taking less for years can put off a closing that should have happened, while the reserve and members' accounts run down.
 - **Work sharing isn't everywhere.** In the states without it, sharing the cut means lost pay with no insurance to make up part of it, and layoffs look better by comparison.
 - **The shock still lands on someone.** Ending agency and contract work first protects the co-op's own workers by pushing the cut onto people outside it. That's what every employer does, and it's close to what happened to Fagor's workers abroad.
 - **Hiring gets more cautious.** Recall rights, notice and the vote all make adding people in good years a bigger commitment. Co-ops will likely hire more slowly, which the evidence already suggests they do.
 - **Members can still choose layoffs.** Two majorities make it harder, not impossible. The newest members are the easiest to vote out of a job.
@@ -52,25 +52,95 @@ The things that decide whether the experiment is fair are written into the law t
 - the loan limits and the rules against [political favoritism](pilot-safeguards.md#political-favoritism);
 - **how loans are managed once made.** A loan can be called in early only if payments stop, never for a technicality. The rules for handling a co-op in trouble are filed in advance too.
-The board can propose changes to the lending standards, with published reasons. The reviewers then report every result both ways: under the original standards and under the new ones. By law, no official can direct a decision on a particular loan, and any attempt is logged and published.
+The board can propose changes to the lending standards, with published reasons. The reviewers then report every result both ways: under the original standards and under the new ones. By law, nobody outside the bank can direct a decision on a particular loan, except the President through the board he appoints. Every instruction or contact the bank receives about a particular loan is logged and published. The board itself can overrule its staff on a loan, because the Constitution probably requires that, but only in writing and in public ([Who has the last word](#who-has-the-last-word)).
 ### Rigging the result
 A hostile board has two ways to make co-ops look like failures without breaking any rule openly. The reviewers check for both.
- **Turning away good applicants.** Every year, the reviewers audit a sample of rejected applications against the filed standards and publish the rejection rate for applications that met them. If too few co-ops get funded because applicants didn't show up, that's a real result, as [the pilot](pilot-spec.md#why-about-400-co-ops) says. If too few get funded because the bank turned away applicants who met its own standards, the final verdict says so: **"not tested,"** not "failed." The audit also covers co-ops in lower-paid work separately, so the bank can't quietly drift toward the safest co-ops ([Who the Bank Lends To](who-gets-loans.md)).
+- **Turning away good applicants.** Every year, the reviewers re-score the bank's rejected applications against the filed standards and publish the rejection rate for applications that met them. Where the line falls is set in advance ([below](#when-rejections-mean-not-tested)). If too few co-ops get funded because applicants didn't show up, that's a real result, as [the pilot](pilot-spec.md#why-about-400-co-ops) says. If too few get funded because the bank turned away applicants who met its own standards, the final verdict says so: **"not tested,"** not "failed." The audit also covers co-ops in lower-paid work separately, so the bank can't quietly drift toward the safest co-ops ([Who the Bank Lends To](who-gets-loans.md)).
 - **Making bad loans on purpose.** If the [emergency stop](pilot-spec.md#the-decision-rule) fires, the reviewers check whether the losses come mainly from loans that broke the filed standards. If they do, it's treated like fraud, not like a verdict on co-ops. Lending restarts under the original standards, and those loans are reported separately.
 **This isn't a way to keep the bank alive.** "Not tested" means exactly what "failed" means for the bank: no new loans, the wind-down, and no second round of money. It only changes what the record says about co-ops. Nothing on this page extends the timeline either. The latest the final review can happen is year 15, which is the pilot's existing rule for when good applications are scarce.
 ### When rejections mean "not tested"
 "Turned away applicants who met its own standards" needs a line drawn in advance, or a board could argue about it forever. The line is filed with the rest of the plan before the first loan.
 **What the reviewers check.** Every year they re-score every complete application the bank rejected, and every one it approved. They also re-score a random sample of applications that were withdrawn, left incomplete or passed the 120-day limit, since pushing people to give up is another way of saying no. Checking every file, not a sample, removes the argument about sampling luck. It costs something, perhaps a few hundred thousand dollars a year if the bank decides several hundred applications, and that cost counts against the bank's money test like any other.
 They score each file with the filed scoring model, from what the applicant submitted plus the checks the standards call for, like credit reports. Any change a loan officer made to the applicant's numbers counts only if it's a reason on the filed list. Paperwork made after the decision, like closing documents, is removed first, so the reviewers can't tell which files were approved.
 Around the bank's approval line there's a band where the bank decides by lottery ([the lottery at the margin](pilot-spec.md#who-co-ops-are-compared-against)), and honest judgment calls fall there. A rejection counts as **wrongful** if both of these are true:
 - the reviewers' score is above the top of that band;
 - the file doesn't show a reason from the filed list of disqualifiers that the reviewers find is actually backed by the file. Examples are a false statement, a sham co-op, or a missing document. A missing document counts only if it's on a standard checklist every applicant gets, with a deadline filed in advance. A reason that isn't on the list doesn't count, however sensible it sounds. The bank can add reasons to the list, but only publicly and only for later decisions, the same way it changes any [lending standard](#what-a-new-board-cant-change).
 Every rejection notice names the specific reason, which federal fair-lending law already requires for most small-business applicants and makes available on request for larger ones ([12 CFR 1002.9](https://www.law.cornell.edu/cfr/text/12/1002.9)), and also gives the applicant their score.
 **The line.** The bank fails a year's audit on either of two tests:
 1. **Too many turned away.** More than 1 in 10 of the applications scoring above the band were rejected wrongfully.
 2. **The best kept out.** Wrongly rejected applicants scored higher than the approved applicants who also scored above the band, by more than chance explains. That comparison leaves out the lottery winners from inside the band, who would always score lower and make an honest bank look guilty.
 Co-ops in lower-paid work are held to the same line separately ([Who the Bank Lends To](who-gets-loans.md#money-set-aside)), and the yearly report also breaks the rejection figures down by the founders' race, ethnicity and sex. The report also publishes how often each disqualifier was used, so a sudden jump in "sham co-op" or "missing document" stands out.
 **The same line for approvals.** Rejections aren't the only way to rig a test. Approvals scored below the band, outside the lottery, with no filed reason, are counted too, and more than 1 in 10 fails the audit the same way. Those loans are reported separately, like loans that [broke the standards](#rigging-the-result). This keeps the audit from pushing loan officers toward saying yes to everything.
 **Why 1 in 10.** There's no good benchmark for how often a lender wrongly turns away a clear pass, so 1 in 10 is a judgment call, set loose on purpose. Small-business loans are far less standardized than mortgages, and the lottery band already absorbs the close calls. Even so, when a bank is breaking its own rules on more than 1 clear case in 10, it isn't running the test the law describes. For approvals there's loose context: when mortgage lenders re-check loans they've already approved, they find serious errors in about 1.5% of them ([ACES, 2025](https://www.send2press.com/wire/aces-q4-and-cy-2025-mortgage-qc-industry-trends-report-shows-critical-defect-rate-falls-to-annual-low/)). That's a much more routine kind of loan, which is part of why the line here is set far looser.
 **Fixing it, not just labeling it.** Every applicant found wrongly rejected, in any year, is offered a new decision within 60 days. It's made on the reviewers' score, and at staff level only a disqualifier the reviewers confirm can block it. The board can still overrule it in writing, but that counts against the bank in the audit ([Who has the last word](#who-has-the-last-word)). That undoes most of the damage while the pilot is running. The fix isn't a lending target. It only brings in applicants who met standards the bank filed itself. Loans made this way count in full in both deciding measures. They're also reported separately, since a group that waited a year may not be the group it was.
 **What "not tested" then takes.** At the final review, the verdict is "not tested" instead of "failed" only if all three of these hold:
 1. the pilot failed its test;
 2. the bank failed the audit in at least one year;
 3. the wrongful rejections that were never fixed could have changed the result. Those are the ones where the group turned down the new offer, had broken up, never got one, or had the new decision overruled by the board. The reviewers add them back as if each had done as well as funded co-ops with similar scores. If that would turn the survival result into a pass, the verdict is "not tested." If not, it stays "failed."
 Otherwise a fail stays a fail. A pass stands too, since rigging that didn't work doesn't change what the co-ops did. And "not tested" gives the bank no claim to the fast-track vote or to new money.
 **It can't easily be used to dodge a fail.** A friendly board can't see a fail coming and use this rule to hide it. The verdict comes years after lending ends, every wrongful rejection is offered a new decision, and step 3 asks whether the missing co-ops would have changed the numbers, not just whether some were missing. Rejecting good applicants on purpose to set up that excuse would also have to happen in writing, because an unrecorded reason counts against the bank. Any instruction to reject a particular application is covered by the rules against [political favoritism](pilot-safeguards.md#political-favoritism).
 **What it can't catch.**
 - **Scoring can be wrong.** If the filed scoring model itself counts against some founders more than it predicts repayment, re-scoring with the same model won't show it. That's checked separately ([Who the Bank Lends To](who-gets-loans.md#treated-the-same)).
 - **People who never apply.** An audit of files can't see people who never applied because the bank was slow, hard to reach or cut its outreach. The published application and approval rates ([After a Pass](scale.md)) are the only check there.
 - **What isn't written down.** Scoring from the file can't see what a loan officer learned in a meeting and didn't write down. That cuts both ways: a bank that wants its reasons counted has to write them down.
 ### No quorum, no freeze
 Unlike the Export-Import Bank, this bank can't be frozen by leaving board seats empty. It uses ordinary delegation, which keeps the President in charge:
 - **Standing authority for smaller loans.** The board appoints senior credit officers and gives them authority to approve loans up to $1 million under the filed standards. That authority doesn't lapse when board seats go empty. Any board can take it back, publicly, but it can't disappear by default.
- **No quorum means an acting chair, not no one.** If the board can't meet, the Treasury Secretary, or an acting official named under the normal federal vacancy law, can act for it on loans too big for staff.
+- **No quorum means an acting chair, not no one.** If the board can't meet, the Treasury Secretary acts for it, but only on loans too big for staff and on reviewing staff decisions. The bank's own law has to say so. The general federal law on acting officials doesn't cover seats on the board of a government corporation ([5 U.S.C. § 3349c](https://www.law.cornell.edu/uscode/text/5/3349c)). Every rule on the board's own overrules ([below](#who-has-the-last-word)) applies to the Secretary too, and every decision made without a quorum is flagged in the results. The Secretary can't change the lending standards, and can take away a credit officer's authority only for cause, in writing.
- **Applications can't be buried.** A complete application gets a decision within 120 days, yes or no, with reasons. The clock pauses while the bank is waiting on information it asked for. The rule forces an answer, not a yes.
+- **Emptying the board concentrates power. It doesn't hide it.** A president who fires the board and names no one puts its review power in one cabinet officer's hands. That's better than a freeze, and every use of it is public, but it's a single point of control. The results report how long each vacancy lasted and whether the quorum was lost through firings or through terms running out.
- **A second check during vacancies.** Any loan over $500,000 approved while the board lacks a quorum is cleared by the independent auditor before any money goes out.
+- **Applications can't be buried.** A complete application gets a decision within 120 days, yes or no, with reasons. The clock pauses once, while the applicant answers the bank's one round of follow-up questions ([below](#who-can-go-to-court)). The rule forces an answer, not a yes.
 - **A second check during vacancies.** Any loan over $500,000 approved while the board lacks a quorum is checked by the independent auditor before any money goes out. If the auditor objects, the loan waits for the Treasury Secretary's written decision, which is published with the auditor's objection. If the Secretary hasn't decided within 30 days, the loan doesn't go out. It counts as a rejection by the bank, including in the rejection audit if the applicant scored above the lottery band.
 ### Who has the last word
 The Constitution limits how far a lender like this can be insulated from the people the President appoints. Anyone who makes final decisions for the government has to answer, at some level, to officials the President appointed and the Senate confirmed. In 2021 the Supreme Court struck down a rule that stopped the head of the Patent Office from reviewing decisions by the judges below him, because "the unreviewable authority" of those judges was "incompatible with their appointment" as lower-level officers ([United States v. Arthrex, 2021](https://www.law.cornell.edu/supremecourt/text/19-1434)). The bank's credit officers hold permanent jobs with the power to commit up to $1 million of federal money on their own signature. Courts might well treat them the same way. That case was about officials deciding disputes, not lenders, and the credit officers might instead count as ordinary employees. The design below works either way.
 So the design gives the last word to the board, and makes using it visible:
 - **The board appoints the credit officers.** The board of a freestanding federal body likely counts as the "head of a department" that can appoint lower-level officers ([Free Enterprise Fund v. PCAOB, 2010](https://www.law.cornell.edu/supremecourt/text/08-861)). That case was about the SEC. Whether the board of a government corporation counts the same way hasn't been decided.
 - **The board can review any staff decision,** approvals and rejections alike. A staff decision isn't signed for 15 days unless the board waives review of it in writing. Those days count inside the 120-day deadline, and inside the 60 days for new decisions after the audit. That way the board never has to cancel a signed loan.
 - **Every overrule has names on it.** It's a recorded vote showing how each member voted, with reasons given file by file, never one memo for a batch. It's published along with any outside contact about that file. Loans the board decided over its staff's heads are reported as their own group. A board rejection of an applicant who scored above the lottery band counts in the [rejection audit](#when-rejections-mean-not-tested) like any other. A board approval of an applicant who scored below it, outside the lottery, counts in the approval check and falls under the rules against [political favoritism](pilot-safeguards.md#political-favoritism).
 - **What that protects.** A board can block good loans or push weak ones, one at a time, but each is public. Enough blocked loans can make a fail "not tested," and pushed loans that go bad show up as broken standards if the [emergency stop](pilot-spec.md#the-decision-rule) fires. That protects the record, not the co-ops turned away. "Not tested" ends the bank just as a fail does.
 - **Credit officers can be fired only for cause,** such as misconduct or breaking the filed standards. Only the board can fire them, with written findings that are published. For 140 years the Supreme Court has let Congress limit the firing of officials appointed by a department head ([United States v. Perkins, 1886](https://www.law.cornell.edu/supremecourt/text/116/483)). In July 2026 a federal trial court in Virginia held that this survives *Slaughter* (*Comans v. Executive Office of the President*, [reported by Lawfare](https://www.lawfaremedia.org/article/inferior-officers-protections-post-slaughter)). That's one court, and it binds no other.
  - The administration argues the rule covers only officers with "limited duties and no policymaking or administrative authority," a line from [Seila Law v. CFPB, 2020](https://www.law.cornell.edu/supremecourt/text/19-7). Officers who can commit $1 million on their own signature may not fit that, so losing is at least as likely as winning.
  - If it's lost, credit officers can be fired at will. Either way, the board can take back any officer's lending authority at any time, in public.
 - **The President supervises through the board.** The law can't stop a president directing the board he can fire, or replacing it with people who need no instructions. What it can do is put a duty on the bank's side. Board members and staff log and publish every instruction or contact they get from anyone in the executive branch, the White House included, about a particular loan, applicant or group of applicants. Contacts from members of Congress are handled the same way.
  - What this can't catch: orders given by phone and never mentioned, or a board replaced with people who agree. A law requiring the President's own messages to be published could also run into executive privilege. This rule catches careless pressure, not careful pressure.
 **The same goes for the outside referees.** The reviewers and the auditor are private contractors. Private bodies can advise the government, but they can't have the final say over what it does. In 2025 the Supreme Court upheld a private body's role in the phone-subsidy program because its recommendations "cannot go into effect without an agency's say-so" ([FCC v. Consumers' Research, 2025](https://www.law.cornell.edu/supremecourt/text/24-354)). So:
 - **The reviewers' score binds the staff, not the board.** Suppose the rejection audit finds an applicant was wrongly turned away. The new decision is made by a credit officer on the reviewers' score, following a rule the law sets for them. It then goes through the same 15-day board review as any other decision.
  - The board can overrule it, in writing. The overrule counts as a wrongful rejection in the audit unless it names a disqualifier on the filed list, and the reviewers confirm the file backs it.
  - That count is a report, not a veto. It measures whether the filed standards were applied, whoever applied them.
  - A court might hold that even this gives the reviewers too much say. Then the score becomes advice to the staff, and a staff refusal simply counts in the audit the same way.
 - **The results are reports. The board adopts them.** The reviewers' "failed" or "not tested" is what the record says, and on its own it orders no one. New lending ends on the date the law sets. Within 60 days of the final report, the board formally adopts the result. It can reject the reviewers' calculation only by publishing the specific error in how the filed rule was applied, which the auditor then checks in public. Once the result is adopted, a fail starts the loan sale, and a pass gives Congress its fast-track vote. Carrying out the sale after a fail is a duty with a deadline, so a court can order it. A friendly board could still refuse a fail on a made-up error, but only in writing, with the auditor's answer beside it.
 - **Restarting after an emergency stop is up to the board.** The board decides in writing within 30 days of the reviewers' report. If the report says restart and the board refuses, it has to say so in public. A hostile board can end lending this way, and that can't be closed without taking the last word away from the board.
 ### Where the money sits
@@ -91,11 +161,37 @@ Future stages of a loan that haven't been paid out are *not* promised. The contr
 If a later law tried to change the terms of money already lent, there's precedent for the government owing damages. In *United States v. Winstar* (1996), Congress changed banking rules in a way that broke promises regulators had made to savings-and-loan companies that took over failing ones. The Court's lead opinion held that Congress was free to change the law, but the government still owed damages for breaking its contracts ([Winstar, 1996](https://www.law.cornell.edu/supremecourt/text/518/839)). It's only partial protection. There was no single majority opinion, the damages cases dragged on for years, and it only helps where the contract clearly puts the risk of a change in the law on the government. So the loan contracts say that explicitly.
 ### Who can go to court
 Most of the rules above work without a judge. The verdict's wording follows the reviewers' findings, and the reviewers are paid in advance. The reports don't need a court either: if the bank doesn't publish its figures on time, the reviewers, who get the same data, publish them. But a few rules only work if someone can enforce them: deciding applications within 120 days, making the new decisions the [rejection audit](#when-rejections-mean-not-tested) requires, and paying out loans already signed. If a hostile board simply ignores them, someone has to be able to take it to court, and win something more useful than money years later.
 Recent cases show the risk. In 2025 the Supreme Court said claims to restore cancelled research grants likely belonged in the Court of Federal Claims, which can award money but can't order a program to keep running ([NIH v. American Public Health Association, 2025](https://www.law.cornell.edu/supremecourt/text/25A103)). In the green-bank case, a panel of the D.C. Circuit said the same in 2025. In August 2026 the full court voted 6 to 4 to keep the order blocking the grants' cancellation, and the government is taking the case to the Supreme Court ([D.C. Circuit judgment, 2026](https://media.cadc.uscourts.gov/judgments/docs/2026/08/25-5122-2186441.pdf)). Which court can hear these cases, and what it can order, is itself being fought over. So the bank's law settles it for this bank instead of leaving it to the general rules.
 **What a court can order.**
 - **Only duties with a deadline.** The law says the bank *must* decide a complete application within 120 days, and must make each new decision the audit calls for within 60 days. Courts can order an agency to take a specific action the law requires of it ([Norton v. Southern Utah Wilderness Alliance, 2004](https://www.law.cornell.edu/supremecourt/text/03-101)). A court checks whether the duty was met on time, never whether a rejection was right. The reasons are checked by the [rejection audit](#when-rejections-mean-not-tested), not by judges. The one exception is a new decision after the audit. The law already says the staff's answer there is yes unless the reviewers confirm a disqualifier, so a court can probably order the staff to follow that rule. The board keeps its 15-day review of the result, and a written overrule by the board stands. It's counted in the audit instead.
 - **No endless paperwork.** Whether an application is complete is judged against the bank's published checklist. The bank gets one round of follow-up questions, and the application is complete once the applicant answers them. Otherwise the 120-day clock could be stopped forever and there'd be nothing for a court to order.
 - **Signed loans, from money that's still there.** A borrower can make the bank pay out a stage of a signed loan once that stage's written conditions are met. Those conditions have to be objective and written into the contract, not left to the bank's judgment. The court can order payment only from the bank's own capital. If a later law, including a rider in a spending bill, bars the payment, no court can order it ([OPM v. Richmond, 1990](https://www.law.cornell.edu/supremecourt/text/496/414)). That's the same line drawn [above](#loans-already-made-keep-their-terms).
 - **The right court.** The law lets the government be sued for these duties in federal district court, which can order the bank to act, not only award money, even where the general rules would send the case to the Court of Federal Claims. Congress decides where the government can be sued and for what. It hasn't been tested, and a later Congress could repeal it, but only by passing a law.
 **No friendly settlements.** No court order or settlement can require the bank to approve a loan, apart from following the audit's own rule, or change a filed standard. Every settlement is published and reported to Congress. That stops a friendly board from inviting a lawsuit and agreeing to loosen its own standards, and it stops a hostile one from settling its duties away.
 **Who can sue.** Applicants and borrowers who were harmed. Since 2025, a court's order usually helps only the people who sued ([Trump v. CASA, 2025](https://www.supremecourt.gov/opinions/24pdf/24a884_8n59.pdf)). Class actions may still be possible against a bank-wide practice, like a freeze on all decisions, but probably not over many different files. The federation can sue for a member co-op that was harmed, as membership groups already can, but that doesn't help groups that aren't members. Courts must hear deadline cases quickly, since a founding group waiting on a decision can break up long before a normal lawsuit ends.
 **Legal costs.** A founding group can't afford to sue a federal bank. Small businesses and co-ops that win against the government can sometimes recover their lawyers' fees, but at capped rates, and not if the government's position was "substantially justified" ([28 U.S.C. § 2412](https://www.law.cornell.edu/uscode/text/28/2412)). So when the bank has missed a deadline, which is a plain fact, it pays the winner's reasonable fees in full. All of the bank's legal costs count against its money test, win or lose, like any other running cost.
 **If the government won't defend the law.** Someone could challenge the bank's law itself, and a hostile Justice Department could decline to defend it, or settle. The Attorney General already has to tell Congress within 30 days of deciding not to defend a law ([28 U.S.C. § 530D](https://www.law.cornell.edu/uscode/text/28/530D)). The bank's law adds settlements to that, and requires notice to the federation, the lock-holders and every borrower. After that, the options are weak:
 - The House defended the Defense of Marriage Act in 2013, but the Supreme Court never decided whether it had the right to. The Court has since held that one chamber of a state legislature can't appeal on its own to defend a state law ([Virginia House of Delegates v. Bethune-Hill, 2019](https://www.law.cornell.edu/supremecourt/text/18-281)), and one house of Congress would likely be treated the same way. And a hostile House wouldn't try.
 - Private people can't appeal to defend a law just because they care about it ([Hollingsworth v. Perry, 2013](https://www.law.cornell.edu/supremecourt/text/12-144)). Borrowers with signed loans probably have enough at stake to defend their own loans. The federation and applicants may not.
 **Why the bank doesn't get its own lawyers.** Some federal lenders can go to court in their own name. Here that would add little. After *Slaughter* the President controls the board, and a board that doesn't want to defend the bank won't. Going to court for the government is also an executive power, so lawyers allowed to fight the President in court would be challenged themselves. The power to enforce these rules sits with the people they protect, not with the bank.
 ### The lock doesn't depend on Washington
 [The lock](the-lock.md) lives in each co-op's own charter and is enforced by an independent lock-holder, not by the bank. So repealing the bank's law doesn't unlock a co-op in ordinary times. There's one big exception. The lock only holds in bankruptcy if federal bankruptcy law is amended (see [When a Locked Co-op Goes Bankrupt](bankruptcy.md)), and a Congress that repeals the bank could repeal that amendment too.
-States are the second layer. Co-op law in America is state law. Massachusetts, for example, has had a law for worker co-ops since 1982, but a co-op can leave that status by a two-thirds vote of its members ([Mass. Gen. Laws ch. 157A, § 4](https://malegislature.gov/Laws/GeneralLaws/PartI/TitleXXII/Chapter157A/Section4)). That's exactly the exit the lock closes. So the model includes a short model state law that recognizes locked co-ops and their lock shares. States adopt it or don't. Nothing in the federal law requires it. It only protects co-ops that chose the lock, in exchange for a loan they chose to take.
+States are the second layer. Co-op law in America is state law. Massachusetts, for example, has had a law for worker co-ops since 1982, but a co-op can leave that status by a two-thirds vote of its members ([Mass. Gen. Laws ch. 157A, § 4](https://malegislature.gov/Laws/GeneralLaws/PartI/TitleXXII/Chapter157A/Section4)). That's exactly the exit the lock closes. So the model includes a short [model state law](lock-state-law.md) that recognizes locked co-ops and their lock shares, turns off the members' exit for co-ops that chose the lock, and makes lenders' sales outside court follow the lock's rules. States adopt it or don't. Nothing in the federal law requires it. It only protects co-ops that chose the lock, in exchange for a loan they chose to take.
 ### Federal test, state copies
@@ -128,4 +224,4 @@ The electric co-ops show the longer-term defense. If the test passes and the sec
 - **A board that's merely timid.** The rules stop a freeze and expose rejecting good applicants. They can't make a hostile board eager, stop it hiring timid staff, or stop it pulling back the credit officers' authority in public.
 - **A small constituency.** At pilot scale, around 400 co-ops employ perhaps several thousand people. That's nowhere near enough to defend anything politically. The electric co-ops became defenders after decades and hundreds of co-ops. Until this sector is large, durability comes from the co-ops' own charters and money, not from votes. How long it could take to get large is worked through in [After a Pass: How Big, How Fast](scale.md).
 - **Pressure outside the law.** Other banks refusing to work with co-ops, co-ops shut out of government contracts, targeted inspections. The federation and co-op-friendly lenders like credit unions are the only real answers, and they take time to build.
- **The courts.** How far *Slaughter* reaches, and whether damages follow when a later law breaks a loan contract, will be settled by judges, not by this design.
+- **The courts.** How far *Slaughter* reaches, whether damages follow when a later law breaks a loan contract, and whether the Supreme Court sends cases like these to the Court of Federal Claims despite the bank's own law will be settled by judges, not by this design. Lawsuits are also slow, both sides can use them strategically, and even with fees paid, the people with the most reason to sue are founding groups with the least time to wait.
@@ -32,7 +32,7 @@ Minnesota took a third route, and it gives workers a voice. In 2023 it created a
 No official, agency or Congress picks industries by name. Work qualifies only if it passes two tests, measured from published government data:
 1. **The public already pays for most of it.** Over the last three years, at least half of the industry's revenue came from public benefit programs like Medicaid, Medicare, veterans' care and public child care assistance. Ordinary government purchasing, like cleaning or security contracts, doesn't count. How that's measured, and which kinds of work pass today, is below.
-2. **The job pays less than most.** The typical hourly wage for the job, within that industry, is below the typical wage for all American jobs. In May 2025 that was about $24.50 an hour ($50,980 a year). Home health and personal care aides earned a typical $17.21 an hour, and nursing assistants $20.13 ([BLS, home health and personal care aides](https://www.bls.gov/ooh/healthcare/home-health-aides-and-personal-care-aides.htm); [BLS, nursing assistants](https://www.bls.gov/ooh/healthcare/nursing-assistants.htm)). The test is by job, not by industry, so the nurses and managers in a nursing home don't pull the aides' number up, and splitting staff into separate companies doesn't change anything.
+2. **The job pays less than most.** The typical hourly wage for the job, within that industry, is below the typical wage for all American jobs. In May 2025 that was about $24.50 an hour ($50,980 a year). Home health and personal care aides earned a typical $17.21 an hour, and nursing assistants $20.32 ([BLS, home health and personal care aides](https://www.bls.gov/oes/2025/may/oes311120.htm); [BLS, nursing assistants](https://www.bls.gov/oes/2025/may/oes311131.htm)). The test is by job, not by industry, so the nurses and managers in a nursing home don't pull the aides' number up, and splitting staff into separate companies doesn't change anything.
 The first test is the important one, and it's really a test of who pays, not of what's "essential." That's on purpose: it's the one test lobbying can't argue its way around. Where the public is already the main buyer, the public is already setting the price, and a low public rate is a choice about what these workers are paid. It also keeps the program narrow. Retail, restaurants and other low-wage work paid for by private customers don't qualify. They're covered by the parts of the floor that apply to everyone, like the minimum wage and tax credits. Averaging over three years means an industry can't tip itself over the line in a single year.
@@ -76,25 +76,28 @@ Three things stand out:
 ### Paid to workers, by the hour
- **Straight to the worker,** as a fixed amount per hour worked, as D.C. did at first. It's taxed like wages but doesn't count as income for the worker's own benefits, like Medicaid or food assistance, so it can't knock anyone off them.
+- **Straight to the worker,** as a fixed amount per hour worked, as D.C. did at first.
- **Real hours only.** Federal payroll forms report pay, not hours. So hours come from records that already exist for public programs, like the electronic visit records federal law has required for Medicaid home care since 2020 ([Medicaid.gov](https://www.medicaid.gov/medicaid/home-community-based-services/guidance/electronic-visit-verification-evv)), and from employers' own payroll hours where those aren't available. Hours per worker are capped, samples are audited, and when padded hours are found, the employer repays.
+- **Real hours only.** Federal payroll forms report pay, not hours. So hours come from records that already exist for public programs, like the electronic visit records federal law has required for Medicaid home care since 2020 ([Medicaid.gov](https://www.medicaid.gov/medicaid/home-community-based-services/guidance/electronic-visit-verification-evv)), and from employers' own payroll hours where those aren't available. Hours are capped at 2,600 a year per worker, about 50 a week, across all their jobs. Live-in workers are paid for the hours their state program or wage law already counts as work. Samples are audited, and when padded hours are found, the employer repays.
- **Everyone doing the work counts,** including home care workers employed directly by the people they care for through a state program, and self-employed providers paid by a public program.
+- **Everyone doing the work counts,** including home care workers employed directly by the people they care for through a state program, and self-employed providers paid by a public program. Their hours come from the program's own records.
- **It fades out gradually** as a worker's own hourly pay rises above the threshold, instead of stopping all at once. That means someone just above the line keeps less of each raise for a while, a real cost stated openly.
+- **How much.** A first draft: $3 an hour, set in law. That's enough to take a typical home care aide from $17.21 to about $20.20, roughly what a typical nursing assistant earns now, and an aide in the bottom tenth from $13.00 to $16.00 ([BLS](https://www.bls.gov/oes/2025/may/oes311120.htm)), if employers don't claw any of it back (see [below](#stopping-the-money-from-leaking)). It's a budget choice, not a living wage. It rises each year with average wages, not prices, so it doesn't shrink against the pay it tops up. Every three-year review publishes vacancies, turnover and pay in qualifying work next to the amount, so Congress can see whether it's doing anything.
 - **The same amount for everyone in a qualifying job.** An earlier draft faded it out as a worker's own pay rose. That would have taken a cut of every raise, including raises a state or wage board ordered, and pay in these jobs is bunched too tightly for it to save much: nine in ten home care aides earn under $21.65, and nine in ten nursing assistants under $25 ([BLS](https://www.bls.gov/oes/2025/may/oes311131.htm)). It would also have needed an hourly rate for every worker, which doesn't exist for live-in, day-rate or self-employed providers. So the only way off is the job-level test above: when typical pay in the job rises past the national median, the job leaves the list.
 - **How it's taxed.** It's paid like wages: income tax, payroll tax and Social Security credit, and it counts as earned income for the Earned Income Tax Credit, as any other pay does. A parent in the part of that credit that shrinks with income keeps roughly 60 cents of each dollar after all of it. But the law excludes the supplement from income when deciding eligibility for Medicaid, CHIP, marketplace health subsidies, food assistance, SSI and housing help, so it can't knock anyone off them. That takes a line in each program's rules, and it costs money that hasn't been estimated.
 - **Who can get it.** Anyone allowed to work in the US at the time, with their own Social Security number. Authorization is checked each quarter against Social Security and immigration records. A mismatch, like a name change, gets 90 days to fix before any payment is held, and hours worked while authorized are always paid. That needs saying in the law itself. Federal law bars immigrants who aren't "qualified aliens" from "any grant" or "similar benefit" paid with federal money ([8 U.S.C. 1611](https://www.law.cornell.edu/uscode/text/8/1611)), and that leaves out many people who are allowed to work, like those with Temporary Protected Status or DACA. So the supplement's law says it applies to anyone authorized to work, notwithstanding that rule, and that states can't exclude them either. That's a choice Congress could split off from the rest. The law also says the supplement isn't a public benefit for immigration purposes, so families don't avoid it out of fear.
 - **Same for everyone.** Co-ops and conventional firms qualify on exactly the same terms. The subsidy doesn't favor co-ops, and it doesn't skew [the pilot's](pilot-spec.md) comparison with conventional firms, because both sides get it.
 ### Stopping the money from leaking
 Money aimed at workers has three ways out. Each gets its own rule.
- **The public payer.** The biggest risk is that states cut their Medicaid rates, knowing the federal supplement will fill the gap. So a state's rates for qualifying care can't fall behind inflation. If they do, the federal share of the state's Medicaid spending on that care drops by the same amount. The supplement also can't count toward any rule requiring a share of rates to go to wages, and it's left out when rates are set.
+- **The public payer.** The biggest risk is that states cut their Medicaid rates, knowing the federal supplement will fill the gap. So a state's rates for qualifying care can't fall behind inflation. If they do, the federal share of the state's Medicaid spending on that care drops by the same amount. The supplement also can't count toward any rule requiring a share of rates to go to wages, like [Medicaid's 80% rule for home care](high-turnover.md#when-medicaid-decides-how-much-goes-to-pay), and it's left out when rates are set.
- **The employer.** An employer can't let any job's total pay, wages plus benefits, fall behind inflation compared with the year before its workers qualified. One that does repays the difference to its workers, with a penalty. Pay in qualifying work is compared every year with similar work that doesn't qualify, so slower raises show up.
+- **The employer.** An employer can't let any job's total pay, wages plus benefits, fall behind inflation compared with the year before its workers qualified. One that does repays the difference to its workers, with a penalty. Pay in qualifying work is compared every year with similar work that doesn't qualify, so slower raises show up. And the supplement can't be counted toward any minimum wage, and a state or wage board can't set its minimums lower because of it.
 - **The owner.** In industries full of related-party rent and management fees, public money that frees up payroll can still end up with owners. The supplement doesn't fix that. It's a reason for the rate rules states set, and for co-ops.
 ### The budget
-The supplement is a fixed amount per hour, set in law and adjusted for inflation, so it doesn't shrink when Congress wants to starve it quietly. The cost is whatever that amount times the qualifying hours comes to, published every year. When the formula adds an industry, the cost rises, and everyone can see by how much.
+The supplement is a fixed amount per hour, set in law and rising with average wages, so it doesn't shrink when Congress wants to starve it quietly. The cost is whatever that amount times the qualifying hours comes to, published every year. When the formula adds an industry, the cost rises, and everyone can see by how much.
-For scale: $2 an hour for 5 million workers averaging 1,500 hours a year costs $15 billion a year. There are about 4.7 million home health and personal care aides alone ([BLS](https://www.bls.gov/ooh/healthcare/home-health-aides-and-personal-care-aides.htm)), though not all of them would qualify.
+For scale, in May 2025 employers reported about 4.4 million home care aide and nursing assistant jobs in industries likely to qualify: about 2.3 million in non-medical home care and similar services, 1.1 million in home health, 590,000 in nursing homes and 330,000 in residential care for people with disabilities or mental illness ([BLS, aides](https://www.bls.gov/oes/2025/may/oes311120.htm); [BLS, nursing assistants](https://www.bls.gov/oes/2025/may/oes311131.htm)). Those are jobs, not people, since some people hold two. At $3 an hour and 1,200 to 1,500 hours a year each, that's about $16 billion to $20 billion a year. Not included: aides hired directly by the people they care for, who don't all show up in these counts; self-employed providers; about 510,000 hospital aides and nursing assistants, plus hospital housekeepers and cooks, if hospitals qualify; and the cost of leaving the supplement out of benefit tests. About 430,000 more jobs are in assisted living, which doesn't qualify on today's numbers. Each dollar an hour on the amount adds about a third.
 ### Worker voice, too
@@ -109,6 +112,7 @@ The founding plan pairs this subsidy with public research on automating the same
 - **Some essential work won't qualify.** Where families, not the public, pay most of the cost, the formula leaves the work out. That may include a lot of child care, where D.C.'s evidence comes from. Families who pay for care themselves, and people who care for relatives unpaid, get nothing from this. That's the price of a rule that can't be bent. States can still do what D.C. did.
 - **The formula will be fought over.** Industries will argue about how their work is classified and what counts as public revenue. Checking workers against public program records, not just the codes employers pick, is the defense. It isn't perfect.
 - **Capture isn't ruled out.** The rules catch pay cuts, including cuts in benefits, and states cutting their rates. They can't catch every raise that would have happened anyway.
 - **It leaves out workers who aren't allowed to work here.** That's a political choice, not something the law forces: paying people for work they can't legally be hired for would be hard to pass, and this page doesn't pretend otherwise. It's worse than leaving them out. By the logic of the tax-credit research above, a supplement that draws more authorized workers into care work can hold down the wage employers pay, and workers who don't get the supplement bear that with nothing to make up for it. Many care workers are immigrants, and undocumented ones are more likely to work off the books, where no program reaches them ([PHI](https://www.phinational.org/policy-research/key-facts-faq/)). What protects them is the rule against employers cutting a job's pay, and minimum pay set by state wage boards like Minnesota's, which covers every worker in the job whatever their status.
 - **It costs real money.** Tens of billions of dollars a year is plausible once home care and nursing homes qualify, and much more if hospitals do. That's a choice about what care workers are paid, and the page states it so voters can make it.
 - **It's federal money for work states largely pay for.** States already can, and some do, raise care workers' pay themselves. The federal role here is to make that pay not depend on where you live, and to stop states using it as a reason to pay less. That sits uneasily with leaving child care out: its workers are overwhelmingly women, and if it doesn't qualify, their pay still depends on their state.
 - **Congress can still change the formula.** It's harder to bend than a list, not impossible.
@@ -24,22 +24,22 @@ Here's what **one founder** has received by year 15 if the business succeeds, on
 | Kind of business | Profit per worker (after salaries) | Size at year 15 | **Co-op founder** | **Conventional founder** (one-fifth owner) |
 | --- | --- | --- | --- | --- |
-| Care work | $3,000 | 40 people | about $30,000 | $140,000 to $180,000 |
+| Care work | $3,000 | 40 people | about $19,000 | $140,000 to $180,000 |
-| Main Street | $15,000 | 40 people | about $150,000 | $710,000 to $880,000 |
+| Main Street | $15,000 | 40 people | about $96,000 | $710,000 to $880,000 |
-| Strong | $40,000 | 80 people | about $450,000 | $3.2 million to $4.2 million |
+| Strong | $40,000 | 80 people | about $260,000 | $3.2 million to $4.2 million |
-| Very high margin | $150,000 | 200 people | about $2 million | $29 million to $38 million |
+| Very high margin | $150,000 | 200 people | about $980,000 | $29 million to $38 million |
-**In the success case, a co-op founder ends up with somewhere between a fifth and a twentieth of what the owner of the same firm would.** The bigger and more profitable the firm, the wider the gap. Nothing on this page makes it go away.
+**In the success case, a co-op founder ends up with somewhere between about a seventh and a fortieth of what the owner of the same firm would.** The bigger and more profitable the firm, the wider the gap. Nothing on this page makes it go away.
 Three caveats about these numbers:
 - **They assume the firm exists and works equally well either way.** That's the big assumption. If co-op ownership makes firms less productive, or if the firm would never have been founded as a co-op, the comparison is moot. The first is exactly what [the pilot](pilot-spec.md) measures. The second is the founder problem itself.
- **They're a simple model, not a forecast.** New hires join as members after a year and ramp up to a full share over five. The workforce grows steadily to the size shown. Change the growth rate or the sale price and the ratios move, but the gap never comes close to closing.
+- **They're a simple model, not a forecast.** Founders start at a full share. New hires join as members after three months and ramp up to a full share over five. The part of a share they don't get yet goes to the reserve, as tax law requires, not to the founders ([How a Locked Co-op Is Taxed](taxes.md#the-tenure-ramp)). An earlier version of this table let it go to the other members, and showed co-op founders with roughly twice as much. Payroll tax on the founding share is left out too. The workforce grows steadily to the size shown. Change the growth rate or the sale price and the ratios move, but the gap never comes close to closing.
- **Taxes are left out on both sides.**
+- **Taxes are left out on both sides.** Counting them would widen the gap, not close it. The owner of a partnership or S corporation can usually deduct up to 20% of the business's profit, which a co-op member can't ([How a Locked Co-op Is Taxed](taxes.md#how-this-compares-with-other-businesses)). In most industries, a founder who sells shares in an ordinary small corporation after five years can leave up to $15 million of the gain untaxed, or ten times what they put in if that's more ([26 U.S.C. § 1202](https://www.law.cornell.edu/uscode/text/26/1202)), and a co-op founder has no sale to leave untaxed.
 ## Where the money went
-In the very-high-margin case, a worker who joined in year three has received about $780,000 by year 15 (see [Member Capital Accounts](capital-accounts.md#what-it-adds-up-to)). The people hired after them have less, because they've had fewer years at full share, but all 200 are building a share of what the business earns.
+In the very-high-margin case, a worker who joined in year three has received about $600,000 by year 15 (see [Member Capital Accounts](capital-accounts.md#what-it-adds-up-to)). The people hired after them have less, because they've had fewer years at full share, but all 200 are building a share of what the business earns.
 **If the firm exists either way, the founder's "missing" money isn't lost. It went to the people who did the work.** That's the whole model. A version of the co-op that paid founders like owners would just be a conventional firm with extra steps.
@@ -62,7 +62,7 @@ So for a founder *without* family money, the co-op isn't simply a worse lottery
 These are the ways a co-op can reward founders without selling the firm. Each is limited so it can't turn a founder back into an owner, or let founders pay themselves ahead of the bank.
 - **Member capital accounts.** A founder builds up an account like every other member, from year one. See [Member Capital Accounts](capital-accounts.md).
- **A founding share.** For the first ten years, 10% of the members' profit pool is set aside for the founding members. It's split among everyone who was a member in the first three years, in proportion to how much of that time they were there. So the people who took the early risk get paid for it, including the first hires, not only the people named in the paperwork. And because it's a fixed slice of the pool, not extra votes or weight per head, founders gain nothing by keeping the co-op small.
+- **A founding share.** For the first ten years, 10% of the members' profit pool goes to the people who were there at the start. It's split by the hours each person worked in the first three years, counting everyone on the payroll, members or not, so the first hires share it with the founders and keeping early workers out of membership doesn't help. It's paid only to people still working at the co-op that year. When someone leaves, their part goes back to the pool. The reserve's and the federation's shares are figured before it, so it comes out of the members' side only, and nobody's founding share in a year can be more than the going-rate pay for their job. Because it goes to some workers and not others, it's paid as pay, not as a profit share ([How a Locked Co-op Is Taxed](taxes.md#the-founding-share)). So the reserve takes 30% of it, like any pay above the going rate ([Investing for the Long Run](the-long-run.md#the-rules)), and it counts in the pay ratio. In the table it's about a tenth of what a founder receives. It is a claim on the work of people hired later, which is what the thesis objects to. The limits keep it small: ten years, a fixed slice, and only while you still work there. A fixed slice means founders gain nothing from keeping the co-op small later on. They would gain a little from hiring late in the first three years, since fewer early hours means a bigger share of the slice for each.
 - **Back pay for unpaid early work.** If founders take reduced pay before the business has revenue, the difference is recorded as a debt the co-op owes them. Pay can't go below the minimum wage once the co-op exists ([Owners Are Still Workers](labor-law.md#founders-unpaid-work)). The limits:
  - It's valued at no more than the pay the co-op sets for the same job once it has revenue.
  - It earns interest at the Treasury rate.
@@ -38,7 +38,7 @@ People notice what their co-workers do in teams, not in firms of thousands. The
 Where a line of business gets big enough to be its own firm, it can become one, as Mondragon's co-ops did ([When Growing Means Sharing](growth.md)).
-The standard bylaws share results with every member every quarter, or every month once a co-op has more than 50 workers, and offer training in reading them. The [federation](federation.md) supplies templates and training, so small co-ops don't have to build their own.
+The standard bylaws share results with every member every quarter, or every month once a co-op has more than 50 workers, and offer training in reading them. The 50 is a judgment, not a finding. In a smaller co-op, most people can see most of the work themselves, and closing the books every month costs bookkeeping time a small co-op may not have. A team can still get its own numbers monthly at any size if the members want. The [federation](federation.md) supplies templates and training, so small co-ops don't have to build their own.
 ## Team bonuses the members design
@@ -46,16 +46,18 @@ The profit share is split equally per hour worked, and that doesn't change. But
 The required rules keep bonuses from becoming a way to reward friends or push people too hard:
- **Members approve the formula before the year starts,** in writing. Managers apply it. They don't pick who gets what.
+- **Every bonus follows a formula the members approved in advance,** in writing, before the year starts. Managers apply it. They don't pick who gets what. That covers any bonus a manager hands out under [Who Sets the Pay](pay.md). Managers still decide raises within the bands.
- **A team's bonus is split among its members by hours worked,** not by a manager's choice.
+- **Team bonuses, not individual ones.** The study found that bigger individual bonuses went with *less* action against shirking, perhaps because they make co-workers competitors. So a formula pays teams, and a team's bonus is split among its members by hours worked. Managers' own results pay, set by the board, is a separate formula under the same limits and is published by name.
- **The total is capped** at a share of profit set in the bylaws, and it's reported in the co-op's pay-gap figures by gender and race.
+- **The total is limited.** All bonuses together can't be more than 10% of the co-op's total pay for the year, and no one's bonus can be more than 15% of their own pay. That stops one small team, or the managers, from taking the whole pot. The study doesn't set these numbers, and it doesn't argue for a limit at all. Its finding runs the other way: bigger group bonuses went with more action against shirking. The limit is a policy choice, to keep bonuses from turning into piece rates that push people too hard, or into a way to pay friends. For scale, workers in the study who got profit sharing or gain sharing received a most recent bonus worth about 5% of their pay at the median (4.6% in the national survey, 5.7% in the companies) and 9–12% on average. But that counted profit sharing, and a member's equal profit share already plays that part here. The bonus comes on top.
 - **Paid from a profit, or from the savings themselves.** A bonus tied to the co-op's results is paid only out of a profit on the audited books, and takes at most half of the year's profit before bonuses. A gain-sharing bonus tied to a team's own measured savings (less waste, fewer injuries, less redone work, against a baseline set before the year) can be paid even in a year with no profit, but only up to half of the savings and 3% of the team's pay. If the books are later restated, bonuses paid on the wrong figures are taken back from future bonuses.
 - **Measure quality and safety, not just speed:** work that had to be redone, waste, injuries. Customer ratings can't be used unless they're checked every year for bias by race, gender, age and disability, because customers can rate some workers lower for the same work.
 - **Measured per hour, with protected leave left out.** A teammate's parental leave, medical leave or accommodated schedule can't lower the team's numbers.
 - **How work and costs are split between teams is published,** and a team can challenge its numbers.
 - **Reported.** Bonuses are reported in the co-op's pay-gap figures by gender, race, age and disability.
 Bonuses still stay within the approved pay bands and count toward the pay ratio. Bonuses that push pay above the going rate give the reserve its share ([Investing for the Long Run](the-long-run.md)).
-Managers need a reason to deal with problems too. The board can tie part of managers' pay, within their bands, to how their units do, and the board, not the teams they manage, reviews them.
+Managers need a reason to deal with problems too. The board can tie part of managers' pay, within their bands and the limits above, to how their units do, and the board, not the teams they manage, reviews them.
 ## When a member won't do the work
@@ -66,10 +68,13 @@ Holding members to their share of the work has to mean something specific. Other
 **Then a fair, fast decision.**
 - **Written charges and the evidence,** at least 10 days before the hearing.
- **A hearing** before a panel of members drawn by lot, not including the person's own team, or, in a co-op of fewer than 15 members, before all the members except the person and whoever raised the complaint. The person can bring a co-worker or union representative.
+- **A hearing** before a panel of five members drawn by lot, no more than a week before the hearing. The draw leaves out whoever raised the complaint, the person's managers, close family or partners of either side, and anyone on the person's team now or six months before the charges, so moving people between teams doesn't change who can sit. Either side can strike one name, and either side can challenge a panelist for a close tie or open hostility. Struck names are redrawn. **The co-op needs four of the five votes.**
 - **In a small co-op,** there may not be five members left who aren't involved, and the rest may all be close to one side. So in a co-op of fewer than 15 members, or any co-op that can't fill the panel, the [federation](federation.md) draws the five from members of other co-ops, under the same rules. A person in a co-op of any size can ask for that outside panel.
 - **Paid, private and recorded.** Panel time is paid work time. The federation pays outside panelists' time and travel from its dues. Nobody on either side can contact a panelist privately. The hearing is recorded and closed, and the panel sees only what an accommodation requires, not medical records. Interpreters and disability accommodations are provided.
 - **The person can bring a co-worker or union representative.**
 - **Just cause, proved by the co-op.** The co-op has to show it's more likely than not.
 - **A written decision within 30 days** of the charges.
- **An outside arbitrator on request,** from a list the federation keeps, on appeal. If the dismissal is overturned, the person gets their job back with back pay.
+- **An outside arbitrator on request,** from a list the federation keeps, on appeal. The arbitrator works from the recording and can hear new evidence if the person had no representative or interpreter. If the dismissal is overturned, the person gets their job back with back pay.
 - **Serious misconduct,** like theft or violence, allows suspension with pay while the hearing happens.
 Co-ops that hire managers can let them dismiss members directly. The member can still take it to the hearing and the arbitrator, and gets their job back with back pay if it's overturned.
@@ -77,15 +82,15 @@ Co-ops that hire managers can let them dismiss members directly. The member can
 **Protections that can't be waived.**
 - **No retaliation.** If a member is dismissed within 12 months of organizing, filing a complaint, reporting a safety problem, running for the board or leading opposition in a vote, the co-op has to prove the dismissal had nothing to do with it.
- **Quitting under pressure counts.** A member who quits within 60 days after a transfer, a cut in hours or pay, or being left out of a bonus can ask for a hearing, and the quit is treated as a dismissal. That's the same test [When People Don't Stay Long](high-turnover.md#no-pushing-people-out-before-theyd-join) uses for workers on probation.
+- **Quitting under pressure counts.** A member who quits within 60 days after a transfer, a cut in hours or pay, a worse schedule, losing their regular clients, or being left out of a bonus can ask for a hearing, and the quit is treated as a dismissal. That's the same test [When People Don't Stay Long](high-turnover.md#no-pushing-people-out-before-theyd-join) uses for workers on probation.
- **Probation isn't a loophole.** Workers on probation get a shorter version of the same hearing. Dismissing them for performance still counts in the test against pushing people out before they'd join. Only the narrow reasons listed there, like a client's safety, are excluded.
+- **Probation isn't a loophole.** Workers on probation get the same hearing on shorter clocks: charges 5 days ahead, a panel of three drawn the same way (from other co-ops if need be) that must be unanimous, a decision within 15 days of the charges, and the same appeal. The co-op checks first for a cause it has to accommodate, and any plan to improve starts only once an accommodation is in place and runs at least 30 days. The membership clock keeps running: a worker whose case isn't settled when probation ends becomes a member, subject to the outcome. That makes a three-month probation hard to end early for performance. The model accepts that. The test against pushing people out only sees patterns, so one person's case needs its own protection. Dismissing them for performance still counts in that test. Only the narrow reasons listed there, like a client's safety, are excluded.
 - **The savings are safe.** A dismissed member's [capital account](capital-accounts.md) is fixed on the day they leave, they get a share of that year's profit for the hours they worked, and it's paid on the normal schedule. Nothing can be taken out of it without a court or arbitrator's ruling.
 **Published.** Every year the co-op reports warnings, hearings and dismissals by gender, race, age and disability, along with the results of an anonymous survey on workload and bullying.
 ## Where the share is small anyway
-In low-margin co-ops, like home care, a full profit share is worth a couple of thousand dollars a year, on top of the pay, schedules and say in the work that members get. There, the study's warning applies: a small shared stake may not motivate anyone. So those co-ops can't count on the profit share to do the work. Pay, schedules, training and a real say in how the work is done matter more.
+In low-margin co-ops, like home care, a full profit share is worth a couple of thousand dollars a year, on top of the pay, schedules and say in the work that members get. There, the study's warning applies: a small shared stake may not motivate anyone. So those co-ops can't count on the profit share to do the work, or on bonuses either: half of a thin profit is a small bonus, and gain sharing from a team's own savings is limited to 3% of its pay. Pay, schedules, training and a real say in how the work is done matter more.
 ## Measuring it
@@ -99,4 +104,5 @@ If co-ops fall behind as they grow, that's evidence the 1/N problem is real, and
 - **Everyday pressure doesn't reach a hearing.** Co-workers who hold each other to account can also pick on people who are different. The protections, the published figures and the anonymous survey make that visible. They can't stop all of it.
 - **The process takes time.** A month from charges to decision is fast for a fair process and slow for a small business with a problem. That's the trade.
 - **Team bonuses can pit teams against each other.** Members choose what to reward, and some will choose badly.
 - **The numbers are first drafts.** The 10% and 15% bonus limits, the four-of-five panel and the 50-worker line for monthly books are judgments, not findings. A stricter panel protects members from a hostile majority and makes it harder to remove someone who really won't do the work. The pilot's published hearings and dismissals are how to tell whether the balance is right.
 - **The evidence is thin.** The best study asks workers what they'd do and what they've done, in conventional firms. The pilot is the first real test of these rules in co-ops.
@@ -62,7 +62,11 @@ The model makes spin-offs the standard path for a new line that earns less per w
 - **The new line becomes its own locked co-op,** with its own members, its own profit split, and a [lock share](the-lock.md#how-the-lock-is-made-to-hold) held by an independent lock-holder from the day it's founded.
 - **The parent invests, but doesn't control.** It can fund the new co-op from its reserve, on the terms any investor gets ([Capital, After](capital.md)): repayment plus a share of profits, for at most 15 years, with no vote. If the new co-op borrows from the bank, the parent's claim ranks behind the bank and needs the bank's approval, like any other.
- **Reserve money stays reserve money.** When the new co-op repays the money, it goes back into the parent's reserve. Only the profit share counts as profit, and the reserve takes its cut of that too ([Investing for the Long Run](the-long-run.md)). No single spin-off can take more than a quarter of the parent's reserve.
+- **Reserve money stays reserve money.** When the new co-op repays the money, it goes back into the parent's reserve. Only the profit share counts as profit, and the reserve takes its cut of that too ([Investing for the Long Run](the-long-run.md)). No single spin-off can take more than 15% of the parent's reserve. Up to a quarter is allowed only by a majority of all members in a secret ballot, the same bar [the lock](the-lock.md#when-a-co-op-owns-another-company) sets for buying a company. "Take" counts everything the parent has at stake: money put in and not yet repaid, guarantees of the spin-off's loans, assets sold to it on credit, and rent or bills left unpaid for more than 90 days. Spin-offs in the same business, and spin-offs of spin-offs, count as one. A stake written off in the last five years still counts, so a parent can't lose 15% and then start again. The test uses the reserve at the start of the year, when new money goes in. A reserve that shrinks later doesn't force a sale, but no new money goes in until it's back under the limit.
 Federal law limits how much a national bank may lend one borrower without collateral to 15% of the bank's capital ([12 U.S.C. 84](https://www.law.cornell.edu/uscode/text/12/84)). This limit is stricter, because the reserve is only part of a co-op's own capital; members' accounts are the rest. It needs to be. A parent's stake has no collateral, it ranks behind the spin-off's lenders, and new businesses close a lot: only about 35% of American business locations opened in 2013 were still open ten years later ([Bureau of Labor Statistics](https://www.bls.gov/bdm/us_age_naics_00_table7.txt)). And a failed stake is a loss like any other, shared between the reserve and members' own accounts, with members paying most of it ([Investing for the Long Run](the-long-run.md#spending-it-badly)).
 All of a parent's stakes in spin-offs together stay under half of its reserve, and under a third of its assets, not counting cash and government bonds. Above 40%, federal law can treat a company that holds investments as an investment fund, with its own heavy rules ([15 U.S.C. 80a-3(a)(1)(C)](https://www.law.cornell.edu/uscode/text/15/80a-3)). A co-op that mainly runs its own business is probably outside that law anyway, but the cap keeps it from having to argue the point.
 - **The spin-off is still a co-op.** Its own workers become members, and it's in the same federation as the parent, so a failure in one doesn't leave the other's workers with nothing ([The Federation](federation.md)).
 In the example, the parent's members keep their $20,000 and earn a return on what they put in. The 20 new workers build full shares of their own co-op's profit instead of partial shares of someone else's. Without the spin-off, the members would most likely have turned the line down, and the jobs wouldn't exist.
@@ -73,11 +77,12 @@ This matters most for exactly the case the founding plan worried about: **expans
 ### 2. Rules so spin-offs can't be abused
- **New lines only, unless the workers choose to go.** A co-op can't spin off work its members already do unless a majority of the workers whose jobs would move vote for it. Anyone who doesn't want to move keeps their place in the parent. A spin-off that sells mostly to the parent is treated as part of the parent for the membership rule.
+- **New lines only, unless the workers choose to go.** A co-op can't spin off work its members already do unless a majority of the workers whose jobs would move vote for it. Anyone who doesn't want to move keeps their place in the parent.
 - **A spin-off that mostly works for the parent gets the parent's terms.** The worry is a parent moving its own work into a captive spin-off whose members get a smaller share. So if a spin-off makes more than 40% of its sales to the parent in any two of three years, counting sales through a middleman, through the parent's other spin-offs, or through firms its members own, the parent has to close the gap. The spin-off's workers choose, by secret ballot: membership in the parent with the tenure they've built, or a profit pool with the parent (below) that makes shares per member equal. The test is stricter than the one [the lock](the-lock.md#when-a-co-op-owns-another-company) uses for an outside supplier (most of its output, two years running), because the parent created this company. Prices between the two are still checked every year, as below.
 - **Deals between parent and spin-off are insider deals.** Prices, fees, rent and contracts between them must match what outsiders would pay, and they're checked every year, like any [insider deal](pilot-safeguards.md#the-hidden-boss). The lock's limit on exclusive contracts applies: no contract gives one party a claim on most of what the other produces for longer than five years ([The Lock](the-lock.md#closing-the-back-doors)).
 - **Assets move at an independent appraisal.** Equipment, customers or buildings moved to the spin-off count as a sale of part of the business, which goes through the lock-holder. The parent keeps any debts and obligations from before the split. So a spin-off can't be used to park a failing line or old liabilities.
 - **Those who move don't vote on the money.** Parent members who plan to join the spin-off can't vote on the parent's investment in it. They keep their tenure on the ramp only if the spin-off's founding papers agree to it, so senior members can't move over and dilute the new members in their turn.
- **A second opinion on big investments.** Before a parent puts more than a tenth of its reserve into a spin-off, the federation gives a written opinion on the plan to the parent's members. It's advice, not a veto. The investment is the members' call.
+- **A second opinion on big investments.** Before a parent puts more than a tenth of its reserve into one spin-off, counting everything it put in over the last three years, the federation gives a written opinion on the plan to the parent's members. It's advice, not a veto. The investment is the members' call. Bigger commitments also need the independent adviser's opinion that [every large commitment](the-long-run.md#spending-it-badly) needs.
 ### 3. Sharing across the group, if the co-ops choose
@@ -88,7 +93,7 @@ Parent and spin-off can agree to pool part of their profits and split it per mem
 Some growth can't be spun off. More customers for the same service, or a cheaper product sold by the same team, can't easily become a separate company. There, the dilution stays. What softens it:
 - **The ramp.** A co-op can choose the long end, ten years. That comes at a cost to newer members, who are more often younger or outsiders, and to workers who don't stay long ([When People Don't Stay Long](high-turnover.md#the-ramp-when-people-leave-early)).
- **The founding share is a fixed slice.** Founders' extra reward is a set share of the pool, not extra weight per head, so founders gain nothing by keeping the co-op small ([The Founder Problem](founder-problem.md)).
+- **The founding share is a fixed slice.** Founders' extra reward is a set share of the pool, not extra weight per head, so founders gain nothing by keeping the co-op small once it's past its first three years ([The Founder Problem](founder-problem.md)).
 - **Growth that earns the average is free.** Adding workers to work that's as profitable as the rest doesn't dilute anyone. The problem is only lower-margin growth.
 - **Someone else can take it.** A line the members turn down can be offered to the federation, or to a group of workers, to start as a new co-op.
@@ -96,10 +101,25 @@ Some growth can't be spun off. More customers for the same service, or a cheaper
 The pilot already publishes how many jobs its co-ops create ([The Pilot, in Numbers](pilot-spec.md#what-gets-measured)). It also publishes, with the comparisons filed in advance:
- **Job growth compared with matched conventional firms,** in full-time-equivalent jobs, counted both with and without spin-offs, and broken out by thirds of value added per worker (a way to compare how productive firms are that doesn't depend on how a co-op splits pay and profit). The gap should show up most in the most productive co-ops.
+- **Job growth compared with matched conventional firms,** in full-time-equivalent jobs, counted both with and without spin-offs, and broken out by thirds of value added per worker (a way to compare how productive firms are that doesn't depend on how a co-op splits pay and profit). The gap should show up most in the most productive co-ops. Growth is measured from each co-op's second full year to its tenth, the same way for its matched firms, and a firm that closes counts as losing all its jobs, so co-ops that survive by not growing aren't flattered or punished by who's left. Value added isn't reported for the matched conventional firms, so the thirds come from each co-op's own value added per worker in its second full year, before growth is measured, and each co-op is compared only with its own matched firms. Productivity is also tested as a sliding scale across all co-ops, not just in thirds. Young firms' job growth varies enormously. Among American firms under five years old that stayed open, the fastest-growing tenth grew about 110 percentage points a year faster than the slowest tenth, and a few very fast growers pull the average up ([Decker and others, 2016](https://www.nber.org/papers/w21776)). On rough figures, about 130 co-ops in the top third against about five matched firms each, the smallest gap the comparison could reliably find is something like 12 to 20 percentage points a year, depending on how many close and how the reviewers handle the outliers. So **the prediction that the gap shows up most in the most productive co-ops probably can't be tested at this scale.** The reviewers file the time span, the handling of outliers and the power calculation before the first loan. A finding of no gap doesn't mean co-ops grow as fast.
- **Expansions voted down.** Each co-op reports major expansion proposals and how members voted on them.
+- **Expansions voted down.** Each co-op reports every major expansion proposal that reached its board or a members' vote, and what happened to it. "Major" means a new line of business, a new location, a spin-off, or anything expected to add at least a tenth to the co-op's hours or to spend at least a tenth of its reserve. Related proposals within a year are added together, so splitting one plan into small pieces doesn't hide it. Any member can put a proposal on the list. Lines offered to the federation or to other workers after the members turned them down are counted too. The yearly audit checks the list against actual hiring and spending. A proposal nobody writes down still can't be counted, so this undercounts.
 - **Spin-offs:** how many, how they do, and the gap in pay and profit share per member between each parent and its spin-offs.
 - **Who gets hired.** Applicants and hires by gender and race, compared with the matched firms, since members who share profit have a reason to hire few people, and people like themselves.
 - **How hires heard about the job.** The share of hires who came through a member's referral rather than a public posting, and how long referred and other hires stay. Referred hires often stay longer, so referrals aren't bad in themselves. But hiring through friends and family is also the quietest way for a co-op to keep looking like its founders, and applicant counts can't see it.
 - **Who leaves during probation.** People let go or pushed out before they could join, by gender and race, pooled across co-ops. The push-out check ([No Pushing People Out](high-turnover.md#no-pushing-people-out-before-theyd-join)) looks at one co-op at a time and can't see a pattern that small.
 - **Compared with the local workforce.** Hires are compared with people doing the same work in the same county, from Census survey data, as well as with the matched firms.
 None of this sets targets. It's measured because the incentive is predictable, not because co-ops are assumed to discriminate.
 **Testing hiring directly.** Counting applicants can't show whether equally qualified people are treated alike. The standard check sends fake job applications that are identical except for a name suggesting the applicant's race or sex, and records who gets called back. The largest such study sent over 83,000 applications to entry-level jobs at 108 of the biggest American employers. About 24% got a call back within 30 days. Applicants with distinctively Black names got about 2.1 percentage points fewer calls, and the gap varied a lot between companies. Telling one company apart from the rest took up to 1,000 applications per company ([Kline, Rose and Walters](https://www.nber.org/papers/w29053)). So:
 - **Co-ops are tested as a group, never one by one.** A small co-op fills a few jobs a year, far too few to judge on its own. The pilot's outside reviewers send applications to entry-level openings at funded co-ops at random times between years three and nine. The dates aren't announced. Each opening gets one pair of applications, one with a name suggesting a Black applicant and one a white applicant, because more would stand out at a six-person co-op. Jobs that need a license are skipped unless both applications can honestly show the same one.
 - **One main measure, filed in advance.** The difference in calls back within 30 days between the Black and white names, pooled over all the testing. It's reported on its own terms, against zero, and next to the published results for big employers. Sex, Hispanic names and other comparisons are reported too, corrected for testing many things at once.
 - **What it can find.** Before filing, the reviewers count how many entry-level openings co-ops actually post, from the pilot's own payroll records, and state the smallest gap the test could detect, allowing for the fact that openings at the same co-op aren't independent. As a rough guide, if co-ops posted about 1,500 openings, the smallest gap it could reliably detect would be somewhere around 5 to 6 points, more than twice the big-employer average. If openings fall short, the result is "not settled." Either way, **a test that finds nothing doesn't show co-ops hire fairly.** It can only catch co-ops being much worse than ordinary employers.
 - **No unwilling firms.** Co-ops agree to the testing when they borrow. Conventional employers never agreed to anything, so they aren't sent fake applications, even though that would make a cleaner comparison. The co-ops' result stands next to other studies' published results instead. Before any testing, the ethics board that approves [the support lottery](pilot-spec.md#the-support-lottery) signs off, and state laws on testers are checked. Fake applications are withdrawn as soon as a co-op responds. Afterward, a sample of co-ops is asked whether they spotted the test, and the rate is published.
 - **Every opening is posted, with exceptions.** As a loan condition, co-ops post every opening publicly for at least a week, with written criteria for the job, before filling it. Payroll start dates are checked against posting dates, so a posting that closes after the new hire started doesn't count. Exempt, but counted separately: recalling laid-off members, rehiring someone within three years, union hiring halls, and aides a home care client chooses.
 - **Discrimination is a loan breach, whatever the co-op's size.** Federal job-discrimination law covers only employers with 15 or more workers ([42 U.S.C. § 2000e(b)](https://www.law.cornell.edu/uscode/text/42/2000e)), and most co-ops are smaller. Every borrower agrees not to discriminate in hiring, pay or membership. Complaints go to the civil-rights agencies where they can act, and to the bank as a possible breach where they can't.
 - **What a bad result does.** Nothing happens to any single co-op on the test alone, because the test can't single one out. If co-ops as a group show a real gap, scored interviews and outreach beyond members' own networks become a condition of every new loan, and the test is repeated.
 Spin-offs can borrow from the bank. Because they start with an established co-op behind them, they're reported separately and don't count in the pilot's main test, the same way the pilot handles businesses that aren't really new ([Guarding the Pilot](pilot-safeguards.md#relabeling-an-old-business-as-new)). That keeps them from flattering the survival numbers, and keeps a struggling low-margin spin-off from counting against the test.
@@ -115,7 +135,7 @@ If the most productive co-ops grow much more slowly than similar conventional fi
 - **Not every line can be spun off.** Where growth has to happen inside one firm, members still have a reason to turn down work that earns less than their average. Reporting the expansions they vote down makes that visible. It doesn't stop it.
 - **Spin-offs cost something.** Separate books, a separate board and separate legal costs. For a small line, that may be more than it's worth. And splitting a line off a firm that shares its customers and managers can make both work less well.
- **Reserve money can be wasted.** Money that can't be paid out is tempting to spend. Fagor, Mondragon's appliance maker, overexpanded and went bankrupt in 2013 ([Investing for the Long Run](the-long-run.md#whats-still-open)). The quarter cap and the federation's opinion are limits, not a test of whether an investment is wise.
+- **Reserve money can be wasted.** Money that can't be paid out is tempting to spend. Fagor, Mondragon's appliance maker, overexpanded and went bankrupt in 2013 ([Investing for the Long Run](the-long-run.md#whats-still-open)). The caps on spin-off stakes and the federation's opinion are limits, not a test of whether an investment is wise.
 - **The parent profits from people it doesn't work with.** For up to 15 years, the parent collects a share of the new co-op's profit. It's finite, it carries no vote, and dealings between them are checked at outside prices. That's the model's line between renting capital and owning people's work ([Capital, After](capital.md)). Some will say it's still the wrong side of that line.
 - **Richer and poorer co-ops.** Spin-offs will often be lower-paid than their parents, and lower-margin work is disproportionately done by women and workers of color. Voluntary pooling and published gaps are the answer offered. Neither closes the gap.
 - **Steady employment cuts both ways.** Co-ops keep people on in bad years and hire slowly in good ones. Where that means fewer jobs than the business could support, the people who don't get hired pay for it, and they don't get a vote.
@@ -55,7 +55,7 @@ A retirement plan and a co-op aren't the same, and the same study found that peo
 Existing home care co-ops charge refundable fees of $25 to $1,000, often taken from paychecks a little at a time (PHI, 2005). That's a real cost for someone earning an aide's wage, and in many states a deduction from pay needs the worker's written permission.
-So in this model, **the buy-in comes out of the member's own profit shares, not their paycheck.** It's capped at $1,000. Until it's covered, part of each profit share goes toward it instead of being paid out in cash, though never the cash a member needs to pay tax on their share. A member can choose to pay it faster from their pay if they ask in writing. Either way, it sits in their own [capital account](capital-accounts.md) and is paid back to them on the account's normal schedule, whether or not they stay.
+So in this model, **the buy-in comes out of the member's own profit shares, not their paycheck.** It's capped at $1,000. Until it's covered, part of each profit share goes toward it instead of being paid out in cash, though never the cash a member needs to pay tax on their share. It's held apart from their [capital account](capital-accounts.md), at its face value. It earns no interest and isn't charged with the co-op's yearly losses, and it's paid back in full within a year after they leave. Nobody pays it from their paycheck, so nobody puts cash into the co-op to join ([Member Capital Accounts](capital-accounts.md#are-accounts-securities)).
 ### A short probation
@@ -89,17 +89,50 @@ Some things make it less harsh than it sounds:
 - **The vote doesn't ramp.** A member who stays one year has the same vote as one who stays thirty.
 - **Time on the ramp adds up.** Someone who leaves and comes back within a few years picks up where they left off, and protected leave, like parental or medical leave, counts as time worked ([Worker Ownership](worker-ownership.md)). That matters in care work, where many workers, most of them women, step out for a while to care for their own families.
- **Whatever they built goes with them.** A member's account keeps paying out on its normal schedule after they leave, and small balances are paid all at once ([Member Capital Accounts](capital-accounts.md#how-its-paid-out)).
+- **Whatever they built goes with them.** A member's account keeps paying out on its normal schedule after they leave, and small balances are paid all at once ([Member Capital Accounts](capital-accounts.md#how-its-paid-out)). But where most payouts would go to people who've left, pension law makes accounts risky, so co-ops with turnover this high almost always pay the members' share all in cash instead. Everyone is still signed up for an ordinary retirement plan outside the business, with the co-op adding 3% of wages and a federal match for low earners from 2027 ([Member Capital Accounts](capital-accounts.md#saving-for-retirement)).
 - **In care work, the profit is small anyway.** At home care's thin margins, a full share is worth a couple of thousand dollars a year, and a typical member's is less ([Member Capital Accounts](capital-accounts.md)). For these workers, most of what matters is pay, hours and a say in how the work is done.
 A co-op can choose the short end of the ramp. This page doesn't shorten it further, because the founding plan sets that range on purpose. A longer ramp was meant to let a co-op hire without every new member cutting into everyone else's share right away. Under tax law, it only does that if the co-op pays the difference as wages for years of service ([How a Locked Co-op Is Taxed](taxes.md#the-tenure-ramp)). Whether low-margin, high-turnover co-ops should be allowed a much shorter ramp is an open question ([Open Problems](open-problems.md)).
 ## When Medicaid decides how much goes to pay
 A federal rule adopted in 2024 says that at least 80% of what Medicaid pays an agency for personal care, home health aide and homemaker services has to go to the direct care workers who give it ([42 CFR 441.302(k)](https://www.ecfr.gov/current/title-42/section-441.302)). It starts on July 9, 2030, or with the first managed care contract year after that where a state pays through private plans.
 - **Who counts as a direct care worker.** Aides and personal care attendants, but also the nurses who give care and the staff who supervise it clinically.
 - **What counts as their pay.** Wages, benefits like health insurance, paid leave and retirement, and the employer's share of payroll taxes. Training, travel and protective equipment come off the top before the 80% is measured.
 - **What it covers.** Only these services paid under Medicaid's home and community-based waivers and three similar options. It doesn't reach Medicare, private-pay clients, or Medicaid's ordinary home health benefit, so how much it touches a co-op depends on who pays for its work. Care where the person receiving it sets the worker's rate isn't counted either.
 - **Exceptions.** A state can set a lower level for small agencies that meet criteria it sets, and exempt some agencies facing hardship, after public notice.
 **It may not survive.** As of September 2026 the rule is in the federal regulations unchanged. But the home care industry has fought it since it was proposed, warning it would close agencies ([Home Health Care News, 2024](https://homehealthcarenews.com/2024/04/home-cares-industry-slams-finalized-80-20-rule-warns-agency-closures-are-coming/)), and it could be changed or dropped before 2030. The model neither needs it nor depends on its failing.
 **What it does and doesn't do.** It sets a floor on the share of the rate that goes to care workers. It doesn't set a floor on pay: 80% of a low rate is still low pay, and an agency can meet it by spending more on health insurance with no raise. If rates don't rise, the likely costs are agencies leaving Medicaid, fewer hours for clients, and less money for scheduling and supervision. Rules like this can raise pay and can also cost access. Which one wins is an empirical question, and the model takes no side on it.
 For a co-op, it means conventional agencies now have to do part of what a co-op promises. A co-op's case in Medicaid home care then rests less on pay and more on steadier hours, a say in the work, and keeping people longer, which is what [the pilot](pilot-spec.md) has to show.
 ### How a co-op meets it
 - **Wages, benefits and payroll taxes alone reach 80%.** The profit share and account credits don't count. The model's position is that the share is an owner's share, not pay ([Owners Are Still Workers](labor-law.md#is-the-profit-share-pay)), and a co-op can't call it pay to Medicaid and not pay to the tax office. Leaving it out also stops a co-op from holding hourly pay down and making it up with a year-end share that may not come.
 - **Any shortfall is paid out as wages.** The shared payroll service works out the ratio every quarter and shows it to members. If the year ends below 80%, for any reason, the difference is paid to the direct care workers who worked that year, as an hourly wage supplement, before any profit is shared. That's plain wages, so it counts without anyone's ruling. It runs in the same payroll pass that already recalculates overtime ([Owners Are Still Workers](labor-law.md#overtime-and-the-profit-share)).
 - **Job titles are checked.** Which roles count as direct care follows the rule's list and state guidance, and the co-op's auditor checks it each year, so an office job can't be relabeled as supervision.
 - **The rest has to fit in the 20%.** Office staff, insurance, rent, the bank's loan payments, the reserve and any profit share all come out of what's left. In Medicaid home care that means profit shares and account balances near zero, and a reserve that grows slowly. So the bank lends to a co-op doing this work only if loan payments fit inside the 20% with no profit at all, and sets its grace periods to match.
 - **Shared services are priced at cost and published.** Fees the co-op pays the federation or the bank are listed in its yearly report, at cost, so the federation can't become a way to move money out the way related-party fees do at conventional agencies.
 - **No hardship exemptions.** A co-op backed by a public bank doesn't take a hardship slot from a struggling independent agency. It can use a state's small-agency level only if it meets the state's criteria like anyone else, and only with a written plan to reach 80% within three years.
 - **Where the rates are set.** The same 2024 rules require each state to have an advisory group on these rates that includes direct care workers, and to publish its advice ([42 CFR 447.203(b)(6)](https://www.ecfr.gov/current/title-42/section-447.203)). Rates are the real limit on pay, so the federation takes part in those groups, and in the public comment where states set small-agency levels and exemptions, alongside unions.
 ### Keeping the pilot fair
 Co-ops are compared with conventional firms in the same industry, region and start year ([The Pilot](pilot-spec.md#who-co-ops-are-compared-against)), but that doesn't make them equally exposed to this rule. So for co-ops and comparison firms alike, the pilot records the share of revenue from covered Medicaid services, whether the firm used a small-agency level or an exemption, its reported ratio where the state publishes it, fees paid to related companies, and whether the state bargains with a care workers' union.
 ## What this doesn't solve
- **Ownership doesn't fix the pay.** Home care wages are low largely because much of the work is paid for by public programs like Medicaid, at rates the agencies don't set. A co-op can't pay more than it's paid. It can offer steadier hours, training and a say, and co-ops seem to keep people longer. But the pay problem needs better public rates, rules that send more of those rates to workers, and unions bargaining for them, along with [the floor](the-floor.md).
+- **Ownership doesn't fix the pay.** Home care wages are low largely because much of the work is paid for by public programs like Medicaid, at rates the agencies don't set. A co-op can't pay more than it's paid. It can offer steadier hours, training and a say, and co-ops seem to keep people longer. But the pay problem needs better public rates, rules that send more of those rates to workers, like [the 80% rule](#when-medicaid-decides-how-much-goes-to-pay), which can raise pay but may also cost access, and unions bargaining for them, including with states and through wage boards like [Minnesota's](essential-work.md), along with [the floor](the-floor.md).
 - **The numbers are rough.** Turnover varies a lot between agencies, the home care industry figure comes from a survey of agencies that chose to take part, and the co-ops' 38% comes from a small count. The pilot will measure this directly and report [results by industry](pilot-spec.md#what-gets-measured).
 - **Automatic membership hasn't been tried at a large care co-op.** It should raise membership a lot. How much, and whether default members take part in governance, is unknown.
 - **A short probation means less time to judge fit.** A co-op admits people it has known for three months, and they vote. That's the trade-off the model accepts. The ramp limits what a poor fit costs in money. It doesn't limit their vote.
 - **The stable minority can still run things.** Office staff and coordinators often stay while aides come and go. One member, one vote and paid meeting time help. They don't guarantee aides a real voice.
- **Some things need legal work.** How membership interacts with tax filing for members without Social Security numbers, with visa status, and with the asset limits of public benefits needs answers before care co-ops sign people up automatically. Federal labor law probably doesn't protect union activity by members who own the firm. The charter protects it instead, and fixing the law takes a separate bill ([Owners Are Still Workers](labor-law.md#union-rights-the-biggest-gap)).
+- **Some legal questions have answers now, and some don't.**
  - **Taxpayer numbers.** An individual taxpayer number from the IRS doesn't "authorize you to work legally in the U.S." ([IRS](https://www.irs.gov/tin/itin/individual-taxpayer-identification-number-itin)). Members have to be employees verified as allowed to work, so workers who have only that number can't be members. That's a gap in the model, not a fix ([How a Locked Co-op Is Taxed](taxes.md#what-this-doesnt-solve)).
  - **Work permits that lapse.** Many care workers work on permits that have to be renewed or can be ended, such as Temporary Protected Status. A member whose permit lapses has to come off the payroll. They keep their account, which pays out on its normal schedule, and for 12 months they keep their place on the ramp and rejoin without a new probation once they can work again. Workers on a visa tied to their employer get a free consult with an immigration lawyer through the federation before they're signed up. Owning part of a co-op doesn't raise the special rules some visas have for owners, which start at "more than 50 percent" of the employer or "majority voting rights" ([8 CFR 214.2(h)](https://www.law.cornell.edu/cfr/text/8/214.2)).
  - **Benefits.** The share and account credits that haven't come due shouldn't count as savings for SSI or food assistance, because the bylaws bar members from getting at them early. But SSI may count a credit as income when it's made, and may count the share as unearned income, which it treats harshly. So workers on SSI or disability benefits, found through a confidential check the federation runs, not the co-op, become members only if they say yes, and get their share all in cash until Social Security says how it counts it ([How a Locked Co-op Is Taxed](taxes.md#benefits)). Opting out doesn't change how a cash share is counted, and the notice says so.
  - **Unions.** Federal labor law probably doesn't protect union activity by members who own the firm. The charter protects it instead, and fixing the law takes a separate bill ([Owners Are Still Workers](labor-law.md#union-rights-the-biggest-gap)).
 - **Opting out can still be pressured, and pushing people out can still be hidden.** An independent lock-holder and results-based checks make both harder. They can't make them impossible.
@@ -13,11 +13,11 @@ summary: A working model for building an economy where the people who do the wor
 This model doesn't buy, seize or convert anyone's company. Instead it builds new worker-owned companies alongside existing ones, then lets customers and workers choose between them.
- **Workers own their company.** Every member gets one vote. A share of the profits grows with tenure until long-time members split them equally, per hour worked, which is how federal tax law lets co-ops pay tax on it only once. Salaries still exist, and hard jobs still pay more. Part of each year's profit goes into a personal account that pays it back a few years later on a fixed schedule, whether or not you've left, which is designed to keep it outside federal pension law, and part goes into a permanent reserve that keeps the business investing. Members can't drain it through high pay or let the equipment quietly wear out, and big bets get an outside opinion first. An insurance pool the co-ops pay for protects workers' last paychecks and part of their savings if the co-op fails. A fair, fast process deals with members who won't do the work, with protections so it can't be turned on the wrong people. Members are the co-op's employees, so they get the minimum wage, overtime and injury insurance like anyone else. Where the law leaves owners out, of unemployment insurance in some states or of union protection, the co-op's charter fills what it can. Membership comes automatically after a short probation, so co-ops in high-turnover work like home care don't end up run by the few who stay. Equal shares give members a reason to turn down growth into lower-paying work, so co-ops can grow by starting new co-ops they invest in instead. [Worker Ownership](worker-ownership.md), [Does Sharing the Profit Mean Less Effort?](free-riding.md), [When People Don't Stay Long](high-turnover.md), [Owners Are Still Workers](labor-law.md), [When Growing Means Sharing](growth.md), [Member Capital Accounts](capital-accounts.md), [How a Locked Co-op Is Taxed](taxes.md), [Protecting Members' Savings](savings-guarantee.md) and [Investing for the Long Run](the-long-run.md)
+- **Workers own their company.** Every member gets one vote. A share of the profits grows with tenure until long-time members split them equally, per hour worked, which is how federal tax law lets co-ops pay tax on it only once. Salaries still exist, and hard jobs still pay more. Part of each year's profit goes into a personal account that pays it back a few years later on a fixed schedule, whether or not you've left, which is designed to keep it outside federal pension law, though courts haven't settled that; where most payouts would go to people who've left, as in high-turnover work, the share is paid in cash instead. Part goes into a permanent reserve that keeps the business investing. Members can't drain it through high pay or let the equipment quietly wear out, and big bets get an outside opinion first. An insurance pool the co-ops pay for protects workers' last paychecks and part of their savings if the co-op fails. A fair, fast process deals with members who won't do the work, with protections so it can't be turned on the wrong people. When business falls off, everyone shares the cut before anyone is laid off, and layoffs follow an order set in advance that treats members and non-members alike. Members are the co-op's employees, so they get the minimum wage, overtime and injury insurance like anyone else. That also means members who run payroll, and in New York possibly every member, can personally owe wages the co-op fails to pay, so a co-op that misses a payroll stops ordinary work until it's paid up. Where the law leaves owners out, of unemployment insurance in some states or of union protection, the co-op's charter fills what it can. Membership comes automatically after a short probation, so co-ops in high-turnover work like home care don't end up run by the few who stay. Where Medicaid requires 80% of home care payments to go to care workers, co-ops meet it from wages alone. Equal shares give members a reason to turn down growth into lower-paying work, so co-ops can grow by starting new co-ops they invest in instead. The checks behind all this are scaled to size, so small co-ops get a yearly review and random audits instead of a full audit every year, though honest checking still costs them real money. [Worker Ownership](worker-ownership.md), [Does Sharing the Profit Mean Less Effort?](free-riding.md), [When Work Runs Short](downturns.md), [When People Don't Stay Long](high-turnover.md), [Owners Are Still Workers](labor-law.md), [When Growing Means Sharing](growth.md), [Member Capital Accounts](capital-accounts.md), [How a Locked Co-op Is Taxed](taxes.md), [Protecting Members' Savings](savings-guarantee.md), [Investing for the Long Run](the-long-run.md) and [What the Rules Cost a Small Co-op](compliance.md)
 - **A small public bank lends to worker co-ops.** It charges market rates, so it only succeeds if co-ops can really compete. Its whole job is to be willing to lend to a kind of company other banks won't. Spain, Italy and the US have all tried versions of this, and the pilot is built around what went right and wrong. [The Bank](the-bank.md) and [Has This Been Tried?](precedents.md)
- **Owners who want to sell to their workers can.** The bank lends for these sales on a separate track, with its own $100 million and its own test. Only healthy firms qualify, there's no new tax break, the price is capped at an independent appraisal, the seller shares the risk, and the whole workforce votes. [When an Owner Wants to Sell to the Workers](buyouts.md)
+- **Owners who want to sell to their workers can.** The bank lends for these sales on a separate track, with its own $100 million and its own test. Only healthy firms qualify, there's no new tax break, the price is capped at an independent appraisal, the seller shares the risk, and the whole workforce votes. It serves deals the SBA's rules shut out, which ask a co-op, unlike an ESOP, for cash up front and one worker's personal guarantee. Its results are compared with SBA-financed purchases and ESOP sales, and its pay test follows everyone who worked there at the sale. [When an Owner Wants to Sell to the Workers](buyouts.md)
- **Co-ops funded this way stay co-ops forever.** They can't be sold to conventional owners, and members can't vote to cash out what earlier members built. An independent lock-holder can veto any attempt, including selling the business off piece by piece. If a co-op goes bankrupt, only another co-op can buy it whole, and its workers get a real chance to be that buyer. That needs an amendment to federal bankruptcy law, drafted here. [The Lock](the-lock.md), [When a Locked Co-op Goes Bankrupt](bankruptcy.md)
+- **Co-ops funded this way stay co-ops forever.** They can't be sold to conventional owners, and members can't vote to cash out what earlier members built. An independent lock-holder can veto any attempt, including selling the business off piece by piece. If a co-op goes bankrupt, only another co-op can buy it whole, and its workers get a real chance to be that buyer. That needs an amendment to federal bankruptcy law, drafted here, and a short model state law closes the ways out that state law leaves open. [The Lock](the-lock.md), [When a Locked Co-op Goes Bankrupt](bankruptcy.md), [The Lock in State Law](lock-state-law.md)
- **It runs as an honest experiment.** A one-time $350 million pilot aims to fund about 400 new co-ops. The success measures are published before the first loan. If, after twelve years, co-ops stay open about as well as similar conventional firms while paying their members fairly, and the bank earned at least what Treasury bonds would have, Congress votes on growing it. If not, it shuts down automatically. It's built so that a hostile government can't quietly freeze it or rig the result, though Congress can always repeal it. It also tests, by lottery, whether serious help before launch gets more co-ops started. Part of the loan money is set aside for co-ops in lower-paid work, so the bank can't drift toward only the safest co-ops, and the verdict has to say which kinds of co-ops it covers. The pilot can't show whether co-ops lift pay at other employers. Even after a pass, a sector big enough for that is decades away nationally. So growth comes in capped stages, and that effect gets its own test in a few local markets. [The Test](the-test.md), [The Pilot, in Numbers](pilot-spec.md), [Help Before the First Loan](before-launch.md), [Who the Bank Lends To](who-gets-loans.md), [After a Pass: How Big, How Fast](scale.md) and [Making It Last](durability.md)
+- **It runs as an honest experiment.** A one-time $350 million pilot aims to fund about 400 new co-ops. The success measures are published before the first loan. If, after twelve years, co-ops stay open about as well as similar conventional firms while paying their members fairly, and the bank earned at least what Treasury bonds would have, Congress votes on growing it. If not, it shuts down automatically. It's built so that a hostile government can't quietly freeze it or rig the result, though Congress can always repeal it. It also tests, by lottery, whether serious help before launch gets more co-ops started. Part of the loan money is set aside for co-ops in lower-paid work, so the bank can't drift toward only the safest co-ops, and the verdict has to say which kinds of co-ops it covers. The pilot can't show whether co-ops lift pay at other employers. Even after a pass, a sector big enough for that is decades away nationally. So growth comes in capped stages, and that effect gets its own test in a few local markets. For raising pay across a whole kind of work, wage boards and unions are faster, and the model doesn't replace them. [The Test](the-test.md), [The Pilot, in Numbers](pilot-spec.md), [Help Before the First Loan](before-launch.md), [Who the Bank Lends To](who-gets-loans.md), [After a Pass: How Big, How Fast](scale.md) and [Making It Last](durability.md)
 - **Co-ops back each other up.** They pool part of their profits into a shared fund. If one fails, its workers are moved into others instead of being left with nothing. [The Federation](federation.md)
 - **Nobody is left behind by low-margin work.** Owning a company doesn't help much when there's barely any profit to own, so a strong floor covers the rest. A fixed formula, not lobbyists, decides which low-paid work gets public help. [Ownership and the Floor](the-floor.md) and [Who Decides What's Essential](essential-work.md)
@@ -44,6 +44,44 @@ 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)). For lower-income members' credits that aren't taxed until paid, the co-op also follows the tax rules for deferred pay, as a precaution, without conceding that they apply ([How a Locked Co-op Is Taxed](taxes.md#credits-taxed-later-the-deferred-pay-rules)).
 - **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. The model argues first that nothing is held back until people leave. In the alternative, if the share counts as pay, it argues that it's a bonus under the Labor Department's rule. That fallback concedes, for pension law only, the point the model resists elsewhere ([Member Capital Accounts](capital-accounts.md#why-not-pay-it-out-when-you-leave)).
 - **Medicaid's home care pay rule.** From 2030, agencies must spend 80% of certain Medicaid home care payments on care workers' pay. That rule borrows the overtime law's broad meaning of pay, so the share might count. The co-op doesn't count it anyway, to keep one position everywhere, and pays any shortfall as wages ([When People Don't Stay Long](high-turnover.md#when-medicaid-decides-how-much-goes-to-pay)).
 - **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 outside accountant tests 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. In small co-ops that's a fixed test of every worker's pay rather than a full audit ([What the Rules Cost a Small Co-op](compliance.md#one-package-done-once-a-year)).
 **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.
 ### When wages go unpaid, members can owe them
 Some states make a company's owners or officers personally pay wages the company doesn't, and federal law does the same for people who run it. The laws were written for owners who pocket the profit and leave the workers unpaid. In a worker co-op, the owners and officers are workers too, so the bill can land on the co-op's own members, including its lowest-paid ones. The members owed wages and the members who owe them can be the same people.
 - **Federal law reaches people in charge, in every state.** The Fair Labor Standards Act counts as an employer "any person acting directly or indirectly in the interest of an employer" ([29 U.S.C. § 203(d)](https://www.law.cornell.edu/uscode/text/29/203)). Courts have read that to reach officers and managers who control the business's operations, and an unpaid minimum wage or overtime is owed again as damages, so twice over ([§ 216(b)](https://www.law.cornell.edu/uscode/text/29/216)). It covers only the minimum wage and overtime, not the rest of a worker's pay. No state law can take this away.
 - **New York appears to reach every member.** For an ordinary private corporation or LLC, only the ten largest owners are personally liable for unpaid wages ([Business Corporation Law § 630](https://newyork.public.law/laws/n.y._business_corporation_law_section_630); [LLC Law § 609(c)](https://newyork.public.law/laws/n.y._limited_liability_company_law_section_609)). For a co-op it's broader: every member and every director of a cooperative corporation is personally liable, each for the whole amount, for wages owed to its employees ([Cooperative Corporations Law § 47](https://newyork.public.law/laws/n.y._cooperative_corporations_law_section_47)), and the co-op can't opt out of that in its charter. The state's worker co-op article applies the co-op chapter except for listed sections, and § 47 isn't listed ([§ 85](https://newyork.public.law/laws/n.y._cooperative_corporations_law_section_85)). The same article says a worker co-op is governed by the corporation law ([§ 84](https://newyork.public.law/laws/n.y._cooperative_corporations_law_section_84)), so a court could read it the other way, but the ten-largest rule isn't among the corporation-law sections it brings back. I haven't found a court case either way. "Wages" includes severance, vacation pay, and benefit and pension contributions. A worker has to give written notice within 180 days after the work ends, and can sue a member only after a judgment against the co-op goes unpaid. A member who pays more than their share can recover the excess from the other members. Choosing another form doesn't escape it: in a co-op of ten or fewer equal members, the ten-largest rule reaches everyone anyway, and both rules apply to companies formed in other states when the work is done in New York.
 - **Massachusetts reaches officers and managers.** The president, treasurer and any officers or agents managing a corporation count as the employer under the state's wage law ([ch. 149, § 148](https://malegislature.gov/Laws/GeneralLaws/PartI/TitleXXI/Chapter149/Section148)), and unpaid wages are owed three times over, plus legal costs ([§ 150](https://malegislature.gov/Laws/GeneralLaws/PartI/TitleXXI/Chapter149/Section150)). Workers can't waive this. In a co-op, those officers are members the others elected, and they may be paid no more than anyone else.
 - **New Jersey's closing law may reach owners and managers.** Its severance duty, a week per year worked in large closings and layoffs, falls on the "employer," which it defines to include anyone acting in the employer's interest, anyone who owns and operates it, and whoever makes the decision behind the layoffs ([P.L. 2019, c. 423](https://pub.njleg.state.nj.us/Bills/2018/PL19/423_.HTM); [Protecting Members' Savings](savings-guarantee.md#notice-pay-and-severance)). In a co-op, the members own and operate it.
 - **California reaches owners and managers who cause it.** An owner, director, officer or managing agent who violates certain wage rules, "or causes" them to be violated, can be held liable as the employer ([Labor Code § 558.1](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=LAB&sectionNum=558.1)). That includes the penalty for final pay not paid on time, which keeps running as a day's wages per day for up to 30 days ([§ 203](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=LAB&sectionNum=203)). "Causes" probably means some personal part in the decision, so officers who decided to keep people working are at risk, and a member who only voted probably isn't.
 So the model does four things:
 - **No working on credit.** A payroll counts as missed when wages are still unpaid five business days after the day state law says they're due. The board declares it and tells the pool the same day, and the pool can declare it if the board doesn't. From then on, the co-op can't schedule more ordinary work until everyone is paid up, unless it files for bankruptcy protection or the federation's fund lends it the payroll. The fund decides on a loan within two business days, and its loan is repaid after workers' wage claims, not before. Work to keep people safe, care for people or animals, save perishable goods and wind down in order goes on, and the pool pays for it first. This keeps a failing co-op from running up unpaid wages its own members might have to cover ([When Work Runs Short](downturns.md#when-cutting-isnt-enough)).
 - **Stopping and federal notice rules.** A sudden stop at a co-op with 100 or more workers can count as a plant closing that needed 60 days' notice ([29 U.S.C. § 2102](https://www.law.cornell.edu/uscode/text/29/2102)). The law shortens that when the business was seeking money that notice would have scared off, or when the cause wasn't foreseeable, but the employer must still give as much notice as it can. So a co-op whose quarterly accounts show the pool's warning signs ([Keeping Workers' Savings Safe](savings-guarantee.md#who-runs-it-and-how-claims-are-paid)) gives conditional notice early rather than waiting for the missed payroll.
 - **The insurance pool pays first.** The [pool](savings-guarantee.md#the-insurance-pool) covers up to eight weeks of each worker's unpaid wages, then notice pay ([Notice pay and severance](savings-guarantee.md#notice-pay-and-severance)). If the rule above is kept, that covers most unpaid wages, but notice pay, vacation, severance and benefit contributions can go past it. The pool doesn't pursue ordinary members for what it pays, and the co-op's bylaws and officers' insurance cover elected officers who kept the rule and didn't hide losses. Federal and Massachusetts liability can't be waived, but it can be insured.
 - **The model state law narrows it.** In states that adopt it, a member of a locked co-op covered by the pool isn't personally liable just for being a member, for claims by other members or for anything the pool paid. Workers who aren't members keep their full claims for anything the pool didn't pay, since they had no vote. There's no shield for wages earned after a payroll was missed and the rule wasn't kept, or for anyone who ran payroll or kept people working ([The Lock in State Law](lock-state-law.md#what-the-model-law-does), point 10). It doesn't touch federal law.
 Until a state adopts that, members in states like New York take on a real personal risk. The risk follows where the work is done, not where the co-op was formed, and the bank's checked entry for each state says what it is. Every member is told in writing when they join, with the rules of the state where they work.
 ## 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:
@@ -60,8 +98,8 @@ For a member who loses their job when the co-op fails, that's the worst time to
 - **Always cover members.** Where a state lets a co-op choose whether to cover its officers or owners, a locked co-op chooses to cover them. That's a condition of the bank's loan and part of the charter.
 - **Members are told in writing** before they join if their state leaves them out, the same notice Washington already requires for officers who aren't covered.
- **A model state law copies Washington and goes further.** It's a separate short law a state can adopt on its own, apart from [the lock's state law](durability.md#federal-test-state-copies): members of a locked co-op are covered like any other worker, and their membership share doesn't count as ownership when they claim.
+- **A model state law copies Washington and goes further.** It's a separate short law a state can adopt on its own, apart from [the lock's state law](lock-state-law.md): members of a locked co-op are covered like any other worker, and their membership share doesn't count as ownership when they claim.
- **Owners can't lay themselves off in turns.** The worry behind the state exclusions is real: owners can arrange their own layoffs. So under the model law, a member laid off in a rotation isn't counted as unemployed, except through the state's work-sharing program where it has one. Layoffs follow the co-op's written layoff order, and like any employer, a co-op whose members claim benefits pays a higher tax rate.
+- **Owners can't lay themselves off in turns.** The worry behind the state exclusions is real: owners can arrange their own layoffs. So under the model law, a member laid off in a rotation isn't counted as unemployed, except through the state's work-sharing program where it has one. Layoffs follow the co-op's [written layoff order](downturns.md#the-layoff-order), and like any employer, a co-op whose members claim benefits pays a higher tax rate.
 - **Where a state still excludes members,** co-ops in that state can band together through the [federation](federation.md) for their own unemployment cover. Mondragon did this. When Spain excluded co-op members from its social security system in 1958, the co-ops built their own mutual insurer, Lagun Aro, and later added an unemployment benefit ([MONDRAGON, *History*](https://www.mondragon-corporation.com/en/history/)). In America, a shared fund like that is insurance, so it has to be licensed by the state or set up as a special trust the tax law allows for unemployment pay. It's optional.
 - **The pilot counts the gap.** It publishes how many members, by state, had no unemployment cover, and what happened to them when they lost their jobs.
@@ -0,0 +1,106 @@
 ---
 title: The Lock in State Law
 section: The Co-op
 order: 31
 summary: The lock is written into each co-op's charter, but ordinary state law still leaves several ways out, and this page drafts a short law any state can adopt to close them for co-ops that choose the lock.
 ---
 # The Lock in State Law
 [The lock](the-lock.md) is built from a co-op's own founding documents and a single *lock share* held by an independent lock-holder, which can veto a sale or a change to the lock. Most of that works under today's law. But co-ops and companies are creatures of state law, and state law has its own ways out that a charter can't fully close by itself.
 This page lists those ways out and drafts a short model law that closes them. It applies only to co-ops that choose the lock. States can adopt it or not, and nothing in the federal law requires them to. A co-op in a state that hasn't adopted it is still locked by its charter and lock share, just less securely.
 ## Where state law leaks
 - **Members can vote to stop being a co-op.** Massachusetts has had a law for worker co-ops since 1982, and a co-op can leave that status "by a vote of two-thirds of the members" ([Mass. Gen. Laws ch. 157A, § 4](https://malegislature.gov/Laws/GeneralLaws/PartI/TitleXXII/Chapter157A/Section4)). That's exactly the exit the lock closes.
 - **Mergers and changes of form usually need only the owners' vote.** In Delaware, for example, a merger is approved by "a majority of the outstanding stock" entitled to vote ([Del. Code tit. 8, § 251(c)](https://delcode.delaware.gov/title8/c001/sc09/index.html)). Most states also let a company turn itself into a different kind of business, or move to another state, by a vote. A lock share catches these only if the charter says its consent is needed, and only as far as each state's law lets a charter say so.
 - **Some protection already exists, unevenly.** Delaware already gives a class of shares its own vote on any change that would "alter or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely" ([Del. Code tit. 8, § 242(b)(2)](https://delcode.delaware.gov/title8/c001/sc08/index.html)). So a Delaware lock share can block its own removal. Co-op laws often don't have classes of shares at all, and they vary a lot from state to state.
 - **Courts can end a company.** Massachusetts, like most states, lets a court dissolve a corporation when its directors or owners are deadlocked, or when its creditors can't be paid ([Mass. Gen. Laws ch. 156D, § 14.30](https://malegislature.gov/Laws/GeneralLaws/PartI/TitleXXII/Chapter156D/Section14.30)). After debts are paid, what's left normally goes to the owners. A charter can say otherwise, but whether a court has to follow that when it's the one dissolving the company isn't settled everywhere.
 - **Courts dislike permanent limits on selling.** A lock is a "restraint on alienation," a limit on selling property, and courts look hard at those when they last forever ([Cornell Legal Information Institute](https://www.law.cornell.edu/wex/restraint_on_alienation)). Limits on selling company shares are usually allowed if they're reasonable, but "reasonable" is up to a judge.
 - **Creditors can sell without a bankruptcy court.** A lender with a claim on a business's equipment and other assets can sell them after a default, or keep them, under state law ([UCC § 9-610](https://www.law.cornell.edu/ucc/9/9-610)). A mortgage lender can foreclose on its building. A creditor with a court judgment can have the sheriff sell its property, a tax agency can hold a tax sale, a state court receiver can sell the business, and so can an assignee when a business hands everything over to pay its creditors. The [bankruptcy amendment](bankruptcy.md#what-can-be-sold-and-to-whom) tries to reach those sales with a federal law resting on Congress's power over commerce, which will be challenged. A state law covering the same sales is on much firmer ground.
 ## What the model law does
 **1. Locking is a choice, and people who vote no can leave.** A co-op becomes locked by saying so in its articles, naming a lock-holder from the approved list and issuing the lock share. For a new co-op, the founders decide it unanimously. An existing co-op or business, like one being [sold to its workers](buyouts.md), needs at least a two-thirds vote of its members, and never less than the vote it would take to leave co-op status. Members who vote no can leave within 90 days and have their whole capital account paid out on the normal schedule. They aren't paid what the business would sell for unlocked. That value never belonged to any one member, and paying it out is exactly the windfall the lock exists to prevent. The status is shown in the state's public business records, and a notice is filed where lenders already look for claims on a business's property (a UCC filing).
 **2. The members' exit doesn't apply.** Once locked, a co-op can stop being a co-op only with the lock-holder's consent, and the lock-holder can consent only to two things: merging into another locked co-op, or closing with its remaining value going to the co-op movement's fund. Any member vote that a state's co-op law would otherwise allow, like the Massachusetts two-thirds vote, doesn't apply to a locked co-op. The lock clauses in the articles, the named fund and the lock-holder can't be changed without the lock-holder's consent either. This is the one real change to members' rights, and it's the point of the law.
 **3. The lock is valid by law.** The lock share and the lock's limits on selling are declared reasonable and not an unlawful restraint on alienation. Anyone who takes over the business with notice of the lock is bound by it, including a receiver, a trustee or a buyer. Notice comes from the public record and the UCC filing.
 **4. The lock-holder has rules too.** Without its consent, a locked co-op can't merge, convert or move to another state except into another locked co-op, and can't sell, lease or license more than a quarter of its assets or its revenue-producing business within any three years, counted together, or its brand, core technology or main customer contracts, whatever their size ([Closing the back doors](the-lock.md#closing-the-back-doors)). Ordinary sales, like selling stock to customers or replacing old equipment with new, don't count. The quarter is measured on the co-op's books at the start of the three years. Companies the co-op controls are locked too. But the lock-holder isn't free to say yes or no as it likes:
 - **It must say yes** to a sale at a fair price of things the co-op no longer needs, and to spinning off part of the business as a new locked co-op.
 - **It must say no** to anything that would leave most of the business, its brand, technology or main contracts in the hands of anyone but a locked co-op.
 - **Silence means yes.** If it hasn't answered a request it must approve within 30 days, the answer is yes.
 - **It can be challenged and replaced.** Members can take a refusal to court quickly, and the lock-holder pays their costs if the refusal was unreasonable. Members can also replace their lock-holder by a two-thirds vote, but only with another one on the approved list, and not in the middle of a deal it's reviewing.
 **5. Breaking the rules doesn't pay.** The state's business filing office must refuse any filing for a merger, conversion, move or change to the lock clauses that breaks them. Asset sales aren't filed with the state, so for those the remedy is different. A sale that breaks the lock can be undone against a buyer who knew about it. A buyer who paid a fair price without knowing keeps what it bought, but the co-op's gain from the sale goes to the fund, and the insiders who arranged it are liable for the rest. That protects honest buyers, which lenders and buyers need before they'll deal with a locked co-op at all.
 **6. Closing hands the value on, even when a court does the closing.** When a locked co-op closes, by its own vote or by a court's order, what's left after its debts and the members' own account balances ([Member Capital Accounts](capital-accounts.md)) goes to the co-op movement's fund named in its articles. Balances count only as allocated under the co-op's published rules. Anything added to members' accounts in the two years before closing, above the average of the three years before that, goes to the fund instead, so members can't empty the reserve into their own accounts on the way out. If the named fund no longer exists, the lock-holder names the closest one, and the attorney general does only if the lock-holder can't. Courts keep every power they have to dissolve a company and to protect members who've been treated unfairly, paid from their own accounts. What they lose is the power to hand the rest to the members.
 **7. Sales outside bankruptcy follow the same rules as inside it.** The rules are written into the state law itself, so they don't depend on a federal law that might be changed or never passed. They apply when a lender sells or keeps a locked co-op's property, a mortgage is foreclosed, a sheriff sells for a court judgment, a tax sale is held, a receiver sells, or the co-op hands everything over to pay its creditors, if what's sold adds up, over three years, to more than a quarter of the business, or includes its brand, technology or main contracts. They're the rules in [When a Locked Co-op Goes Bankrupt](bankruptcy.md#what-can-be-sold-and-to-whom):
 - for 90 days, only other locked co-ops, the federation and a co-op formed by the workers can buy the business whole, at a price no lower than what the pieces would bring, set by an independent appraiser;
 - after that, the pieces can go to anyone, but no buyer can put the business back together, and a buyer who hires more than a third of the members within two years owes the difference to the co-op's creditors;
 - creditors who never chose to lend, like people the co-op injured and tax agencies, are paid by the federation fund anything the lock cost them, as in bankruptcy.
 A lender that follows these rules has sold in a "commercially reasonable" way under the UCC, so it can't be penalized for the lower price. A clause in a loan agreement choosing another state's law to avoid these rules is void in the adopting state's courts. A lender whose claim was on file before the co-op locked, and who didn't agree to the lock, isn't bound.
 **8. Several parties can enforce it.** The lock-holder, any member, any other locked co-op, the bank, and the state attorney general can all go to court to enforce the lock. That matches [The Lock](the-lock.md#how-the-lock-is-made-to-hold). Anyone who brings a frivolous case pays the other side's costs, as in [bankruptcy](bankruptcy.md#everything-else), so competitors can't use lawsuits to hold up each other's deals.
 **9. A backstop if the lock breaks anyway.** If a court still lets a locked co-op convert or be sold, the value above creditors and members' own balances goes to the fund, not to the members. That's layer 4 of the lock, now written into state law. Nobody gets a windfall from breaking it. This part has real precedent. Italian co-ops that take the tax benefits for being mainly mutual must write into their bylaws that their whole net value, apart from members' paid-in capital, goes to the movement's funds when they close ([Italian Civil Code, art. 2514](https://www.brocardi.it/codice-civile/libro-quinto/titolo-vi/capo-i/sezione-i/art2514.html)), and the same happens if they become an ordinary company ([art. 2545-undecies](https://www.brocardi.it/codice-civile/libro-quinto/titolo-vi/capo-i/sezione-v/art2545undecies.html)). Italy has sent that value to the funds since 1992 ([Law 59/1992, art. 11](https://www.diritto.it/i-fondi-mutualistici-per-la-promozione-e-lo-sviluppo-della-cooperazione/)). But Italy lets a co-op change its form. It locks the value, not the co-op, and that's the softer alternative [The Lock](the-lock.md#what-the-lock-costs) leaves open.
 **10. Members aren't wage guarantors just for being members.** Some states make a company's owners personally liable for its unpaid wages, and New York makes every member of a co-op liable ([Owners Are Still Workers](labor-law.md#when-wages-go-unpaid-members-can-owe-them)). In a locked co-op, those owners are its workers. So a member of a locked co-op that's covered by the insurance pool isn't personally liable just for being a member, for claims by other members or for wages the pool paid. Workers who aren't members keep their full claims for the rest. People who ran payroll or kept others working, whatever their title and even if they stepped down in the 90 days before, stay liable as the state's law provides, and so does anyone paid in full, or paid anything else by the co-op, while others went unpaid. The shield doesn't cover wages earned after a missed payroll if the co-op kept working on credit. Federal law isn't affected.
 **What it leaves alone.** It changes no taxes, sets no rules for co-ops that didn't choose the lock, and doesn't require any co-op to lock. Everything else about running a co-op stays with the state's ordinary co-op or corporate law.
 ## Which state's law counts
 Under a long-standing rule, a company's internal affairs, like who votes on a merger, whether members can leave co-op status, and where its value goes when it closes, are governed by the law of the state where it's organized, not where it does business. So a co-op can organize under the model law in a state that has adopted it, wherever it works, the way many companies organize in Delaware. The bank lends to co-ops organized anywhere, but it publishes which states have adopted the law.
 That rule covers less than it sounds like:
 - **Property is different.** Sales of land follow the law of the state where the land sits. A receiver or sheriff in another state follows that state's law. Lenders' rules for equipment may too.
 - **Lenders pick their law.** A loan agreement can choose which state's law governs it ([UCC § 1-301](https://www.law.cornell.edu/ucc/1/1-301)). The model law voids a choice made to avoid the lock, but only in the adopting state's own courts.
 - **Some states reach in anyway.** California applies some of its own corporate rules to companies organized elsewhere that do most of their business there and are mostly owned by people who live there ([Cal. Corp. Code § 2115](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP&sectionNum=2115)).
 Outside the adopting state, the co-op's charter, the lock share and the federal rules are what's left.
 ## Draft text
 A short version, written to be dropped into a state's co-op or corporate law. Section numbers are placeholders.
 > **Sec. 1. Definitions.** (a) A "locked cooperative" is a cooperative or corporation whose articles (1) state that it is a locked cooperative under this Act, (2) name a lock-holder approved under Sec. 9, and (3) name a cooperative development fund. (b) The "lock share" is the single share issued to the lock-holder. (c) A "lock-preserving transaction" is a merger or consolidation into, or a transfer of the business to, another locked cooperative, or a dissolution under Sec. 6. (d) A "covered transfer" is any transfer, lease or license, voluntary or not, that together with others in the preceding 36 months exceeds 25 percent of the book value of the cooperative's assets at the start of that period, or 25 percent of its revenue-producing business, or includes its principal trade name, core technology or principal customer contracts, but not a sale of inventory or replacement of equipment in the ordinary course of business.
 >
 > **Sec. 2. Election.** (a) A cooperative becomes a locked cooperative by adopting articles under Sec. 1(a), approved (1) at formation, by all of its founding members; or (2) otherwise, by at least two-thirds of its members and not less than the vote required to revoke cooperative status, and by the holder of any security interest in substantially all of its assets. (b) A member who voted against an election under subsection (a)(2) may withdraw within 90 days and shall be paid the balance of the member's capital account on the cooperative's ordinary schedule. (c) The Secretary of State shall show locked status in the public record of the entity, and the cooperative shall file a financing statement giving notice of it.
 >
 > **Sec. 3. Status.** (a) A locked cooperative may end its locked status only by a lock-preserving transaction. (b) Any provision of law allowing members to revoke cooperative status, including [the state's worker-cooperative revocation section], does not apply to a locked cooperative. (c) Without the written consent of the lock-holder, no amendment may change the articles' lock provisions, named fund or lock-holder, except a replacement under Sec. 5(d). (d) The lock share and the restrictions in the articles are reasonable restrictions and are not void as restraints on alienation. They bind every successor, receiver, assignee, trustee and transferee with notice.
 >
 > **Sec. 4. Restricted transactions.** Without the written consent of the lock-holder, a locked cooperative, and any entity it controls, shall not (1) merge, consolidate, convert, domesticate or transfer to another jurisdiction, except in a lock-preserving transaction or into an entity that remains a locked cooperative; or (2) make a covered transfer.
 >
 > **Sec. 5. Duties of the lock-holder.** (a) The lock-holder shall consent to a lock-preserving transaction, to a covered transfer of assets no longer needed in the business at fair value, and to a transfer of part of the business to a new locked cooperative. (b) The lock-holder shall not consent to any transaction by which all or substantially all of the business, or its principal trade name, core technology or principal customer contracts, would be held by anyone other than a locked cooperative. (c) A request under subsection (a) not answered within 30 days is approved. A member may seek expedited review of a refusal, and the court shall award costs against a lock-holder whose refusal was unreasonable. (d) Members may replace the lock-holder by a two-thirds vote with another approved lock-holder, except while a request is pending before it. (e) A lock-holder shall not act on a transaction in which it, or a fund it controls, is a party or would receive assets.
 >
 > **Sec. 6. Dissolution.** (a) On the dissolution of a locked cooperative, whether voluntary or by order of a court, the assets remaining after payment of creditors and of members' capital account balances shall be distributed to the cooperative development fund named in its articles, or, if that fund no longer exists, to a fund named by the lock-holder that most nearly serves the same purpose, or, failing that, by the Attorney General. (b) Allocations to members' capital accounts in the 24 months before dissolution, in excess of the average annual allocation in the 36 months before that period, are paid to the fund and not to the members. (c) No court shall order any other distribution of those assets, except payment from a member's own capital account.
 >
 > **Sec. 7. Transfers outside bankruptcy.** (a) Notwithstanding [the state's enactment of UCC Article 9], any law governing mortgages, execution, tax sales, receiverships or assignments for the benefit of creditors, and any choice of law in an agreement, a covered transfer of a locked cooperative's property by a secured party, mortgagee, officer executing a judgment, taxing authority, receiver or assignee shall be made as follows: (1) for 90 days after notice of the sale, the business may be sold as a whole only to a locked cooperative, a cooperative federation or a cooperative formed by its workers, at a price not less than the value of its assets sold separately as found by an independent appraiser; (2) thereafter its assets may be sold separately, but no buyer, with anyone financially related to it, may acquire all or substantially all of the business; and (3) a buyer under paragraph (2) that employs more than one-third of the cooperative's members within two years shall pay the cooperative's creditors the difference between the price paid and the value of the business as a going concern. (b) A disposition made in accordance with this section is commercially reasonable. (c) The cooperative development fund shall pay each involuntary creditor the amount, if any, by which this section reduced its recovery. (d) This section does not apply to a secured party that did not consent to the election and whose interest was perfected before the cooperative became locked.
 >
 > **Sec. 8. Enforcement and remedies.** (a) The lock-holder, any member, any other locked cooperative, [the bank] and the Attorney General may bring an action to enforce this Act. A court shall award costs against a party whose action is frivolous. (b) The Secretary of State shall not accept a filing that would effect a transaction prohibited by Sec. 3 or 4. (c) A transfer in violation of Sec. 4 may be set aside against a transferee with notice. Against a transferee that gave fair value without notice, it stands, and the cooperative's proceeds from it, and any loss to the cooperative, are recoverable for the fund from the persons who caused it. (d) If any conversion or transfer is completed despite this Act, the value of the business in excess of its debts and its members' capital account balances, as found by the court, is held in trust for the fund named in its articles.
 >
 > **Sec. 9. Lock-holders.** The Attorney General shall approve as lock-holders the organizations on [the bank's] list of approved lock-holders, and any cooperative federation or nonprofit that meets published standards of independence, funding and succession equivalent to that list's.
 >
 > **Sec. 10. Members' liability for wages.** (a) Notwithstanding [the state's laws making shareholders or members of a corporation, cooperative or limited liability company personally liable for its wages], a member of a locked cooperative that is covered by [the insurance pool established under the bank's authorizing act] on the date the unpaid services were performed is not personally liable, by reason of being a member, (1) to another member, or (2) to anyone else, to the extent of wages the pool has paid. (b) Subsection (a) does not apply to wages for services performed more than five business days after the cooperative first failed to pay wages when due, unless it was then operating under a filing for relief under title 11 of the United States Code or a payroll loan from [the fund]. (c) This section does not limit the liability of any person (1) who, at any time from 90 days before the cooperative first failed to pay wages when due, served as a director, officer or managing agent, approved payroll, signed for its payment or directed employees to continue work after wages were unpaid; or (2) who received wages in full, or any distribution, allocation paid in cash, redemption or other payment from the cooperative, for a period in which other employees' wages were due and unpaid. (d) This section does not affect liability under federal law.
 ## What it costs, and who objects
 - **Members give up an exit the law otherwise gives them.** Libertarian and conservative critics object that the model law overrides a state's own rule, like the Massachusetts two-thirds vote, for people who may join the co-op decades after the choice was made. Founders choose it unanimously. In an existing business, those who vote no can leave with their savings. Anyone who joins later is told in writing before becoming a member. That narrows the objection but doesn't answer it: "forever" still binds people who weren't there, which is why the lock's [costs](the-lock.md#what-the-lock-costs) and the Italian alternative stay open questions.
 - **Members who vote no get their savings, not a share of the business.** A libertarian critic would pay them what their share would be worth if the business were sold unlocked. The model law doesn't, because that value is exactly what the lock keeps from being cashed out. So some dissenters will feel they lost something, and they may take it to court.
 - **The lock-holder has real power over big sales.** The duties above limit it, but a member who wants to sell part of the business still has to convince an outside body, or a judge.
 - **Lenders get less if a co-op fails.** Fewer buyers means lower prices, and a 90-day wait. Lenders will charge for that, and the bank's published recovery rates show how much.
 ## What this doesn't solve
 - **Only adopting states.** A co-op organized elsewhere relies on its charter and lock share alone, and even a co-op organized in an adopting state can lose property sold under another state's law.
 - **A legislature can repeal it.** Nothing here can stop a later legislature changing its own corporate law, and most states reserve the power to amend the rules for companies they charter. A repeal would leave the charter, the lock share and the federal rules.
 - **Bankruptcy still needs Congress.** State law can't override federal bankruptcy law. The [bankruptcy amendment](bankruptcy.md) is still needed, and this law only covers the sales that happen outside bankruptcy.
 - **It hasn't been tested.** No US state has a lock like this for a business. The closest are charity law, which already keeps a charity's assets dedicated to its purpose, and Britain's community interest companies ([The Lock](the-lock.md#why-forever-isnt-as-strange-as-it-sounds)). How courts would read it, and whether a dissenter could win a claim that locking took their property, is unknown.
@@ -9,34 +9,36 @@ summary: An honest list of what isn't solved yet.
 An honest list of what the model hasn't solved yet, most dangerous first.
-1. **Adverse selection on founders.** *(The most dangerous.)* The lock removes the exit, and profits are shared with every member. In the success case a co-op founder ends up with somewhere between a fifth and a twentieth of what a conventional owner of the same firm would ([The Founder Problem](founder-problem.md)). For founders without wealth the gap in what the bet is *worth* is smaller, but at the top it's decisive. If the strongest founders go conventional, the bank's portfolio is the rejected pool, and the test fails for reasons that say nothing about co-ops. The pilot can at least tell how much of a result is down to founders: [Co-ops or Their Founders?](who-founds.md) measures founders on both sides from government records, and the verdict has to say how much their backgrounds explain. That doesn't change pass or fail, because if the lock keeps strong founders away, that's part of what the lock does. Still open: nothing yet makes the deal better for the founders the model most needs, and with about 400 co-ops, "too few to tell" is a likely answer.
+1. **Adverse selection on founders.** *(The most dangerous.)* The lock removes the exit, and profits are shared with every member. In the success case a co-op founder ends up with somewhere between about a seventh and a fortieth of what a conventional owner of the same firm would ([The Founder Problem](founder-problem.md)). For founders without wealth the gap in what the bet is *worth* is smaller, but at the top it's decisive. If the strongest founders go conventional, the bank's portfolio is the rejected pool, and the test fails for reasons that say nothing about co-ops. The pilot can at least tell how much of a result is down to founders: [Co-ops or Their Founders?](who-founds.md) measures founders on both sides from government records, and the verdict has to say how much their backgrounds explain. That doesn't change pass or fail, because if the lock keeps strong founders away, that's part of what the lock does. Still open: nothing yet makes the deal better for the founders the model most needs, and with about 400 co-ops, "too few to tell" is a likely answer.
 2. **The horizon problem.** *(Mostly answered.)* Members near retirement have little reason to vote for investments whose payoff arrives after they leave. The evidence from France and Italy finds no underinvestment where co-ops must keep a reserve, and [Investing for the Long Run](the-long-run.md) closes the main routes around this model's reserve: pay above the going rate, sales of assets, development spending, high pay that turns into losses, and worn-out equipment still in use. A warning light shows when a co-op stops replacing its equipment, and big bets get an independent opinion before members vote. Still open: nothing forces a co-op to maintain what it has, a bad bet that fails after its backers leave falls on the people who came after, and it's unsettled whether 30% is enough and whether the account rate is right. Members' accounts now pay back within three to seven years ([Member Capital Accounts](capital-accounts.md#why-not-pay-it-out-when-you-leave)), so they help less with long-lived investments than accounts held until members leave. Letting members sell their places to incoming workers was rejected, because that is how the plywood co-ops ended up sold.
-3. **Members' savings sit inside their employer.** *(Partly answered.)* [Member capital accounts](capital-accounts.md) are capped at a year's pay, protected by a solvency test, and now insured by a pool the co-ops pay for ([Protecting Members' Savings](savings-guarantee.md)). It covers final wages, former members' payouts and a protected slice of current accounts. Premiums are now estimated from Europe's wage guarantee funds and US closure and default rates: at least 0.25% of payroll for final wages, and probably 2% to 3% a year of covered savings, which takes nearly all the interest on a protected slice. The reserve target is sized for a five-year wave of failures like 2008–2012, and cover for current members' savings waits until the pool has its own track record. Still open: the pool has no government backing, so a worse recession could outrun it; the estimates rest on rough data, not co-ops; the reserve takes about fifteen years to build; and it needs a federal charter to avoid fifty states' insurance laws. Also open: an account paid out when a member leaves would probably be a pension plan under federal law, which would forbid the co-op from using the money. So accounts now pay each year's credit back on a fixed schedule of three to seven years, whether or not the member has left. That's designed to stay outside pension law, but it isn't settled until the Labor Department answers. It gives up the trust, disclosure and fiduciary rules that pension law would bring, which the model only partly replaces, and it leaves the co-op less of its members' money to invest for the long run.
+3. **Members' savings sit inside their employer.** *(Partly answered.)* [Member capital accounts](capital-accounts.md) are capped at a year's pay, protected by a solvency test, and now insured by a pool the co-ops pay for ([Protecting Members' Savings](savings-guarantee.md)). It covers final wages, former members' payouts and a protected slice of current accounts. Premiums are now estimated from Europe's wage guarantee funds and Census closure rates for small firms like co-ops: about 0.55% of payroll for final wages and notice pay, and 3% to 6.5% a year of covered savings depending on the co-op's age, which takes most or all of the interest on a protected slice. The wage rate assumes a failed co-op owes about five of the eight weeks, counting pay in place of notice, which nobody has measured. Notice pay and severance from overlapping federal, state and bylaw rules don't add up; a worker gets the largest of each, but the pool doesn't cover severance, and a long-serving worker's severance is mostly lost in a failure. The reserve target is six extra years' worth of claims while the pool is young, and limits for new additions fall when the reserve falls behind its planned path. If a recession hit in the pilot's fifth year, the pool would pay roughly 45 to 60 cents on the dollar of savings claims, so in its early years it's a partial promise, and cover for current members' savings waits until the pool has its own track record. Still open: the pool has no government backing, so a worse recession could outrun it; the estimates rest on rough data, not co-ops; the reserve takes about fifteen years to build; and it needs a federal charter to avoid fifty states' insurance laws. Also open: an account paid out when a member leaves would probably be a pension plan under federal law, which would forbid the co-op from using the money. So accounts now pay each year's credit back on a fixed schedule of three to seven years, whether or not the member has left. That's designed to stay outside pension law, but it isn't settled until the Labor Department answers, and federal appeals courts weigh programs like it differently. Because nobody loses their account for leaving, much of what's paid goes to people who've left, which weakens the case. So co-ops where more than a third of payouts go to people no longer working there shorten the wait, then stop making new credits, and credits taxed only when paid wait for the Department ([Member Capital Accounts](capital-accounts.md#why-not-pay-it-out-when-you-leave)). In high-turnover work, that almost always means no accounts, so the lowest-paid members lose the savings the model promises them. An ordinary retirement plan outside the business, with the co-op adding 3% of wages for everyone and, from 2027, a federal match for low earners, makes up part of that ([Member Capital Accounts](capital-accounts.md#saving-for-retirement)). It gives up the trust, disclosure and fiduciary rules that pension law would bring, which the model only partly replaces, and it leaves the co-op less of its members' money to invest for the long run. State wage laws are a second risk: in some states, California likely among them, a credit in a member's account could count as wages, which can't be held back, charged with losses or paused. Co-ops in those states don't use accounts until the state changes its law ([Owners Are Still Workers](labor-law.md#is-the-profit-share-pay)), so members there build no savings in the co-op. A third: account credits look like the notes the Supreme Court has held to be securities, so the model keeps members from putting money in and asks the SEC for an answer ([Member Capital Accounts](capital-accounts.md#are-accounts-securities)). If the answer is no, the nearest exemption means calling credits pay, which works against the model's positions on tax, pension and wage law.
-4. **Is the lock too rigid?** A co-op that should be sold (a better operator exists, the members want out) can only go to another co-op. If the co-op sector is small, that buyer pool is tiny, and viable firms may be liquidated instead of rescued. The federation as buyer of last resort is a partial answer. Critics on the right add a sharper version: a lock that outlasts a repaid loan by generations is a permanent restriction on selling property, bought with one loan, and it binds members who never agreed to it. The lock is now built to hold in layers, including an independent lock share and rules against selling the business piece by piece ([The Lock](the-lock.md#how-the-lock-is-made-to-hold)). Its biggest legal gap is bankruptcy: federal bankruptcy law generally overrides limits on selling a bankrupt company's property, so the lock only holds in bankruptcy if Congress amends that law. [When a Locked Co-op Goes Bankrupt](bankruptcy.md) drafts that amendment. It's modeled on how bankruptcy law already treats charities. Only co-ops can buy a failed co-op whole, its workers can keep it running and bid with the wages they're owed, and creditors who never chose to lend are paid the lock's cost from the federation fund. It still needs Congress, a later Congress can repeal it, and while the co-op sector is small, some viable businesses will be broken up for lack of a co-op buyer. Italy offers a softer model: a co-op there can convert into an ordinary company, but its accumulated reserves go to the co-op development fund, not to the members ([Has This Been Tried?](precedents.md#italys-co-op-funds-coopfond-and-the-marcora-law)). That would keep the part of the lock that stops members cashing out what earlier generations built, and drop the part that stops a firm from ever changing hands.
+4. **Is the lock too rigid?** A co-op that should be sold (a better operator exists, the members want out) can only go to another co-op. If the co-op sector is small, that buyer pool is tiny, and viable firms may be liquidated instead of rescued. The federation as buyer of last resort is a partial answer. Critics on the right add a sharper version: a lock that outlasts a repaid loan by generations is a permanent restriction on selling property, bought with one loan, and it binds members who never agreed to it. The lock is now built to hold in layers, including an independent lock share and rules against selling the business piece by piece ([The Lock](the-lock.md#how-the-lock-is-made-to-hold)). Its biggest legal gap is bankruptcy: federal bankruptcy law generally overrides limits on selling a bankrupt company's property, so the lock only holds in bankruptcy if Congress amends that law. [When a Locked Co-op Goes Bankrupt](bankruptcy.md) drafts that amendment. It's modeled on how bankruptcy law already treats charities. Only co-ops can buy a failed co-op whole, its workers can keep it running and bid with the wages they're owed, and creditors who never chose to lend are paid the lock's cost from the federation fund, which the co-op that buys the business repays. Whoever carries on the business, including members who keep it through a reorganization, takes on injuries from the old co-op's products, its warranties and household customers' deposits. When members keep a co-op over creditors' objections, the value faces a market test, though a weak one, since a conventional offeror can never win. That cost is usually nothing but can be large, and nobody has measured how often. The bank lends toward a workers' bid only up to what the assets would bring sold off piece by piece, so the rest has to come from the workers' claims, the insurance pool or patient money from the federation, and a failed firm often won't find it. It still needs Congress, a later Congress can repeal it, and while the co-op sector is small, some viable businesses will be broken up for lack of a co-op buyer. Italy offers a softer model: a co-op there can convert into an ordinary company, but its accumulated reserves go to the co-op development fund, not to the members ([Has This Been Tried?](precedents.md#italys-co-op-funds-coopfond-and-the-marcora-law)). That would keep the part of the lock that stops members cashing out what earlier generations built, and drop the part that stops a firm from ever changing hands.
-5. **Scale.** *(Partly answered.)* Even a total success at pilot scale leaves most workers in conventional firms. The labor-market effect needs a sector large enough to move wages, and nobody knows how long growth to that size takes, if it happens at all. That's the price of not forcing it. [After a Pass: How Big, How Fast](scale.md) works through the numbers: even growing at twice the recent pace every year, co-ops would take about 19 years to reach 1% of today's private jobs. Growth after a pass comes in capped stages sized to demand the reviewers certify, and the labor-market effect gets its own test, by lottery, in local markets where co-ops could become a large share of one kind of work. Still open: the closest evidence cuts both ways (big retailers paying more didn't lift other employers' pay; hospitals hiring nurses did), the local test can only find fairly large effects, and co-ops may never become a big enough share anywhere to find out.
+5. **Scale.** *(Partly answered.)* Even a total success at pilot scale leaves most workers in conventional firms. The labor-market effect needs a sector large enough to move wages, and nobody knows how long growth to that size takes, if it happens at all. That's the price of not forcing it. [After a Pass: How Big, How Fast](scale.md) works through the numbers: even growing at twice the recent pace every year, co-ops would take about 19 years to reach 1% of today's private jobs. Growth after a pass comes in capped stages sized to demand the reviewers certify, and the labor-market effect gets its own test, by lottery, in local markets where co-ops could become a large share of one kind of work. Still open: the closest evidence cuts both ways (big retailers paying more didn't lift other employers' pay; hospitals hiring nurses did), and co-ops may never become a big enough share anywhere to find out. A first-draft power calculation from public pay records ([The numbers, in a first draft](scale.md#the-numbers-in-a-first-draft)) says the local test could only see an effect of about 5% of pay, bigger than the union evidence suggests a 10% co-op share could produce. So on public numbers the test fails its own rule and wouldn't run. Unless better records change that, the labor-market effect may stay untested. And as a way to raise pay across a whole kind of work, wage boards are faster, more direct and cheaper for the government's budget, though their effect on jobs is disputed ([Compared with wage boards and unions](scale.md#compared-with-wage-boards-and-unions)). The labor-market effect isn't a reason to prefer co-ops for that job.
-6. **Political durability.** *(Partly answered.)* Gradual construction invites gradual repeal. [Making It Last](durability.md) builds the bank to survive a hostile government: the lending standards and the test are fixed in law, board vacancies can't freeze lending, the verdict says "not tested" rather than "failed" if the bank turns away applicants who meet its own standards, and repeal can't unlock the co-ops. Still open: after the Supreme Court's 2026 ruling any president can replace the bank's board; money not yet lent can be taken back in a budget bill; the lock's bankruptcy protection depends on a federal law that can be repealed; and at pilot scale the sector has no real constituency.
+6. **Political durability.** *(Partly answered.)* Gradual construction invites gradual repeal. [Making It Last](durability.md) builds the bank to survive a hostile government: the lending standards and the test are fixed in law, board vacancies can't freeze lending, the verdict says "not tested" rather than "failed" if the bank turns away applicants who meet its own standards (every rejection is re-scored, the line is more than 1 in 10 clear passes turned away, and the result has to be one those applicants could have changed; see [the line](durability.md#when-rejections-mean-not-tested)), and repeal can't unlock the co-ops. Still open: after the Supreme Court's 2026 ruling any president can replace the bank's board; money not yet lent can be taken back in a budget bill; the lock's bankruptcy protection depends on a federal law that can be repealed; and at pilot scale the sector has no real constituency. The 1-in-10 line is a judgment call with no benchmark behind it. The bank's law lets applicants and borrowers sue to enforce its deadlines and signed loans ([Who can go to court](durability.md#who-can-go-to-court)), but that's untested, lawsuits are slow, and if the Justice Department won't defend the law itself, the people left to defend it may not be allowed to. The Constitution probably requires that the board have the last word on each loan, so the board can overrule its staff, only in writing, by named vote and in public ([Who has the last word](durability.md#who-has-the-last-word)). Whether the credit officers can keep protection from being fired after *Slaughter* is unsettled, and a president who empties the board hands its power to the Treasury Secretary.
-7. **Growth and dilution.** *(Partly answered.)* Softened by the tenure ramp, not eliminated, and federal tax law softens it less than the founding plan expected: by default, the part of a share new members haven't reached goes to the reserve, not to other members ([How a Locked Co-op Is Taxed](taxes.md#the-tenure-ramp)). In steady state, an equal split per head still means a marginal hire must generate the average surplus to break even for incumbents. Capital-intensive expansion into lower-margin lines will face internal resistance conventional firms don't have. [When Growing Means Sharing](growth.md) makes Mondragon's answer the standard path: a lower-margin line becomes its own locked co-op, funded from the parent's reserve as a finite, voteless investment, under rules that stop it being used to push existing workers out or move money through insider deals. Still open: growth that can't be split off still dilutes, spin-offs create richer and poorer co-ops (the groups can pool profits, but don't have to), and the evidence comes from co-ops that could hire non-members, so it probably understates the problem under the lock.
+7. **Growth and dilution.** *(Partly answered.)* Softened by the tenure ramp, not eliminated, and federal tax law softens it less than the founding plan expected: by default, the part of a share new members haven't reached goes to the reserve, not to other members ([How a Locked Co-op Is Taxed](taxes.md#the-tenure-ramp)). In steady state, an equal split per head still means a marginal hire must generate the average surplus to break even for incumbents. Capital-intensive expansion into lower-margin lines will face internal resistance conventional firms don't have. [When Growing Means Sharing](growth.md) makes Mondragon's answer the standard path: a lower-margin line becomes its own locked co-op, funded from the parent's reserve as a finite, voteless investment, under rules that stop it being used to push existing workers out or move money through insider deals. Still open: growth that can't be split off still dilutes, spin-offs create richer and poorer co-ops (the groups can pool profits, but don't have to), and the evidence comes from co-ops that could hire non-members, so it probably understates the problem under the lock. Members who share profit also have a reason to hire people like themselves. The pilot tests co-ops' hiring as a group with fake paired applications ([Testing hiring directly](growth.md#5-measuring-it)). But that can only catch co-ops being much worse than ordinary employers, conventional firms aren't tested alongside them, and hiring through members' friends and family is only counted, not tested. And the measure of whether co-ops grow more slowly than similar firms is too noisy, at pilot scale, to find anything but a very large gap ([Measuring it](growth.md#5-measuring-it)).
-8. **Who decides which sectors are "essential"?** *(Partly answered.)* Subsidy authority is price-setting power over a large chunk of the labor market, and every low-margin industry will suddenly discover it is Essential. [Who Decides What's Essential](essential-work.md) takes the choice away from people. A fixed formula decides: work qualifies only if public programs already pay for most of it and it pays badly. The money goes to workers by the hour, measured from records like Medicaid's visit logs, and states whose rates fall behind inflation lose federal Medicaid money in step. The data sources are now named: federal payment records for public money, and Census revenue, with new Census questions on a deadline and rules so status can't flip on noise. Still open: counted properly, hospitals are near the line, which would add their low-paid jobs and a great deal of cost; child care's status is undetermined until the new data exists; other work mostly paid for by families doesn't qualify; employers and owners may still capture some of the money; and it plausibly costs tens of billions of dollars a year.
+8. **Who decides which sectors are "essential"?** *(Partly answered.)* Subsidy authority is price-setting power over a large chunk of the labor market, and every low-margin industry will suddenly discover it is Essential. [Who Decides What's Essential](essential-work.md) takes the choice away from people. A fixed formula decides: work qualifies only if public programs already pay for most of it and it pays badly. The money goes to workers by the hour, measured from records like Medicaid's visit logs, and states whose rates fall behind inflation lose federal Medicaid money in step. The data sources are now named: federal payment records for public money, and Census revenue, with new Census questions on a deadline and rules so status can't flip on noise. Still open: counted properly, hospitals are near the line, which would add their low-paid jobs and a great deal of cost; child care's status is undetermined until the new data exists; other work mostly paid for by families doesn't qualify; employers and owners may still capture some of the money; workers without work authorization get nothing and may be made worse off; and at a first-draft $3 an hour it costs about $16 billion to $20 billion a year for home care aides and nursing assistants alone, more if hospitals qualify ([Paid to workers, by the hour](essential-work.md#paid-to-workers-by-the-hour)).
-9. **The 1/N problem.** *(Mostly answered.)* Peer monitoring works at 30 people; at 10,000 your extra effort raises the pool by a rounding error. The answer is culture and structure: co-ops really do push out free riders, and the federation model keeps units small enough for monitoring to bite while pooling risk above them. [Does Sharing the Profit Mean Less Effort?](free-riding.md) turns that into rules: small teams with their own numbers, team bonuses whose formula members set in advance, and a fair, fast dismissal process with protections against retaliation and discrimination. Still open: the evidence comes from conventional firms with profit sharing, not co-ops, and a small shared stake may even make people less willing to speak up; the pilot tracks value added per hour as co-ops grow to find out.
+9. **The 1/N problem.** *(Mostly answered.)* Peer monitoring works at 30 people; at 10,000 your extra effort raises the pool by a rounding error. The answer is culture and structure: co-ops really do push out free riders, and the federation model keeps units small enough for monitoring to bite while pooling risk above them. [Does Sharing the Profit Mean Less Effort?](free-riding.md) turns that into rules: small teams with their own numbers, team bonuses whose formula members set in advance, and a fair, fast dismissal process with protections against retaliation and discrimination. It sets first-draft numbers: all bonuses together at most 10% of pay and no one's more than 15% of their own, and a dismissal needs four of five members drawn by lot, with an outside panel from other co-ops for small co-ops. Still open: the evidence comes from conventional firms with profit sharing, not co-ops, and a small shared stake may even make people less willing to speak up; the pilot tracks value added per hour as co-ops grow to find out.
-10. **The pilot's own weak points.** [The pilot](pilot-spec.md) puts the burden of proof on the co-ops, which means roughly a 1-in-10 chance of shutting down a pilot that was actually working. It tests individual co-ops, not the [federation](federation.md) support network Mondragon relied on. Its lotteries test help after the loan and, since the pre-launch lottery was added, help before it ([Help Before the First Loan](before-launch.md)), but only among groups that come forward, not outreach to workers who never think of starting a co-op. Founders now put in a small stake they can pay in unpaid work, but founders who can't afford months of unpaid work still face a barrier. Its comparison group (small businesses with government-backed loans) is biased in directions that partly cancel out, by amounts nobody knows. And market-rate lending based on collateral may mostly reach founders who already have some wealth. Approval rates by race, gender and wealth are published so that shows up, but publishing a gap doesn't close it.
+10. **The pilot's own weak points.** [The pilot](pilot-spec.md) puts the burden of proof on the co-ops, which means roughly a 1-in-10 chance of shutting down a pilot that was actually working. It tests individual co-ops, not the [federation](federation.md) support network Mondragon relied on. Its lotteries test help after the loan and, since the pre-launch lottery was added, help before it ([Help Before the First Loan](before-launch.md)), but only among groups that come forward, not outreach to workers who never think of starting a co-op. The pre-launch help now has a cost ceiling set in advance, $400,000 of total public cost per extra co-op still open at year four, but there's no good benchmark for it, and the lottery is small enough that "not settled" is a likely verdict ([The cost ceiling](before-launch.md#the-cost-ceiling)). Founders now put in a small stake they can pay in unpaid work, but founders who can't afford months of unpaid work still face a barrier. Its comparison group (small businesses with government-backed loans) is biased in directions that partly cancel out, by amounts nobody knows. And market-rate lending based on collateral may mostly reach founders who already have some wealth. Approval rates by race, gender and wealth are published so that shows up, but publishing a gap doesn't close it.
-14. **Drift toward the safest co-ops.** *(Partly answered.)* A bank that lends only to co-ops can still lend mostly to the safe ones, like consultancies started by people with savings, as America's co-op bank did. [Who the Bank Lends To](who-gets-loans.md) sets aside $90 million of the loan money for co-ops in lower-paid work, which goes back to the general pool only if the reviewers certify the bank handled those applications fairly. Results are reported for that group and for first-time owners without much wealth, and the verdict has to say which kinds of co-ops it covers. Still open: the set-aside makes money available but can't make groups apply; it can be used mostly on work just under the average wage; first-time owners without wealth get reporting, not money; and in work whose prices are set by Medicaid or contractors, a failure may say more about the price than about co-ops.
+14. **Drift toward the safest co-ops.** *(Partly answered.)* A bank that lends only to co-ops can still lend mostly to the safe ones, like consultancies started by people with savings, as America's co-op bank did. [Who the Bank Lends To](who-gets-loans.md) sets aside $90 million of the loan money for co-ops in lower-paid work, half of it for the lowest-paid industries, which goes back to the general pool only if the reviewers certify the bank handled those applications fairly. Results are reported for that group and for first-time owners without much wealth, and the verdict has to say which kinds of co-ops it covers. Still open: the set-aside makes money available but can't make groups apply; within each half it can be used mostly on the better-paid end; "lower-paid" is judged by industry, which leaves out poorly paid co-ops in well-paid industries and can be gamed by how a co-op describes its work; first-time owners without wealth get reporting, not money; and in work whose prices are set by Medicaid or contractors, a failure may say more about the price than about co-ops. Even measuring who gets loans needs its own rule: lending rules bar asking applicants' race and sex, and the federal exception for small-business lenders won't reach a bank this small, so the bank's law has to require the question, and a later Congress could drop it ([Asking needs its own legal basis](who-gets-loans.md#treated-the-same)).
-15. **Taxes.** *(Partly answered.)* A locked co-op is a corporation that pays tax once on members' profit shares, under the part of the tax code written for co-ops. [How a Locked Co-op Is Taxed](taxes.md) fits the model to it: profit is shared per hour worked, workers who aren't members get a share too, wages reach the going rate before any profit is shared, and charges come out of the current year's share before older, already-taxed balances. Still open: nobody has ruled that a co-op with an outside lock-holder and a reserve that goes to the federation counts as a co-op for tax purposes; whether profit shares owe payroll tax is unsettled; the ramp no longer shields senior members from new hires unless it's paid as wages; workers without work authorization can't be members; and the kept reserve pays 21% even though nobody owns it.
+15. **Taxes.** *(Partly answered.)* A locked co-op is a corporation that pays tax once on members' profit shares, under the part of the tax code written for co-ops. [How a Locked Co-op Is Taxed](taxes.md) fits the model to it: profit is shared per hour worked, workers who aren't members get a share too, wages reach the going rate before any profit is shared, and charges come out of the current year's share before older, already-taxed balances. Still open: nobody has ruled that a co-op with an outside lock-holder and a reserve that goes to the federation counts as a co-op for tax purposes; whether profit shares owe payroll tax is unsettled; the ramp no longer shields senior members from new hires unless it's paid as wages; workers without work authorization can't be members; the kept reserve pays 21% even though nobody owns it; members can't take the 20% deduction owners of partnerships and S corporations get, so the co-op comes out ahead of partnerships only if profit shares escape payroll tax ([How this compares](taxes.md#how-this-compares-with-other-businesses)); the return on members' accounts probably can't be deducted, so account holders' returns are credited after the co-op's tax ([Interest on accounts](taxes.md#interest-on-accounts)); following the deferred-pay rules for lower-income members' untaxed credits could be read as conceding that the credits are pay; and a member who loses their account when a co-op fails can probably deduct only $3,000 a year of it, after being taxed on it in full, until Congress refunds that tax.
-11. **Federal or state?** *(Mostly answered.)* The test stays federal, because one bank with one plan makes one clean experiment. Any state can copy the bank under the same published rules, reported separately, and a model state law protects the lock ([Making It Last](durability.md#federal-test-state-copies)). Still open: whether a few state lenders sharing one plan would have been the stronger experiment after all, since the most durable public bank in America, North Dakota's, is a state bank.
+11. **Federal or state?** *(Mostly answered.)* The test stays federal, because one bank with one plan makes one clean experiment. Any state can copy the bank under the same published rules, reported separately, and a model state law protects the lock for co-ops that choose it ([The Lock in State Law](lock-state-law.md); [Making It Last](durability.md#federal-test-state-copies)). No state has adopted anything like it, and a co-op organized in a state that hasn't relies on its charter alone. Still open: whether a few state lenders sharing one plan would have been the stronger experiment after all, since the most durable public bank in America, North Dakota's, is a state bank.
-12. **Voluntary buyouts: in or out?** *(Answered.)* In, on a separate track: $100 million of its own, healthy firms only, a willing seller, no new tax break, a capped price the seller shares the risk on, a vote of the whole workforce, and its own test of money and pay, so it can't flatter the startup result ([When an Owner Wants to Sell to the Workers](buyouts.md)). Still open: whether a price set by the market is fair to workers who pay it out of their own future work, and whether about 60 deals can show more than that the loans get repaid.
+12. **Voluntary buyouts: in or out?** *(Answered.)* In, on a separate track: $100 million of its own, healthy firms only, a willing seller, no new tax break, a capped price the seller shares the risk on, a vote of the whole workforce, and its own test of money and pay, which counts the tax sellers put off under an old tax break ([The tax break that already exists](buyouts.md#the-tax-break-that-already-exists)), so it can't flatter the startup result ([When an Owner Wants to Sell to the Workers](buyouts.md)). Still open: whether a price set by the market is fair to workers who pay it out of their own future work, and whether about 60 deals can show more than that the loans get repaid. The comparisons are now set out: SBA-financed purchases, ESOP sales and deals that fell through, with a loss rate fixed by formula in advance ([Who buyouts are compared against](buyouts.md#who-buyouts-are-compared-against)). With so few deals, the loss test can catch a track that does much worse than SBA lending, but it can't show that buyouts do better. Why co-ops can't simply use the SBA is now spelled out: its rules ask a co-op, unlike an ESOP, for cash up front and one member's personal guarantee. The bank's deals do without both, so they rest on the seller's paid-last share and a coverage test on past cash flow ([Why not just use the SBA?](buyouts.md#why-not-just-use-the-sba)). Under the SBA's rules from October 2026, those two rules are nearly the whole gap, and both are SBA policy it could change itself. If it does, or a small fund covers the cash stake, much of the track may not be needed. Whether that's enough in place of cash and guarantees is something only the loss record will show. State programs paid for by Treasury and USDA's rural guarantees already allow co-op buyouts in pieces. The track uses them, but can't count them as private money or use them to hide losses ([Other public help](buyouts.md#other-public-help-that-already-exists)). How often private lenders will really take an equal share is unknown, so deals the bank makes alone are capped at a third of the money. The help each sale needs, the workers' adviser, checks on deals that fall through and help after the sale, costs the public roughly $110,000 to $240,000 per closed deal, about $12 million in all. That comes out of the same margin the money test measures, so the track passes only if losses stay low ([What the help costs](buyouts.md#what-the-help-costs)).
-13. **Work where people don't stay long.** *(Partly answered.)* In home care, most workers leave within a year or two. Membership is now automatic after a short probation, the buy-in comes out of profit shares rather than pay, and pushing people out before they'd join counts against the co-op ([When People Don't Stay Long](high-turnover.md)). Still open: with a five-to-ten-year profit share ramp, only a small minority of care workers ever reach a full share, so the people who stay collect much of the profit the others helped make. A much shorter ramp for low-margin, high-turnover co-ops would fix that, but it would go against the founding plan's range and weaken the ramp's protection against under-hiring. Also open: whether default members take part in governance, and the legal questions around tax IDs, visas and benefit asset limits. How labor law treats worker-owners now has its own page ([Owners Are Still Workers](labor-law.md)). Federal labor law probably doesn't protect members' own organizing, so the charter does, and fixing the law takes a separate bill that may never pass. Some states leave members out of unemployment insurance, and whether founders' unpaid work before the co-op forms is outside wage law still needs the Labor Department's answer.
+13. **Work where people don't stay long.** *(Partly answered.)* In home care, most workers leave within a year or two. Membership is now automatic after a short probation, the buy-in comes out of profit shares rather than pay, and pushing people out before they'd join counts against the co-op ([When People Don't Stay Long](high-turnover.md)). Still open: with a five-to-ten-year profit share ramp, only a small minority of care workers ever reach a full share, so the people who stay collect much of the profit the others helped make. A much shorter ramp for low-margin, high-turnover co-ops would fix that, but it would go against the founding plan's range and weaken the ramp's protection against under-hiring. Also open: whether default members take part in governance, and whether Social Security counts a profit share as earned income for SSI, which decides whether members on SSI lose more by joining. SSI may also count an account credit as income when it's made. Until Social Security answers, members on SSI get their share all in cash and join only if they say yes ([How a Locked Co-op Is Taxed](taxes.md#benefits)), and workers who have only an IRS taxpayer number still can't be members. How labor law treats worker-owners now has its own page ([Owners Are Still Workers](labor-law.md)). Federal law makes the people who run payroll personally liable for unpaid minimum wages, and New York appears to make every co-op member liable for all unpaid wages, though no court has tested that. The model stops ordinary work after a missed payroll and asks states to narrow the rule ([When wages go unpaid](labor-law.md#when-wages-go-unpaid-members-can-owe-them)), but until a state does, members there carry the risk, and elected officers carry it everywhere unless insurance covers it. Federal labor law probably doesn't protect members' own organizing, so the charter does, and fixing the law takes a separate bill that may never pass. Some states leave members out of unemployment insurance, and whether founders' unpaid work before the co-op forms is outside wage law still needs the Labor Department's answer. A federal rule due in 2030 requires 80% of certain Medicaid home care payments to go to care workers' pay. Co-ops meet it from wages alone and pay any shortfall as wages, but in that work it leaves little room for profit shares or a reserve, and whether the rule survives is unknown ([When Medicaid decides how much goes to pay](high-turnover.md#when-medicaid-decides-how-much-goes-to-pay)).
 16. **What the rules cost a small co-op.** *(Partly answered.)* Every check the model adds costs a small co-op money. [What the Rules Cost a Small Co-op](compliance.md) scales checking to size: a yearly review and a fixed list of tests instead of an audit for small co-ops, audits by lot and on warning signs, and a lock-holder review every two years. Even so, the model's own estimate is 1% to 2.5% of a small co-op's sales, which could be a large part of the profit in cleaning or home care. Whether lighter checking lets more cheating through is something the audits by lot will show. Italy's "false co-ops" are the warning.
 *Not problems here, because nobody's company is forcibly bought:* valuing every firm in the economy, owners stripping value before a takeover, foreign capital flight, and years of payouts to former owners. The contractor boundary isn't an economy-wide problem either. Its co-op version, hiring non-members to dodge membership, is handled by [the lock](the-lock.md)'s membership requirement.
@@ -32,7 +32,7 @@ The model doesn't set anyone's pay. It makes sure pay is decided in the open, in
 ### Pay bands, not personal votes
 - **Every job has a pay band**, a range from lowest to highest. Members approve the bands, as part of the pay policy.
- **Managers place people within the bands**, and can give raises and bonuses there, the way any employer does. Nobody's personal salary goes to a vote of the whole co-op.
+- **Managers place people within the bands**, and can give raises there, the way any employer does. Bonuses follow formulas the members approve in advance, within limits ([Does Sharing the Profit Mean Less Effort?](free-riding.md#team-bonuses-the-members-design)). Nobody's personal salary goes to a vote of the whole co-op.
 - **Offers can run for up to three years.** A salary agreed within an approved band holds for the length of the offer, even if the band changes later. So a co-op can hire someone with a firm offer.
 ### Everyone sees the bands
@@ -52,7 +52,7 @@ The model doesn't set anyone's pay. It makes sure pay is decided in the open, in
 A majority vote can't protect a minority from the majority. So some pay decisions need **two majorities**: a majority of all members, and a majority of the members in the lower-paid half. They are:
 - changing the pay ratio;
- any band whose top is above the 90th percentile of local pay for that job, or above three times the co-op's own median pay;
+- any band whose top is above the 90th percentile of pay for that job in the co-op's own area, for remote workers too, or above three times the co-op's own median pay. Where the survey gives no exact figure at the top, the highest figure it gives is used;
 - any change that raises bands for jobs held by more than half the members.
 These votes are by secret ballot, with at least 30 days' notice. That makes both kinds of grab harder: a skilled majority can't vote itself a raise over the heads of the lower-paid, and a scarce specialist can still be paid what it takes, if both groups agree.
@@ -17,7 +17,7 @@ This page lists the ways someone could cheat [the pilot](pilot-spec.md), or sabo
 **The rules:**
- **Every deal with an insider is disclosed.** Any contract with a founder, manager, member's family, or a company they own is reported to the bank and checked each year to confirm it's priced like a deal between strangers. Overpayments are treated as a breach of the loan.
+- **Every deal with an insider is disclosed.** Any contract with a founder, manager, member's family, or a company they own is reported to the bank and checked each year to confirm it's priced like a deal between strangers. Overpayments are treated as a breach of the loan. After the loan is repaid, the same check continues as part of the lock, along with the two rules below on ending contracts and buying key assets ([Deals with insiders](the-lock.md#deals-with-insiders)).
 - **Members can fire management.** Any management or franchise contract can be ended by a members' vote on short notice. A contract the members can't get out of is a boss.
 - **The business owns what it needs to operate, or can buy it.** If key assets are leased from an insider, the bank gets a claim on them or the co-op gets an option to buy them at a fair price. That way the co-op can't be held hostage, and the bank's collateral is real.
 - **Membership is real.** Probation lasts at most 12 months, counted across rehiring, and membership is automatic when it ends unless the worker opts out through the lock-holder. Members must do at least half the work hours in the co-op's second year and three-quarters from its third, counting hours worked through agencies or contractors. Pushing people out before they'd join is tracked and counts against the co-op ([When People Don't Stay Long](high-turnover.md)). All of this is checked every year. A co-op that falls short counts as failed in the [pilot's survival measure](pilot-spec.md#what-gets-measured).
@@ -77,7 +77,7 @@ This page lists the ways someone could cheat [the pilot](pilot-spec.md), or sabo
 **The rules:**
- **Fraud doesn't end the experiment.** Under the [emergency stop](pilot-spec.md#the-decision-rule), lending restarts once the reviewers confirm the specific gaps are closed. Losses that are later recovered are credited back.
+- **Fraud doesn't end the experiment.** Under the [emergency stop](pilot-spec.md#the-decision-rule), lending restarts once the reviewers confirm the specific gaps are closed and the board signs off. Losses that are later recovered are credited back.
 - **The staged payouts and middleman caps above** limit how much any ring can take before it's noticed.
 ## Rigging the review
@@ -104,4 +104,4 @@ This page lists the ways someone could cheat [the pilot](pilot-spec.md), or sabo
 - **Every loan is public:** the borrower, the amount, the rate and the terms.
 - **Every contact from an elected official or their staff about a specific loan is logged and published.**
- **The board answers to elected officials. Individual loans don't.** The President can appoint and remove the bank's board at will. But by law no official can direct a decision on a particular loan, loan officers are bankers, not appointees, and a new board can't change the filed lending standards without the results being reported both ways (see [Making It Last](durability.md#what-a-new-board-cant-change)).
+- **The board answers to elected officials. Individual loans don't.** The President can appoint and remove the bank's board at will. But by law nobody outside the bank can direct a decision on a particular loan except through the board, the board can overrule its staff only in writing and in public ([Who has the last word](durability.md#who-has-the-last-word)), loan officers are career bankers the board hires and can fire only for cause, not political appointees, and a new board can't change the filed lending standards without the results being reported both ways (see [Making It Last](durability.md#what-a-new-board-cant-change)).
@@ -53,7 +53,7 @@ It breaks down like this:
 - **About $290 million for loans.** Around 400 co-ops with a typical first loan of about $500,000 is roughly $200 million. The rest is for follow-on loans to co-ops that grow. For comparison, Shared Capital's average loan is about $230,000. The pilot's loans are larger because it's meant to fund real businesses with real payrolls, not only very small ones.
 - **$30 million, capped, for business help:** $20 million after the first loan (bookkeeping, governance training, legal setup, and more intensive help for half the co-ops, chosen by lottery; see [the support lottery](#the-support-lottery)), and $10 million before it, taken from the loan budget, for a lottery testing whether serious help makes more groups succeed in starting a co-op that lasts ([Help Before the First Loan](before-launch.md)). Venezuela's census blamed many of its failures on the lack of exactly this. This money is a public cost, stated openly and capped, and it's counted in the pilot's total cost to taxpayers. It isn't allowed to hide inside loan pricing.
- **The remainder** is a cash cushion and running costs.
+- **The remainder** is a cash cushion and running costs. Running costs include audits of small co-ops: about 20 a year drawn by lot, plus those triggered by warning signs, perhaps 30 to 50 in all. At $10,000 to $30,000 each, in line with the SEC's estimates for small firms, that's roughly $300,000 to $1.5 million a year. Like any lender's checking, it's a cost of lending, paid from the bank's income and built into its market rate. Audits of buyout co-ops are charged to the buyout track ([What the Rules Cost a Small Co-op](compliance.md#audits-by-lot-and-when-something-looks-wrong)).
 ## Why about 400 co-ops
@@ -192,14 +192,14 @@ At year 12, both measures must pass:
 **If both pass:** the charter triggers a fast-track, up-or-down vote in Congress on a second capitalization, with no amendments and no committee bottleneck. It can't be automatic, because no Congress can bind a later one's spending. A fast-track vote is the most that can honestly be promised. If the bank is later allowed to borrow, its debts carry **no federal guarantee**, written into the charter. Fannie Mae and Freddie Mac needed a taxpayer rescue in 2008 partly because markets had always assumed the government stood behind them. This bank shouldn't be able to create that assumption.
-**If either fails, the shutdown happens by itself, with no further vote needed.** No new loans. The remaining loans are offered at fair value to co-op and community lenders, who keep the same repayment terms. Whatever they don't buy is collected by the Treasury on the original terms until paid off. None of it goes to distressed-debt buyers. The money goes back to the Treasury. The co-ops stay co-ops, because [the lock](the-lock.md) is in their own charters, but they're on their own.
+**If either fails, the shutdown happens by itself, with no further vote needed.** The board formally adopts the reviewers' result, and after a fail it has to start the loan sale by a deadline the law sets ([Who has the last word](durability.md#who-has-the-last-word)). No new loans. The remaining loans are offered at fair value to co-op and community lenders, who keep the same repayment terms. Whatever they don't buy is collected by the Treasury on the original terms until paid off. None of it goes to distressed-debt buyers. The money goes back to the Treasury. The co-ops stay co-ops, because [the lock](the-lock.md) is in their own charters, but they're on their own.
 **There is no "inconclusive, keep going" option.** If the evidence doesn't clearly show co-ops holding their own, that counts as a fail. The burden of proof is on the co-ops, which is where a skeptic would put it.
 **The emergency stop.** If net losses ever pass 20% of the capital ($70 million), new lending freezes (the [buyout track](buyouts.md) has its own stop, at $20 million), and the reviewers report within six months on the cause:
 - **A recession:** lending restarts only if the SBA's own loans from the same years lost money at a similar rate. That's a fixed comparison, not a judgment call.
- **Fraud:** lending restarts once the reviewers certify the specific gaps are closed and recovery has been pursued. Otherwise one organized fraud ring could end the experiment on purpose (see [Guarding the Pilot](pilot-safeguards.md)).
+- **Fraud:** lending restarts once the reviewers certify the specific gaps are closed and recovery has been pursued, and the board signs off in writing. Otherwise one organized fraud ring could end the experiment on purpose (see [Guarding the Pilot](pilot-safeguards.md)).
 - **Bad lending decisions:** no restart. That's a result.
 ## What this pilot can't tell you
@@ -30,7 +30,7 @@ Three lessons come out of these. When members sense trouble, they rush to get th
 Every locked co-op belongs to a **members' savings insurance pool**. It protects three things, in this order.
-**1. Final wages.** If a co-op fails owing its workers pay, the pool pays up to eight weeks of each worker's unpaid wages and earned time off. For a low-paid worker, this is usually the biggest loss, and US bankruptcy law only partly protects it: unpaid wages get priority, but only up to $17,150 per worker, and only after secured lenders are paid ([11 U.S.C. § 507(a)(4)](https://www.law.cornell.edu/uscode/text/11/507)).
+**1. Final wages.** If a co-op fails owing its workers pay, the pool pays up to eight weeks of each worker's unpaid wages and earned time off, and then notice pay the co-op owes ([below](#notice-pay-and-severance)). For a low-paid worker, this is usually the biggest loss, and US bankruptcy law only partly protects it: unpaid wages get priority, but only up to $17,150 per worker, and only after secured lenders are paid ([11 U.S.C. § 507(a)(4)](https://www.law.cornell.edu/uscode/text/11/507)).
 **2. Former members' payouts.** When someone leaves, their account becomes a fixed amount the co-op owes them, paid on the account's normal schedule, three to seven years after each credit was made (see [Member Capital Accounts](capital-accounts.md#how-its-paid-out)). They no longer work there and have no say in how it's run, so this is the clearest case for protection. The pool covers these unpaid payouts up to $50,000 per person.
@@ -38,6 +38,21 @@ Every locked co-op belongs to a **members' savings insurance pool**. It protects
 **The limits are per person**, across every co-op they've ever belonged to. An account split in a divorce or passed to an estate shares the original person's limit.
 ## Notice pay and severance
 A worker whose co-op closes can be owed three kinds of money: pay for work already done, pay in place of the notice they should have had, and severance. The laws that require the last two overlap, so a worker could look owed the same weeks two or three times over. The model sorts it out this way.
 - **What the laws require.** The co-op's bylaws require 30 days' notice or pay instead, with no exceptions ([When Work Runs Short](downturns.md#the-layoff-order)). Federal law requires 60 days' notice of a closing from employers with 100 or more full-time workers, or 100 or more workers putting in 4,000 hours a week between them ([20 C.F.R. § 639.3(a)](https://www.ecfr.gov/current/title-20/part-639/section-639.3)). One that closes without it owes back pay and benefits for each day short, up to 60 days, but never for more than half the days the worker was employed ([29 U.S.C. § 2104](https://www.law.cornell.edu/uscode/text/29/2104)). Courts disagree on whether that means calendar days or working days. Federal law excuses short notice when the business was seeking money that notice would have scared off, or when the cause wasn't foreseeable ([§ 2102(b)](https://www.law.cornell.edu/uscode/text/29/2102)). California requires 60 days at sites with 75 or more workers, part-time ones included, with back pay on the same terms ([Labor Code §§ 1400.5](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=LAB&sectionNum=1400.5), [1401](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=LAB&sectionNum=1401), [1402](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=LAB&sectionNum=1402)). New York requires 90 days' notice from employers with 50 or more full-time workers there, but, like federal law, limits back pay to 60 days ([Labor Law § 860-g](https://newyork.public.law/laws/n.y._labor_law_section_860-g)). New Jersey requires 90 days from employers with 100 or more, and its penalty for short notice is four more weeks of severance rather than back pay. Other states have their own versions, and the bank's checked entry for each state lists them.
 - **Notice pay, once.** A worker gets back pay for the longest period any one law pays, not all of them added up. That's at most 60 days under the federal, California and New York laws. New Jersey's extra four weeks are severance, not notice pay. The laws figure back pay at the higher of the worker's final rate and their three-year average. The pool pays at its own covered rate ([Closing the loopholes](#closing-the-loopholes)), and any difference stays the worker's claim against the co-op.
 - **Severance: the larger of the bylaws and state law.** The standard bylaws pay a week per year worked. New Jersey's 2019 law requires the same of employers with 100 or more workers when a closing or mass layoff ends 50 or more jobs at a site, and counts federal back pay toward it ([P.L. 2019, c. 423](https://pub.njleg.state.nj.us/Bills/2018/PL19/423_.HTM)). New Jersey has amended it since, reportedly to count more workers and sites, and the bank's entry has to be checked against the current text. The bylaws never add on top of the law; they only fill in where the law pays less.
 - **What the pool pays, in order.** Out of each worker's eight weeks, first pay for work already done and earned time off, then notice pay, including the co-op's usual health contribution for those weeks. Pay from other work in the same weeks is taken off the notice pay, so nobody is paid twice for the same weeks. The pool covers notice only up to the standard bylaws' 30 days or the period the law actually requires, whichever is longer. A co-op can promise more, but the pool won't pay for it, and a longer notice period or bigger severance adopted in the two years before a failure gets neither cover nor priority. Severance isn't covered. France's fund covers it, but this pool is smaller and has nothing behind it.
 - **The pool takes over the claim it paid.** Federal law subtracts wages the employer paid for the notice days, but the pool isn't the employer, and no court has said whether its payments count. So the pool pays as an advance on the co-op's behalf, and each worker assigns to it, in writing, their notice-pay claims up to what it paid.
 - **Unemployment benefits.** In some states, pay in place of notice delays unemployment benefits for the weeks it covers. There, part of what the pool pays saves the state's fund money rather than adding to the worker's income. The pool pays notice pay in whatever way costs workers the least benefit in each state, and the bank's checked entry says what that is.
 - **Skipping notice isn't following the rules.** Directors who closed without the notice the bylaws or the law required, when no legal exception applied, are among the people the pool pursues ([Owners Are Still Workers](labor-law.md#when-wages-go-unpaid-members-can-owe-them)).
 - **Much of the severance is at risk in a failure.** Bankruptcy puts wages, severance and notice pay earned in the 180 days before filing ahead of other unsecured debts, up to $17,150 per worker ([11 U.S.C. § 507(a)(4)](https://www.law.cornell.edu/uscode/text/11/507)). Courts often treat only the part of length-of-service severance earned in those 180 days as having that priority, so a long-serving worker's week-per-year is mostly an ordinary claim that may pay little. Back pay a court awards for notice-law violations covering days after the filing can be paid ahead of that, as a cost of the case, if the court finds it won't cost other jobs ([§ 503(b)(1)(A)(ii)](https://www.law.cornell.edu/uscode/text/11/503)). A trustee that only liquidates the business may owe no federal notice at all. The pool's claim for what it paid ranks behind the worker's own unpaid claims ([When a Locked Co-op Goes Bankrupt](bankruptcy.md), point 7).
 - **A co-op buyer that keeps the workers owes no notice pay for them.** When a business is sold, its workers count as the buyer's employees from the day of the sale, so those who keep their jobs haven't lost them under federal notice law ([29 U.S.C. § 2101(b)(1)](https://www.law.cornell.edu/uscode/text/29/2101)). The failed co-op still owes notice pay to those the buyer doesn't take on, and the buyer owes notice for any later closing.
 - **Splitting doesn't avoid it.** Federal rules can treat related companies as one employer, looking at common ownership, common directors, actual control, shared personnel policies and dependence on each other ([20 C.F.R. § 639.3(a)(2)](https://www.ecfr.gov/current/title-20/part-639/section-639.3)). Co-ops in a federation share standard bylaws, a lender and a pool, so a court might count them together. That's unsettled. So the bylaws don't rely on the answer: a co-op whose group reaches 100 workers, counting companies it controls and co-ops split from it in the last three years, gives 60 days' notice as if federal law applied, and layoffs within any 90 days are added together. Neither the bank nor the pool may direct a co-op's layoffs, which would make the case for counting co-ops together stronger.
 ## How it's paid for
 **By the co-ops, not taxpayers.** The pool has **no government backing**, for the same reason [the bank's](pilot-spec.md#the-decision-rule) debts don't. A public guarantee would be a hidden subsidy, and markets would come to assume it. That's a real difference from credit unions and banks, and it's why the pool has to be run more cautiously than they are. The charter also bars the bank from lending to the pool, buying its assets or paying its claims, so the bank can't become a backstop by the back door. No law can stop a future Congress from bailing the pool out. The best this model can do is keep the promises small enough, and the cut in a bad year plain enough, that a bailout isn't needed.
@@ -49,28 +64,38 @@ Every locked co-op belongs to a **members' savings insurance pool**. It protects
 - **Deferring is limited.** A struggling co-op can defer up to one year's premium, as a debt to the pool. While it does, new additions to its members' accounts aren't covered, and the pool watches its accounts monthly. Deferred premiums count as nothing in the pool's reserve, and if the co-op fails, they're paid ahead of its members' accounts.
 - **Who pays.** Current members pay for cover of their own slices, out of their account interest, in proportion to each person's protected balance. Members who take all their profit share in cash, as low-income members can, don't pay for cover they don't have. The co-op as a whole pays for final-wage cover, since everyone is covered, and for former members' payouts. Those are debts the co-op owes, and charging the premium to former members would take most of the interest on money they can't touch.
 - **Other ways to cover former members.** A co-op can instead put former members' unpaid payouts in a fully funded escrow account, or back them with a surety bond from an approved insurer. The pool is the default. If private options come in cheaper, that's a useful check on the pool's prices.
- **The reserve is kept safe.** It's held in Treasury securities by an independent custodian, out of reach of any co-op's creditors, as Europe's rules require of wage funds. It never holds the bank's loans or anything issued by co-ops, which would fail at the same time as the co-ops it insures.
+- **The reserve is kept safe.** It's held in Treasury securities by an independent custodian, out of reach of any co-op's creditors, as Europe's rules require of wage funds. It never holds the bank's loans or anything issued by co-ops, which would fail at the same time as the co-ops it insures. The one exception is what it's owed back after a failure: when it hands the wage claims it paid to a workers' co-op buying the failed one ([When a Locked Co-op Goes Bankrupt](bankruptcy.md), point 7), the new co-op's debt to it is counted as worth nothing in the reserve until it's repaid, and can't be more than the wages the pool paid in that failure.
 ## What it should cost
 Nobody has priced insurance quite like this, but the pieces can be estimated from what's known.
-**Final wages: at least 0.25% of payroll.** Europe's wage guarantee funds are the closest match. Both are paid for by employers as a share of payroll:
+**Final wages and notice pay: about 0.55% of payroll.** Europe's wage guarantee funds are the closest match. Both are paid for by employers as a share of payroll:
 - **Germany** pays up to three months of unpaid wages when an employer goes insolvent. Employers paid 0.06% of payroll in 2023 and 2024, and pay 0.15% in 2025 and 2026. After the financial crisis the rate jumped to 0.41% in 2010 ([lohn-info.de](https://www.lohn-info.de/insolvenzgeldumlage.html); [Haufe](https://www.haufe.de/id/beitrag/insolvenzgeldumlage-fuer-2026-HI17106952.html)).
 - **France** covers wages and other amounts owed to workers, including severance, up to a ceiling. Employers pay 0.25% of each worker's pay, up to about €16,000 a month, in 2026 ([Service Public](https://entreprendre.service-public.gouv.fr/actualites/A17906)). In 2009 the rate rose from 0.10% to 0.20%, 0.30% and then 0.40% within a single year ([Eurojuris](https://www.eurojuris.fr/articles/augmentation-du-taux-de-cotisation-ags-au-1er-octobre-2009-10360.htm)).
-Both are run or required by the state and spread across every employer in the country, so their rates are a floor, not a benchmark. This pool covers less, eight weeks of wages, but it covers young, small firms in a few industries, with nothing behind it. So it starts at 0.25% of payroll, plus a charge to build its reserve, and the actuary adjusts from there.
+Both are run or required by the state and spread across every employer in the country, so their rates are a floor, not a benchmark. This pool covers less, eight weeks of wages and notice pay, but it covers young, small firms in a few industries, with nothing behind it. At 0.25% of payroll, the rate would quietly assume that a co-op that fails owes its workers, on average, about two of the eight weeks, since most businesses keep paying wages until they close. Notice pay changes that: a co-op that closes without notice owes about four weeks of it under its own bylaws, on top of the last unpaid pay period, and failing businesses rarely give notice in time. Pay from other work cuts it somewhat. So the pool starts by assuming about five of the eight weeks, at about 0.11% of payroll per week owed, which comes to 0.55% of payroll, plus a charge to build its reserve, and the actuary adjusts from there. The rate is the same for every co-op, as with wage cover in Europe, so older co-ops, which fail less often, help pay for younger ones. That's a choice, made so the newest co-ops aren't charged most for cover their workers need most. Nobody has measured any of this for small US firms. If a failed co-op owed all eight weeks, the premium would need to be about 0.9% of payroll. The pool records what it paid, and for what, in every failure.
-**Members' savings: probably 2% to 3% of covered amounts a year, and possibly much more.** When a co-op fails, members' accounts and unpaid payouts rank behind its lenders, so the pool should expect to pay almost the whole covered amount. What matters is how often covered co-ops fail owing more than they have. Three rough numbers bracket it:
+**Members' savings: about 3% to 6.5% of covered amounts a year, depending on the co-op's age.** When a co-op fails, members' accounts and unpaid payouts rank behind its lenders, so the pool should expect to pay almost the whole covered amount. What matters is how often covered co-ops fail owing more than they have. Three rough numbers bracket it:
- **Closures.** Of US business locations opened in 2013, about 61% were still open after three years, when account cover starts. After that, roughly 7% to 10% closed each year ([Bureau of Labor Statistics](https://www.bls.gov/bdm/us_age_naics_00_table7.txt)). Those are locations, not firms, so some are branches of businesses that carried on.
+- **Closures of firms like these.** The Census Bureau counts every US employer that closes all its locations, each year, by the firm's age and size ([Business Dynamics Statistics, firm age by size, 1978–2023](https://www2.census.gov/programs-surveys/bds/tables/time-series/2023/bds2023_fa_fz.csv)). Selling or merging doesn't count as closing. Among firms with roughly 10 to 200 workers, the share that closed each year, averaged over 1990 to 2023, falls with age:
- **Not every closure is a failure.** In Census Bureau data, about a third of owners of closed businesses said the business was successful when it closed ([Headd, Census Bureau, 2001](https://ideas.repec.org/p/cen/wpaper/01-01.html)). That suggests something like 5% a year close unsuccessfully. But many "successful" closures were owners retiring or selling, which a locked co-op can't do, so for co-ops the real figure could be higher.
+
  | Firm age | Closed each year |
  | --- | --- |
  | 3 | 8.0% |
  | 4 | 7.0% |
  | 5 | 6.4% |
  | 6 to 10 | 4.9% |
  | 11 to 15 | 3.7% |
  The Bureau sorts firms by their average workforce over two years, so a firm that closes is filed at half its size. These figures count closures filed at 5 to 99 workers against firms filed at 10 to 99. Counting only closures filed at 10 to 99 would give less than half as much, which is too low. Many of the closures filed at 5 to 9 are firms that had already been shrinking, so the figures lean a little high for a healthy co-op. Figures for business locations rather than firms tell a similar story: of those opened in 2013, about 61% were still open after three years, when account cover starts, and roughly 7% to 10% closed each year after that ([Bureau of Labor Statistics](https://www.bls.gov/bdm/us_age_naics_00_table7.txt)).
 - **Not every closure is a failure.** In Census Bureau data, about a third of owners of closed businesses said the business was successful when it closed ([Headd, Census Bureau, 2001](https://ideas.repec.org/p/cen/wpaper/01-01.html)). But many "successful" closures were owners retiring or selling, which a locked co-op can't do, and members, ranking last, can lose their savings even when the lenders are paid. So the pool counts 80% of closures as claims, not two-thirds, until its own data says otherwise.
 - **Loan defaults.** Among the SBA's mature loan groups, loans making up 6% to 10% of the money lent eventually defaulted ([GAO-20-618](https://www.gao.gov/products/gao-20-618)). Spread over the life of the loans, that's roughly 1% a year. That's close to a floor: members can lose their savings in failures where the lender still gets paid.
-Worker co-ops may do better. The best study found them about 29% less likely to close, in Uruguay ([Burdín, 2014](https://journals.sagepub.com/doi/10.1177/001979391406700108)). But the pool shouldn't count on that until its own data shows it. So it starts at 2% to 3%: a strong co-op, with a large reserve and little debt, nearer the bottom, a weak one higher. These are starting guesses from rough data, and the pool publishes every year how its actual losses compare.
+Worker co-ops may do better. The best study found them about 29% less likely to close, in Uruguay ([Burdín, 2014](https://journals.sagepub.com/doi/10.1177/001979391406700108)). But the pool shouldn't count on that until its own data shows it. So it starts at 80% of the closure rate for the co-op's age: about 5% to 6.5% a year at ages three to five, when account cover starts, about 4% at six to ten, and about 3% after that. Within each age, a strong co-op, with a large reserve and little debt, pays less, a weak one more. These are starting guesses from rough data, and the pool publishes every year how its actual losses compare.
-**That's expensive.** The protected slice of a current member's account earns only the plain Treasury rate. With the charge to build the reserve, the premium takes nearly all of that interest.
+**That's expensive.** The protected slice of a current member's account earns only the plain Treasury rate. The premium takes most of that interest at a mature co-op, and more than all of it at a young one. That's why current members' cover comes last, is optional, and is priced on the assumption that the co-ops most likely to choose it are the weaker ones. It may never be worth offering.
 ## Starting small
@@ -78,30 +103,41 @@ A few hundred co-ops, all started in the same few years, can't spread this risk
 - **From the start: final wages and former members' payouts,** for every covered co-op. These protect people with no say in how the co-op is run, and final wages are the biggest loss for low-paid workers.
 - **Current members' slices come later,** once the pool has seen about 1,000 years of co-op experience (say, 200 co-ops for five years) and its savings reserve has reached its target. Then each co-op can choose it, but only in a yearly window, based on audited accounts, with cover starting two years later. The pool can refuse a co-op that's showing warning signs. A co-op that opts out can't opt back in for five years. That stops co-ops from joining only when they're in trouble.
- **Limits follow the reserve, not the calendar.** Every year, the limits are set by a published formula from the reserve the pool actually has, compared with what a bad recession would cost. If covered amounts grow faster than the reserve, the limits wait.
+- **Limits follow the reserve, not the calendar.** Every year, the limits are set by a published formula from the reserve the pool actually has, compared with what a bad recession would cost ([the formula](#how-big-the-reserve-has-to-be) is below). If covered amounts grow faster than the reserve, the limits wait.
 ## How big the reserve has to be
 Failures come in waves, and the waves last. US business bankruptcy filings ran about 22,000 a year in 2018 and 2019. In the last big recession they rose to about 43,500 in 2008, 60,800 in 2009, 56,300 in 2010, 47,800 in 2011 and 40,100 in 2012 ([American Bankruptcy Institute](https://abi-org.s3.amazonaws.com/Newsroom/Bankruptcy_Statistics/Total-Business-Consumer1980-Present.pdf); [US Courts](https://www.uscourts.gov/sites/default/files/statistics_import_dir/1209_f2.pdf)). Over those five years, that's about six normal years' worth of extra failures. And most small businesses that close never file for bankruptcy at all.
-If savings claims normally run 2.5% of covered amounts, six extra years' worth is about 15%. So:
+Closures tell a milder story. In the same Census data, closures of firms like these rose by about half a point in 2008 and 2009, and by about a point for firms three to five years old, and were back down by 2010. The early 1990s were worse. What rises in a recession is the share of closures that leave debts unpaid, which is what bankruptcy filings count, and that's what the pool pays for. So the real wave for the pool is somewhere between: closures say almost no extra years, bankruptcies say six.
- **The target for savings cover is 15% of covered amounts,** not the 1.2% to 2% that government-backed funds aim for. Nothing stands behind this pool, so its reserve has to carry a long recession on its own. It doesn't count on reinsurance, which may not exist for this kind of risk.
+A pilot's co-ops are all young and concentrated in a few industries and regions, which makes a wave worse. So:
 - **The target for savings cover is six extra years' worth of expected claims while the pool is young,** meaning until it has 1,000 years of co-op experience and no one industry in one state holds more than a quarter of what's covered. After that it's four years' worth, about 15% of covered amounts for mature co-ops. That compares with the 1.2% to 2% that government-backed funds aim for. Nothing stands behind this pool, so its reserve has to carry a long recession on its own. It doesn't count on reinsurance, which may not exist for this kind of risk.
 - **For final wages, about 10% of covered wages,** by the same reckoning.
- **Building it takes time.** Premiums carry an extra point a year for savings cover, and an extra 0.1% of payroll for wage cover, until the targets are reached. For savings cover that takes about fifteen years if the pool doesn't grow, longer if it does, which is why limits follow the reserve.
+- **Building it takes time.** Premiums carry an extra point a year for savings cover, and an extra 0.1% of payroll for wage cover, until the targets are reached. For savings cover that takes about fifteen years for mature co-ops if the pool doesn't grow, and a young pool won't reach its target during the pilot at all. That's why limits follow the reserve.
- **Surcharges wait for the recovery.** After a bad stretch, premiums can rise by up to one point of covered amounts for up to three years. But the surcharge starts only once national unemployment has stopped rising, so it doesn't hit co-ops at the bottom of a recession. Until then, if claims outrun the reserve, everyone is paid the same share of what they're owed, as below.
+- **Surcharges wait for the recovery.** After a bad stretch, premiums can rise by up to one point of covered amounts for up to three years. But the surcharge starts only once national unemployment has stopped rising, so it doesn't hit co-ops at the bottom of a recession. The surcharge is paid by the co-ops that survived. Until then, if claims outrun the reserve, each person's first $2,000 is paid in full, and everyone is paid the same share of the rest, as below.
- **Concentration is limited by limits, not refusals.** If one industry or one region grows past a set share of what's covered, cover limits for new additions there are lowered. No co-op is refused cover because of its industry.
+- **Concentration is limited by limits, not refusals.** If one industry in one state grows past a quarter of what's covered, cover limits for new additions there are lowered. No co-op is refused cover because of its industry.
 **The formula for limits.** The inputs are written into the charter so the actuary can't pick friendlier ones: the Census closure rates by age for 1990 to 2023, at 80%, until the pool has 1,000 years of its own experience. After that, its own record can lower the rates by at most a quarter. An outside actuary signs off on the inputs, not just the result.
 - **The reserve has a planned path:** what the build charges should have produced by now if claims had run as expected. Only the reserve counts, not the refundable deposits or future premiums, which are priced to pay normal claims.
 - **If the reserve falls behind the path,** limits for new additions fall in proportion, and the cut applies back to everything added since the last yearly valuation, so nobody can rush additions in ahead of it. Amounts covered before that keep their cover.
 - **Limits come back slowly:** by at most a tenth a year, and only after two years on the path.
 - **No switching back and forth.** A co-op that moves its former members' cover to escrow or a surety bond can't return to the pool for five years, and the pool prices it when it does.
 **A bad fifth year.** Suppose a recession starts in the pilot's fifth year. The covered co-ops are three to five years old, priced at about 5.7% a year on average. The reserve is small, about 3% of covered amounts, because most co-ops joined recently. Five bad years at that rate, plus four extra years' worth, come to about 51% of covered amounts. Premiums bring in about 27%, counting a fifth of the paying co-ops lost along the way. With the reserve, that pays about 58 cents on every dollar claimed. With six extra years' worth, or if every closure turns out to be a claim, it's closer to 45 to 50 cents. The industry with the most co-ops is also stressed on its own, at twice its normal rate. For final wages and notice pay, if a failed co-op owes the five weeks the rate assumes, the pool pays about three-quarters. If it owes all eight, it pays a bit under half. So in its first years the pool is a partial promise. Each member's yearly statement shows what the pool would pay per dollar in this stress case, as it stands that year.
 **What it costs, in the standard example.** A mature 40-person co-op might have $300,000 of protected account slices (at most $8,000 a member, and less for members who take their share in cash), $200,000 of former members' payouts outstanding, and about $2 million a year of payroll, with eight weeks of it, about $300,000, covered by final-wage cover.
 | Cover | Premium | A year |
 | --- | --- | --- |
-| Final wages | 0.25% of payroll, plus 0.1% to build the reserve | about $7,000 |
+| Final wages and notice pay | 0.55% of payroll, plus 0.1% to build the reserve | about $13,000 |
-| Former members' payouts | 2%–3%, plus 1 point to build the reserve | $6,000–$8,000 |
+| Former members' payouts | 3%–4% for a co-op past its tenth year, plus 1 point to build the reserve | $8,000–$10,000 |
-| Current members' slices, once offered, if the co-op chooses | 2%–3%, plus 1 point | $9,000–$12,000 |
+| Current members' slices, once offered (after the reserve target is reached), if the co-op chooses | 3%–4% | $9,000–$12,000 |
-| **All three** | | **$22,000–$27,000** |
+| **All three** | | **$30,000–$35,000** |
-That's about 4% of the $600,000 annual profit in the [capital accounts example](capital-accounts.md#where-each-years-profit-goes), or about 2% without cover for current members. A strong co-op would pay less, a weak one more. Once the reserve reaches its target, the extra charges stop. The real rates will come from the pool's actuary and its own experience.
+That's about 5% to 6% of the $600,000 annual profit in the [capital accounts example](capital-accounts.md#where-each-years-profit-goes), or about 3.5% to 4% without cover for current members. A strong co-op would pay less, a weak one more. Once the reserve reaches its target, the extra charges stop. The real rates will come from the pool's actuary and its own experience.
 ## Who runs it, and how claims are paid
@@ -110,7 +146,7 @@ That's about 4% of the $600,000 annual profit in the [capital accounts example](
 - **Checked every year.** An outside actuary publishes an opinion on the pool's reserves, and federal auditors audit it. The pool and the bank are stress-tested together, since the same recession would hit the bank's loans and the pool's claims at once. If the reserve falls below its target, the board publishes a plan to restore it within 90 days, and limits stop rising until it does.
 - **One pool, one register.** Federations can run their own pools only once each meets the national pool's reserve ratio on its own, since pools of co-ops all lose in the same recession. There's one national register of everyone covered, so the per-person limits hold across pools.
 - **Automatic payment.** When a covered co-op fails, the pool pays from the co-op's own member register and payroll records. Nobody has to know to file a claim. Fagor's former workers lost their case partly because they filed too late. Disputes go to an independent adjudicator. Final-wage payments are wages, so the pool or the liquidator pays them through payroll, with the usual withholding.
- **The pool steps into the workers' shoes.** Once it pays wages, it takes over the workers' priority claims in bankruptcy ([When a Locked Co-op Goes Bankrupt](bankruptcy.md)) and under federal and state notice and wage laws, so it recovers what it can. Workers are never paid twice for the same weeks. Some states can make a company's largest owners personally liable for unpaid wages. In a co-op, those are workers, so the pool doesn't pursue ordinary members, only directors who hid losses.
+- **The pool steps into the workers' shoes.** Once it pays wages, it takes over the workers' priority claims in bankruptcy ([When a Locked Co-op Goes Bankrupt](bankruptcy.md)) and under federal and state notice and wage laws, so it recovers what it can. Workers are never paid twice for the same weeks ([Notice pay and severance](#notice-pay-and-severance)). Federal law and some states can make a company's officers or owners personally liable for unpaid wages, and New York appears to make every co-op member liable ([Owners Are Still Workers](labor-law.md#when-wages-go-unpaid-members-can-owe-them)). In a co-op, those are workers, so the pool doesn't pursue ordinary members or officers who followed the rules, only people who hid losses or kept others working after a missed payroll.
 - **Stepping in early.** Every covered co-op sends the pool quarterly accounts. If warning signs appear, the pool can stop covering *new* additions to accounts until the co-op recovers, which stops members from piling up covered savings in a sinking firm. That freeze also applies to anyone who leaves after it starts, so members can't escape it by quitting.
 ## Closing the loopholes
@@ -120,7 +156,7 @@ That's about 4% of the $600,000 annual profit in the [capital accounts example](
 - **No stuffing accounts.** Amounts added to accounts in the year before a failure are covered only up to the co-op's normal split, meaning its average over the previous five years.
 - **No inflated final wages.** Covered pay is the lower of a worker's average over the previous 12 months and what appears in the co-op's payroll tax filings. Paid time off counts only at the co-op's normal accrual. In a co-op's first year, final-wage cover is four weeks, not eight.
 - **No paying insiders first.** Loans that directors or members guaranteed personally, repaid in the year before a failure while wages went unpaid, are clawed back.
- **No cover for brand-new shells.** Account cover starts after a co-op's first three years of audited accounts, and every covered co-op must pass the same checks as bank borrowers: real members doing most of the work, verified against payroll records (see [Guarding the Pilot](pilot-safeguards.md#the-hidden-boss)).
+- **No cover for brand-new shells.** Account cover starts after a co-op's first three years of checked accounts and an audit by the pool itself ([What the Rules Cost a Small Co-op](compliance.md#what-a-review-can-and-cant-stand-in-for)), and every covered co-op must pass the same checks as bank borrowers: real members doing most of the work, verified against payroll records (see [Guarding the Pilot](pilot-safeguards.md#the-hidden-boss)).
 - **No trading claims.** Covered claims can't be sold or transferred, except in a divorce or to an estate.
 - **No underreporting.** Payouts are based on the lower of what the co-op reported and what it actually owed. Unpaid premiums are charged to directors and to uncovered balances, not to protected ones, and directors who file false reports are personally liable.
@@ -137,8 +173,8 @@ Both Fagor and the Italian co-ops got into trouble partly because members' money
 ## What it can't promise
- **A wave of failures could outrun the pool.** Co-ops in the same region or industry tend to fail together, in the same recession. The reserve target is sized for a recession like 2009's, but not a worse one, and it takes years to build. If claims exceed what the pool has, it pays everyone the same share of what they're owed at once, then pays the rest as money comes in. That rule is published in advance, and members are told about it every year. This model gives the pool no government backing, so it can't promise more. **It's insurance, not a guarantee.**
+- **A wave of failures could outrun the pool.** Co-ops in the same region or industry tend to fail together, in the same recession. The reserve target is sized for a long recession, but it takes years to build, and in the pilot's early years a bad recession would leave the pool paying roughly 45 to 60 cents on the dollar. If claims exceed what the pool has, it pays each person's first $2,000 in full and everyone the same share of the rest at once, then pays the rest as money comes in. That rule is published in advance, and members are told about it every year. This model gives the pool no government backing, so it can't promise more. **It's insurance, not a guarantee.**
 - **It starts small.** It will be weakest in its early years. That's why coverage phases in, current members' slices come later, and account cover starts only after three years.
 - **Members pay for it, and it isn't cheap.** Premiums come out of account interest and profit. Insuring current members' savings could take most of the interest on the protected slice, which is why co-ops can choose not to. That's the honest price of making savings safer.
 - **Bankruptcy law may not cooperate.** Courts can push former members' claims to the back of the line, behind other creditors, which makes the pool's recoveries even smaller. That's another reason it assumes nothing comes back.
- **The legal form needs Congress.** Without the federal charter, a pool like this is insurance under state law, needing a license in every state. Whether insured capital accounts raise questions under securities law is also unsettled. Both are listed in [Open Problems](open-problems.md).
+- **The legal form needs Congress.** Without the federal charter, a pool like this is insurance under state law, needing a license in every state. Whether capital accounts count as securities is also unsettled ([Member Capital Accounts](capital-accounts.md#are-accounts-securities)). Both are listed in [Open Problems](open-problems.md).
@@ -54,9 +54,9 @@ If the pilot passes, the charter sends Congress a fast-track vote on more capita
 - **Each stage is sized to audited demand, not a target.** The bank can ask for enough capital to fund the good applications it had to turn away for lack of money, plus at most 20%. Only unique applicants count, only those that met the bank's filed lending standards, and the count is certified by the independent reviewers, not the bank ([Making It Last](durability.md)). Delays don't count. There are still no lending or job targets. An institution with a target lowers its standards to hit it, which is what sank Venezuela's co-op push ([The Pilot, in Numbers](pilot-spec.md#two-warnings-from-real-life)).
 - **Capped growth.** No stage can more than double the bank's capital. A bank that suddenly has to find ten times as many borrowers will lower its standards without meaning to.
- **Demand can't be starved, either.** Applications and approval rates are published against the pilot's own. A hostile administration can't cut outreach, tighten what counts as "good," and then claim nobody wants to borrow, because the reviewers already check a sample of rejected applications every year and publish how many met the standards anyway ([Making It Last](durability.md)).
+- **Demand can't be starved, either.** Applications and approval rates are published against the pilot's own. A hostile administration can't cut outreach, tighten what counts as "good," and then claim nobody wants to borrow, because the reviewers already re-score rejected applications every year and publish how many met the standards anyway ([Making It Last](durability.md)).
 - **The same rules at every stage.** Market rates, the same underwriting, the same limits by industry and county, and no federal guarantee on anything the bank borrows.
- **Growth follows the evidence for each kind of work.** Lending to co-ops in lower-paid work is sized from that group's own result. If the pilot had too few of them to tell, that lending can't grow faster than the rest ([Who the Bank Lends To](who-gets-loans.md#results-by-group)).
+- **Growth follows the evidence for each kind of work.** Lending to co-ops in lower-paid work is sized from that group's own result, and the part held for the lower tier from that tier's result. If the pilot had too few of them to tell, that lending can't grow faster than the rest ([Who the Bank Lends To](who-gets-loans.md#results-by-group)).
 - **The same measures, published for every new group of co-ops.** Each later round of capital is its own vote in Congress, so every Congress sees how the newest co-ops are doing, not just the pilot's. A passed test shows that co-ops funded one way, at one size, could compete. It doesn't show the same is true at a larger volume, when the bank has to reach further for borrowers.
 - **The full public cost, every year.** The bank publishes its all-in cost to taxpayers per co-op job: losses, running costs, all business help, and what the public's capital could have earned in Treasury bonds instead.
@@ -71,8 +71,8 @@ The same idea can test co-ops.
 ### Where
 - **A few kinds of work** where the pilot showed co-ops can compete. At least one should be work where employers really set pay. In home care, for example, pay depends heavily on what Medicaid reimburses, so employers may not be free to respond. Where that's true, changes in reimbursement are measured and controlled for.
- **Local labor markets drawn by lottery,** from a pool whose rules are written into the charter: labor markets defined by commuting patterns, a set size range small enough that co-ops could plausibly become a large share of the work, and local governments that opt in. The draw is public, and its random seed is published in advance. Members of Congress can't add or remove places.
+- **Local labor markets drawn by lottery,** from a pool whose rules are written into the charter: labor markets defined by commuting patterns, with 2,000 to 4,000 private-sector jobs in the chosen kind of work (big enough to measure, small enough that co-ops could plausibly hold a real share), and local governments that opt in. A market counts as opted in only if the governments covering most of its workers do. The draw is public and made within states, so markets are compared with others under the same state minimum wage and Medicaid rates. Markets that border a high-help market are left out of the comparison, because workers and employers cross those lines. Its random seed is published in advance. Members of Congress can't add or remove places.
- **Different levels of help, not just yes or no,** as in the French experiment: some markets get none, some get a moderate level, and some get a high level of outreach and [help before the first loan](before-launch.md), including outreach to owners who might sell to their workers ([When an Owner Wants to Sell to the Workers](buyouts.md)). Each chosen market gets a minimum outreach budget, so a hostile administration can't quietly starve it.
+- **Help or none.** Half the markets get a high level of outreach and [help before the first loan](before-launch.md), including outreach to owners who might sell to their workers ([When an Owner Wants to Sell to the Workers](buyouts.md)). The other half get none. The French experiment used several levels, but a middle level would cost a third of the budget and, with this few markets, add almost nothing to what the test can detect. The help runs for five years. The charter sets a minimum budget, so a hostile administration can't quietly starve it: $300 a year for each job in the chosen kind of work in the market, in today's dollars, rising with inflation. That's my first guess, sized in [the numbers below](#the-numbers-in-a-first-draft). It's paid from its own appropriation, not from loan money, and counted in the bank's published cost per co-op job.
 ### What doesn't change
@@ -80,7 +80,7 @@ The same idea can test co-ops.
 ### What gets measured
- **What happens to co-ops.** Their share of the work in each market, with a minimum share filed in advance that counts as "reached."
+- **What happens to co-ops.** Their share of the work in each market, with a minimum share filed in advance that counts as "reached." New co-ops and buyouts of existing firms are counted separately. A buyout changes who owns a job but adds no new demand for workers, and the evidence above suggests new demand is what moves other employers' pay. Co-ops that move in from outside the market don't count.
 - **What happens to conventional employers** in the same kind of work: pay, turnover, hours, and working conditions where records exist, like injuries.
 - **Who gains.** Results by gender, race and ethnicity, and co-op membership compared with the local workforce. Most home care and cleaning workers are women, many of them Black, Latina or immigrant workers, and the union evidence found much smaller gains for women.
 - **Whether co-ops actually let people in.** Co-op job openings, how long it takes new hires to become members, and the share of work done by non-members. A large co-op sector that doesn't hire is no outside option for anyone.
@@ -90,15 +90,58 @@ The same idea can test co-ops.
 ### Filed in advance
-The markets, the kinds of work, the measures, the analysis and a power calculation are filed before the draw. The power calculation states the smallest effect the test could detect. The goal is on the order of 100 markets. If the smallest detectable effect is bigger than any effect that's plausible, the test isn't run, because an expensive test that can't find anything isn't worth running.
+The markets, the kinds of work, the measures, the analysis and a power calculation are filed before the draw. The power calculation states the smallest effect the test could detect. If that's bigger than any effect that's plausible, the test isn't run, because an expensive test that can't find anything isn't worth running.
 ### The numbers, in a first draft
 These are my own rough figures, from public data. The filed version is redone by the independent team with the detailed records. On these figures, **the test fails its own rule.**
 - **How noisy pay is.** I took the Bureau of Labor Statistics' county pay records for home health care, services for elderly and disabled people, and commercial cleaning ([BLS county data, 2014–2024](https://www.bls.gov/cew/downloadable-data-files.htm)). In counties with 2,000 to 10,000 private-sector jobs in the work, average weekly pay rose by quite different amounts over five years, both from 2014 to 2019 and from 2019 to 2024. Comparing counties in the same state, the typical spread (the standard deviation) was about 8% to 11%. Past growth didn't predict future growth. Weekly pay mixes hourly pay with hours worked and with who's employed, so the Census records, which can follow the same workers over time, could be less noisy. I haven't been able to check that.
 - **The smallest effect the test could find.** With a 9% spread and 100 markets, 50 with help and 50 without, the test would reliably detect a difference of about 5% in pay at employers other than co-ops. "Reliably" means an 80% chance of finding an effect that size, with a 5% chance of a false alarm. There may not be 100 markets to draw from. I count only about 100 counties of the right size in each kind of work, in states with at least two, before any opt out.
 - **What's plausible.** The only guide is the union evidence above: men's pay about 6% higher where unions were about 15 points more common, or about 0.4% for each point. Women's gain was about $900 a year against men's $3,200, and most home care workers are women. It came from comparing places, not from an experiment, and a co-op's pull may not grow point by point the way this assumes. At a 10% co-op share, the men's figure suggests an effect of about 4%, and the women's about 1%.
 - **So the rule says no, for now.** Both of those are below 5%. The filed rule compares the smallest detectable effect with the union figure, weighted by how many men and women do the chosen work. On public numbers it fails for every kind of work I checked, and fails badly for home care. The test only runs if the independent team, using the detailed records, shows it passes. If it never passes, the local test isn't run, and the page says what that means: the labor-market effect stays untested. A smaller effect, like the union one for women, is probably too small for any affordable local test to see.
 - **What counts as "reached."** If the test does run, help markets must average at least 10% of the hours in the chosen work done by workers at new co-ops, measured in year five by the independent team from wage records. That's ambitious. The pilot's own help is judged against about 32 extra co-ops from about 250 founding groups ([Help Before the First Loan](before-launch.md#the-cost-ceiling)), roughly one in eight. At that rate, 10% of a 2,000-job market, about seven co-ops of 30, would take something like 55 founding groups in one place. So the test also runs only if the pilot's results make that reachable.
 - **A checkpoint, so the money isn't wasted.** If help markets average under 4% at the end of year three, the help stops and the result is "not tested." The same team audits whether the help was actually delivered. If it wasn't, the result says so, and it's reported as a broken promise, not as co-ops failing. Pay in the markets is still tracked for the full five years.
 - **What it costs.** In a 2,000-job market, seven extra co-ops at the pre-launch help's own limit of $400,000 each cost about $2.8 million, or $280 a job a year over five years. Hence $300 a job. With 50 help markets averaging 3,000 jobs, that's about $225 million over five years. None of it is lending. Loans still go through the bank's normal rules.
 - **One main measure.** The main result is filed in advance: the pay of workers who stay in their jobs at employers other than co-ops, in one kind of work. Everything else, including other kinds of work, groups of workers, new hires' pay and the share of workers below a low-pay line, is reported with a correction for testing many things at once. Employers that set pay across many markets, like home care chains, are reported separately, since they could carry any response into the markets without help.
 **This test decides nothing by itself.** It isn't part of the pass-or-fail rule, which stays about whether co-ops can compete. Its results are published for voters and Congress to weigh. If co-ops never reach the filed share in the chosen markets, the result is "not tested." If they do and conventional employers don't change, the result is "no effect," and it's reported that way.
 ## Compared with wage boards and unions
 The labor-market effect is about raising pay for workers who never join a co-op. Other policies go at that directly. Here's how they compare, on the best evidence I could find. The comparison isn't like for like, and I say where.
 **Wage boards.** A wage board sets minimum pay for one kind of work, usually with workers and employers at the table. Two recent ones:
 - **California fast food.** Since April 2024, restaurants in fast-food chains with more than 60 locations nationally, franchised ones included, have had to pay at least $20 an hour ([California Labor Code 1474](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=LAB&sectionNum=1474.)). California's fast-food and similar restaurants had about 569,000 jobs in 2023 at an average of about $26,900 a year, and about 554,000 jobs at about $30,300 in 2025 ([BLS county and state pay records](https://www.bls.gov/cew/downloadable-data-files.htm)). Not all of them are at covered chains, and those raw changes also reflect everything else going on in California.
  - **Pay.** The studies agree pay went up because of the law. Compared with similar places, about 7% on average in one careful estimate ([Dube, 2026](https://www.nber.org/papers/w35171)), and 8% to 9% for covered workers in a Berkeley report ([Reich, 2025](https://irle.berkeley.edu/publications/brief/effects-of-the-20-california-fast-food-minimum-wage/)).
  - **Jobs.** They disagree. One team finds about 3% fewer fast-food jobs than there would have been, around 18,000 ([Clemens, Edwards and Meer, 2025](https://www.nber.org/papers/w34033)). Dube's main estimate works out to roughly 1% fewer, and his other methods range from small losses to small gains. He also finds workers quit much less often. The Berkeley team, using phone location data at each restaurant, finds no job loss ([Reich and Sosinskiy, 2026](https://irle.berkeley.edu/publications/press-release/most-comprehensive-study-yet-finds-no-job-losses-from-californias-20-fast-food-minimum-wage/)). Another team using restaurant-level data finds losses concentrated at small chains, which also opened fewer new locations and closed more ([Melo, Neumark, Sigaud and Wagner, 2026](https://www.nber.org/papers/w35749)).
  - **Prices.** Prices for all eating out in four California cities rose about 3.3% to 3.6% more than elsewhere by the end of 2024 ([Clemens and others, 2026](https://www.nber.org/papers/w34990)). The Berkeley report, looking at fast-food prices, finds about 1.5%, or six cents on a four-dollar hamburger. They measure different things.
 - **Minnesota nursing homes.** Minnesota's nursing home board set minimums of $19 to $27 an hour depending on the job. They took effect on September 10, 2026 ([Minnesota Department of Labor and Industry](https://www.dli.mn.gov/nhwsb)). Medicaid pays for much of nursing home care, so the raise needed money from the legislature and federal approval of the state's Medicaid plan. That pushed the start back from January 2026 ([the board's 2025 report](https://www.dli.mn.gov/sites/default/files/pdf/nhwsb_annual_report_2025.pdf)). I couldn't find the dollar cost.
 **Unions.** The federal agency that protects the right to organize, the National Labor Relations Board, cost $294 million in 2026 ([NLRB budget request](https://www.nlrb.gov/sites/default/files/attachments/pages/node-155/performance-budget-justification-2027.pdf)), about $2 a year per private-sector job. Where states bargain with home care workers, the raises come out of Medicaid, like Minnesota's. The union evidence above is the main reason to think one employer's pull on others' pay exists at all.
 **What each costs, roughly.** These aren't the same kind of cost, so here they are side by side rather than netted:
 | | Wage board (California) | Co-op local test |
 | --- | --- | --- |
 | Who pays | Customers every year, including low-income ones, plus owners' margins and possibly some lost jobs and openings, mostly at small chains | Taxpayers, once |
 | How much | About $1,900 a year per covered job (7% of $26,900), for as long as the floor lasts | About $1,500 per job in the market ($300 a year for five years), none of it lent back |
 | What it buys | A raise within about two years | A test, which may never run, of whether co-ops at a tenth of the work lift others' pay. On the union evidence, perhaps 4% for men and 1% for women, later, if at all ([The numbers, in a first draft](#the-numbers-in-a-first-draft)) |
 If a co-op effect like that did happen and lasted, a one-time $1,500 would be a good buy. But it depends on co-ops reaching a share of the work that this page already doubts they can reach. So as a way to raise pay across a whole kind of work, a wage board is faster, more direct, and cheaper for the government's budget, though its effect on jobs is still disputed. The labor-market effect isn't a reason to prefer co-ops for that job.
 **What co-ops do that these don't.** A wage floor raises pay. It doesn't give workers a vote or a share of the profits, it doesn't let them keep what they build, and it lasts only as long as the budget and the politics behind it. Minnesota's slipped for funding. Co-ops give ownership and a vote, but they can't pay more than the work earns ([Ownership and the Floor](the-floor.md)). That's why the model needs both. The case for the bank doesn't rest on the labor-market effect. It rests on whether co-ops can compete and repay ([The Test](the-test.md)). Where they touch:
 - **Co-ops don't compete by paying under the floor.** Co-ops pay any floor that covers them, like any other employer, and neither the bank nor the federation seeks exemptions for them. A co-op outside a floor's reach, like an independent restaurant under California's law, still publishes its pay next to the local floor.
 - **A floor can hurt thin-margin co-ops too.** A board that covers every employer, as Minnesota's does, raises a small co-op's costs like anyone else's, and the California evidence suggests small firms feel that most. Where the work is publicly paid, a floor without higher rates squeezes everyone. The bank's loan reviews test whether a borrower could survive a plausible rise in the floor for its work. The pilot reports failures that follow a new floor separately, while still counting them.
 - **In the local test, a floor or contract is recorded, not thrown out.** The draw is within states, so a statewide floor lands on both halves alike. Local floors and new union contracts are different: they could come from co-ops' pull, which is the effect itself, or they could be timed to spoil the test. So every market drawn stays in the main result. New local floors and major contracts, defined by a pre-filed threshold for how much of the work they cover, are recorded as outcomes, including whether co-op members helped win them. A version without those markets is only a filed side check.
 ## What this doesn't solve
- **Nationally, it's slow.** Even a clear pass likely means decades before co-ops are common enough to change most workers' options. Nothing here speeds that up. Other policies, like sector-wide wage boards and support for unions, aim at the same goal faster. This model doesn't replace them.
+- **Nationally, it's slow.** Even a clear pass likely means decades before co-ops are common enough to change most workers' options. Nothing here speeds that up. Other policies, like sector-wide wage boards and support for unions, raise pay faster and cost the public less ([Compared with wage boards and unions](#compared-with-wage-boards-and-unions)). This model doesn't replace them.
 - **The effect is unproven.** The closest evidence cuts both ways: big retailers paying more didn't lift others' pay, and hospitals hiring nurses did. Co-ops might differ from both, because they offer ownership and a vote, not just pay. That's what the local test is for.
- **The local test may be too small.** Even with about 100 markets, only a fairly large effect will show up. Co-ops may never reach the filed share anywhere. And the union evidence behind the scale estimate comes from comparing places, not from an experiment.
+- **The local test may never run.** On public numbers, even 100 markets could only see an effect of about 5% of pay, bigger than the union evidence suggests co-ops could produce at a tenth of the work. A smaller effect, like the union one for women, would go unseen. Co-ops may never reach the filed share anywhere, and there may not be 100 markets of the right size whose local governments opt in. If the test can't pass its own rule, the honest result is that the labor-market effect stays untested. And the union evidence behind the scale estimate comes from comparing places, not from an experiment.
 - **Concentrating help will be called unfair.** Conventional employers in the chosen markets will say the government is helping their competitors. The honest answer is that lending terms don't change, the help is time-limited and published, local governments opt in, and it's the only way to learn whether the effect is real. It won't stop the attack.
 - **Growth can outrun judgment.** Audited demand, capped stages and published results are the defenses. None of them is airtight.
 - **Success builds a lobby.** If the sector grows, its members will defend the bank, as the electric co-ops defended theirs. That's why growth depends on the published results and a vote each time, not on how many friends the bank has.
@@ -84,41 +84,144 @@ That changes what the ramp does. The founding plan's reason for it was to stop e
 - **Pay the ramp as a wage for years of service.** Everyone gets the per-hour profit share at the starting rate. Senior members get the rest as a pay supplement for years of service, which employers can pay and deduct. That keeps the founding plan's shield for senior members, but it costs payroll tax, about 15% split between the co-op and the member, on most of the profit share. And wages can't be held in capital accounts, so the accounts, and the money the co-op can reinvest from them, shrink.
 - **Ask the IRS to accept the old result.** The unpaid part could count toward the reserve's 30% minimum, which lets the co-op put that much more into the members' pool, so senior members get what they did before. But then senior members gain exactly what new members give up, and the IRS could fairly say it's the old formula by another route. It's only an option if the IRS rules that it's allowed.
 ### The founding share
 [The Founder Problem](founder-problem.md#the-tools) sets aside 10% of the members' pool for the first ten years for the people who worked there in the first three years. Paid as a profit share, it would likely fail the patronage test. The rules exclude amounts paid out of other patrons' earnings to people doing "substantially identical transactions" ([Treas. Reg. § 1.1388-1(a)(2)(ii)](https://www.law.cornell.edu/cfr/text/26/1.1388-1)), and a founder and a later hire working the same hours in the same year are doing much the same business with the co-op. Some worker co-ops measure patronage by wages instead of hours, which could change that. This model uses hours ([One rate per hour](#one-rate-per-hour-for-everyone-who-works)).
 **So it's paid as pay,** in the year it's earned, and only to people still working there that year.
 - **Deferred-pay rules.** Pay that vests by working the year and is paid soon after that year ends is generally not "deferred" under the rules for deferred pay ([26 C.F.R. § 1.409A-1(b)(4)](https://www.law.cornell.edu/cfr/text/26/1.409A-1)). Paying it only to people still there, each year, is meant to fit that. The standard bylaws still need a tax lawyer's review.
 - **Reasonable pay.** It's pay set as a share of profit, and the IRS can treat unreasonable pay to owners as a disguised dividend ([26 U.S.C. § 162(a)(1)](https://www.law.cornell.edu/uscode/text/26/162)). The cap, no more than the going-rate pay for the person's job each year, keeps a founder's total at most about double the going rate. The first pilot co-ops include it in their ruling request (below).
 - **Overtime.** For hourly workers it's a bonus they're owed, so it counts in their overtime rate for the year it's paid.
 - **It costs payroll tax,** paid by the co-op and the person, and it's paid in cash, since wages can't be held in capital accounts.
 ### Capital accounts
 - **The usual way.** Members agree to be taxed now on what's credited to their accounts, and at least 20% is paid in cash. The model's default is half in cash, which covers the tax for most members.
- **Members with lower incomes can choose not to be taxed until they're paid.** The law allows a second kind of credit, a "nonqualified" notice. The co-op pays the 21% now and gets it back as a deduction when the account is paid out, and the member pays tax only when they receive the money ([§ 1382(b)(2)](https://www.law.cornell.edu/uscode/text/26/1382)). That's the default for members under twice the poverty line who leave money in their accounts. They can still take their whole share in cash instead ([Member Capital Accounts](capital-accounts.md)).
+- **Members with lower incomes can choose not to be taxed until they're paid.** The law allows a second kind of credit, a "nonqualified" notice. The co-op pays the 21% now and gets it back as a deduction when the account is paid out, and the member pays tax only when they receive the money ([§ 1382(b)(2)](https://www.law.cornell.edu/uscode/text/26/1382)). That will be the default for members under twice the poverty line who take the standard split. It waits for the Labor Department's answer on pension law, because an untaxed credit a member chooses in advance looks most like the deferred-pay plans courts have called pension plans ([Member Capital Accounts](capital-accounts.md#why-not-pay-it-out-when-you-leave)). Until then, those members take their whole share in cash by default, or the standard split, taxed now. These credits follow extra timing rules, [below](#credits-taxed-later-the-deferred-pay-rules).
- **Charges come out of this year's share first.** Money members already paid tax on can be moved back to the reserve, under [the pay rule](the-long-run.md#the-rules) or when losses are charged to accounts. That's probably taxable to the co-op a second time, and the member may be able to deduct only part of it. So those charges come out of the current year's profit share first, before it's credited or taxed, and reach older balances only when that isn't enough. Credits to accounts that are likely to be charged later can be made as nonqualified notices.
+- **Charges come out of this year's share first.** Money members already paid tax on can be moved back to the reserve, under [the pay rule](the-long-run.md#the-rules) or when losses are charged to accounts. That's probably taxable to the co-op a second time, and the member may be able to deduct only part of it. So those charges come out of the current year's profit share first, before it's credited or taxed, and reach older balances only when that isn't enough.
 ### Interest on accounts
 Accounts earn a return by formula ([Member Capital Accounts](capital-accounts.md#how-the-account-grows)): the one-year Treasury rate plus two points while a member works there, the plain Treasury rate after they leave. How that's taxed depends on whether an account is a debt the co-op owes or an owner's stake in it.
 - **A business deducts interest only on a debt** ([26 U.S.C. § 163(a)](https://www.law.cornell.edu/uscode/text/26/163)). The factors the tax code lists for telling a debt from an owner's stake include an unconditional promise to pay a fixed sum on a set date at a fixed rate, and whether the money ranks behind the business's other debts ([§ 385(b)](https://www.law.cornell.edu/uscode/text/26/385)).
 - **An account is an owner's stake.** It shares in losses, ranks behind lenders, and its payouts can be paused. So its return is probably a return on capital, not deductible interest, even after the member leaves. Co-ops can deduct dividends on capital only if they're tax-exempt farm co-ops ([§ 1382(c)(1)](https://www.law.cornell.edu/uscode/text/26/1382), [§ 1381(a)](https://www.law.cornell.edu/uscode/text/26/1381)). For everyone else, the Treasury's rule is that the profit split by patronage is what's left *after* dividends on "capital stock or other proprietary capital interests" ([26 C.F.R. § 1.1388-1(a)(1)](https://www.law.cornell.edu/cfr/text/26/1.1388-1)). So the co-op pays its 21% on the return first.
 - **The return is paid every year, not just in profit years.** The model used to pay the extra two points only when the co-op made a profit. That made it look like capital taking a share of the profit, which is one of the things the test for being a co-op at all rules out ([above](#does-a-locked-co-op-count-as-a-co-op)). A fixed, capped rate paid in good years and bad is how co-ops have long paid capital. It's credited to the account, not paid in cash, so a loss year doesn't cost the co-op cash.
 - **Account holders pay the tax on their own return.** The return is credited after the co-op's 21% tax on it. With the Treasury rate at 4%, a current member's 6% is credited as about 4.7%, and a former member's 4% as about 3.2%. Otherwise members who take all their share in cash, as lower-income members can, would pay part of the tax on other people's savings.
 - **The return itself comes off the top.** Because it's paid before the patronage split, the reserve, the federation fund and everyone's per-hour share all carry it. In the standard example, a co-op making $600,000 credits at most $180,000 a year to accounts, so after five years at most about $900,000 is waiting to be paid out. At 6%, that's at most about $54,000 a year, less in practice, since newer members, all-cash members and the insured slice (which earns the plain rate) hold less. A member with no account carries at most about $800 a year of it. That's the price of the capital the whole co-op uses instead of borrowing it, and it's published every year, per hour worked and per dollar in accounts.
 - **Members are probably taxed when they're paid, not when it's credited.** The money can't be touched until then. When it's paid, it's probably a dividend. A worker co-op isn't a tax-exempt corporation, so it may count as a "qualified" dividend, taxed at the lower rates for investment income, which are zero for many lower-paid members ([§ 1(h)(11)(B)](https://www.law.cornell.edu/uscode/text/26/1)). So the second tax is often small. But crediting some members' accounts while others take cash could be treated as a payment when it's credited ([§ 305(b)(2), (c)](https://www.law.cornell.edu/uscode/text/26/305)). That goes on the list for the IRS ([below](#getting-certainty)).
 - **If the IRS says the return breaks the co-op test,** the premium drops to the plain Treasury rate automatically, under the bylaws, for returns not yet credited.
 - **Why not make a former member's balance a debt?** It looks like a way to make their interest deductible, but it doesn't hold up. Interest that can be paused isn't "unconditionally payable," so it would be taxed each year before it's paid anyway ([26 C.F.R. § 1.1273-1(c)](https://www.law.cornell.edu/cfr/text/26/1.1273-1); [§ 1272(a)](https://www.law.cornell.edu/uscode/text/26/1272)). A note running several years must pay at least the federal rate for its term, which can be above the one-year rate ([§ 1274(d)](https://www.law.cornell.edu/uscode/text/26/1274)). Interest that can't be paused would pay people who left ahead of those who stayed, which the pause rules forbid. And a balance that turns loss-proof the day someone quits rewards quitting just before a bad year. The deduction isn't worth that.
 ### Credits taxed later: the deferred-pay rules
 A nonqualified credit isn't taxed until it's paid, years after the work. Federal tax law has strict rules for pay that's put off like that ([26 U.S.C. § 409A](https://www.law.cornell.edu/uscode/text/26/409A)). They cover only pay for services, and the model's position is that a profit share is an owner's share, not pay ([Owners Are Still Workers](labor-law.md#is-the-profit-share-pay)). Nobody has decided whether they reach a co-op's patronage credits. So the model follows them as a precaution, and the bylaws say it does so without conceding that they apply. Breaking them would be expensive for exactly the members this option exists to help. Everything put off becomes taxable at once, with interest and an extra 20% tax (§ 409A(a)(1)(B)). So once nonqualified credits are offered:
 - **Only co-ops using the federation's software offer them.** The rules below are easy to get wrong by hand. In other co-ops, lower-income members choose between all cash and the standard split, taxed now.
 - **Only lower-income members get them, by a choice made before the year starts.** A member chooses between the standard split and all cash by the end of the year before, and the choice holds for the whole year ([26 C.F.R. § 1.409A-2(a)(3)](https://www.law.cornell.edu/cfr/text/26/1.409A-2)). A new member can choose within 30 days of joining, and then it covers only profit from hours worked after the choice (§ 1.409A-2(a)(7)). The same choice fixes how the credit will be paid: at once, or in monthly payments that all fall in one calendar year. Whether a member is under twice the poverty line is judged on the higher of the last two years' household income, from their tax returns, so one low year doesn't qualify. The co-op can't decide after a year ends which credits are nonqualified.
 - **The schedule is fixed before the year starts.** A vote to change the wait applies to nonqualified credits only for profit from years that start after the vote.
 - **They're paid unless paying would put the co-op at risk.** Deferred pay can be held back past its date only if paying it would threaten the employer's ability to keep going, and then it has to be paid in the first year it wouldn't ([§ 1.409A-3(d)](https://www.law.cornell.edu/cfr/text/26/1.409A-3)). That's narrower than the co-op's ordinary solvency test, which also pauses payouts that would break its loan terms or its minimum cash level. So by December 1 each year, the co-op's outside accountant looks at the last checked accounts and a forecast, and says in writing whether paying the nonqualified credits due would have that effect. If not, they're paid by December 31. The bank's loan terms leave these payments out of its tests, so paying them doesn't put a co-op in default, and the federation pays for the finding.
 - **No five-year note.** After a two-year pause, other paused payouts become a debt repaid over five years ([Member Capital Accounts](capital-accounts.md#protecting-the-co-op-and-the-people-who-stay)). Stretching nonqualified credits out that way would count as putting them off, which the rules allow only with a year's notice and at least five more years' wait (§ 1.409A-2(b)(1)). So they stay paused and are paid in full in the first year the co-op can pay them without that risk. That means they can be paid ahead of former members waiting on the note, an exception to the rule that the same year's credits are treated the same. They belong to the lowest-paid members, and are usually small.
 - **Small balances follow a rule set in advance.** Paying a whole balance early is allowed if it's under a federal limit well above the $2,000 used here, pays out everything the co-op owes that person under every similar deferred arrangement, and the co-op's decision is in writing by the payment date (§ 1.409A-3(j)(4)(v)). So the plan counts all of a person's nonqualified credits together, and the board records the decision at each payout.
 - **If a co-op gets it wrong, it fixes it and pays the cost.** It first uses the IRS's correction program, which cuts or removes the extra tax for mistakes fixed quickly ([IRS Notice 2008-113](https://www.irs.gov/pub/irs-drop/n-08-113.pdf)). Whatever extra tax and interest remain, the co-op pays, grossed up for the tax on that payment. That payment is wages, so it goes through payroll, and it's paid by the end of the year after the member pays the tax (§ 1.409A-3(i)(1)(v)). It doesn't make up for public benefits a member loses when years of income land at once.
 ### If the co-op fails
 Members pay ordinary income tax on account credits in the year they're made. If the co-op fails and the account is lost, the loss is probably a capital loss, which is worth much less. A credit written as stock, or as a registered certificate of what the co-op owes, is a "security" for this purpose, and a worthless security counts as a capital loss ([§ 165(g)](https://www.law.cornell.edu/uscode/text/26/165)). A credit that's neither is probably a personal debt gone bad, also a capital loss ([§ 166(d)](https://www.law.cornell.edu/uscode/text/26/166)). A member could argue the credit was tied to their job, which the law treats as a business debt. But for an employee that's a miscellaneous itemized deduction, and those are suspended for good ([§ 67(h)](https://www.law.cornell.edu/uscode/text/26/67)), so that route is worth nothing. Capital losses beyond any capital gains offset only $3,000 a year of other income, and the rest carries forward ([§ 1211(b)](https://www.law.cornell.edu/uscode/text/26/1211)). Some states are harsher.
 So a member who loses $20,000 deducts $3,000 a year for seven years, unless they have capital gains to set it against. For a low-paid member who owes little income tax, the deduction is worth little. They were taxed in full on money they couldn't take out, and get little back when it's lost.
 The small-business stock rule, which lets owners take up to $50,000 a year of such a loss against any income ([§ 1244](https://www.law.cornell.edu/uscode/text/26/1244)), probably doesn't help. It covers only stock issued for money or property, and Treasury's rules say stock issued for services doesn't count ([26 C.F.R. § 1.1244(c)-1(d)](https://www.law.cornell.edu/cfr/text/26/1.1244(c)-1)). Credits are figured by hours worked. It also stops applying once a company has taken in $1 million for its stock, which a mid-sized co-op passes in a few years. And it helps most the members who pay the most tax.
 **Less exposure first.** The model's main answer is to keep less taxed money at risk:
 - **Losses hit this year's share first.** Charges come out of the current year's profit share, which hasn't been taxed yet, before they reach older balances ([above](#capital-accounts)). That part of a loss costs members nothing in tax.
 - **Accounts are capped** at one year's pay, and at least a fifth of each year's share, half by default, is paid in cash.
 - **The insurance pool** covers former members' insured amounts and a protected part of current accounts ([Protecting Members' Savings](savings-guarantee.md)).
 - **Once the Labor Department answers** on pension law, credits taxed only when paid could be offered more widely. A credit that was never taxed can't be lost after tax.
 **Then a general fix.** The law the bank needs anyway also gives back the tax a worker actually paid on money they had no right to take out, when their employer's failure wipes it out. It's figured from the worker's own past returns and refundable, so it's worth the same to a low-paid member as a high-paid one. It isn't only for co-ops: any worker taxed on pay their employer held back and lost gets the same. It applies only to failures under a court's supervision. Credits made in the last year before the failure count only if the co-op's outside accountant has already checked that year's books.
 **Timing.**
 - **The pool comes first.** While a claim on the pool is pending, the loss usually can't be claimed yet. A member claims whatever the pool doesn't cover once it has decided. If the pool pays after a member has already deducted the loss, that payment is taxable to the extent the deduction saved them tax ([§ 111](https://www.law.cornell.edu/uscode/text/26/111)).
 - **Members have seven years.** Claims for refunds based on worthless securities or bad debts can be made up to seven years after the return was due ([§ 6511(d)(1)](https://www.law.cornell.edu/uscode/text/26/6511)), because the year a loss happens is often unclear.
 - **Members get the facts in writing.** The trustee or the pool sends each person their account balance, what they got back and when, and the key dates in the case. It can't decide the tax year for them. The co-op's [benefits check](#what-the-co-op-and-federation-do) helps them file.
 - **Losses charged while the co-op is running** can't be deducted when they're charged. They show up only when the account is finally paid out for less than was taxed, probably as a capital loss.
 Credits taxed only when paid were never taxed, so there's no loss to claim on them.
 ## Payroll tax on profit shares
-Wages carry payroll tax, about 15% in all, split between the co-op and the worker. Whether patronage dividends paid to worker-members do too is unsettled. The likelier challenge is that profit divided by hours worked is really wages. A second theory is that it's self-employment income. The IRS has claimed the second against members of at least one worker co-op, then backed down when challenged, without a published explanation ([Gregory Wilson, co-op tax lawyer](http://www.gwilson.com/documents/Article4(PatronageDivTax).pdf)). His argument: a member paid a fair wage through payroll is like a shareholder who works for the company, and a shareholder's dividends don't carry payroll tax. The wages-first rule is built to support that argument.
+Wages carry payroll tax, about 15% in all, split between the co-op and the worker. Whether patronage dividends paid to worker-members do too is unsettled. The likelier challenge is that profit divided by hours worked is really wages. A second theory is that it's self-employment income. The IRS has claimed the second against members of at least one worker co-op, then backed down when challenged, without a published explanation ([Gregory Wilson, co-op tax lawyer](http://www.gwilson.com/documents/Article4(PatronageDivTax).pdf)). His argument: a member paid a fair wage through payroll is like a shareholder who works for the company, and a shareholder's dividends don't carry payroll tax. The wages-first rule is built to support that argument, and the model makes the same argument under state wage laws, though not every law sees it the same way ([Owners Are Still Workers](labor-law.md#is-the-profit-share-pay)).
 If the IRS wins, members pay about 15% more on their profit shares. Low-paid members would at least earn Social Security credit and Earned Income Tax Credit on it.
 ## Benefits
-Profit shares count as income for Medicaid, health insurance subsidies, food assistance and housing aid, even when they're kept in an account. A lump sum can push a family over a limit for a month or a year. So:
+Many care and cleaning workers count on public programs, and becoming a member shouldn't cost anyone their benefits. The aim is for benefits agencies to count this money correctly, not to hide it from them. Programs look at two things: savings and income.
- the lower-income defaults above keep account credits from counting until they're paid;
+### Savings
- anyone can ask for a payout from their account in up to 12 monthly payments, so one payment doesn't push them over a limit for savings, like the one for Supplemental Security Income;
+
- the federation offers benefits advice to every member, along with the templates and training it already supplies ([The Federation](federation.md)).
+Some programs have a savings limit. For Supplemental Security Income (SSI), it's $2,000 for one person ([20 CFR 416.1205](https://www.law.cornell.edu/cfr/text/20/416.1205)), and Medicaid for older and disabled people generally uses similar rules. Medicaid for most working-age adults has no savings limit at all: "A State shall not apply any assets or resources test" ([42 U.S.C. 1396a(e)(14)(C)](https://www.law.cornell.edu/uscode/text/42/1396a)).
 **The membership share and credits that haven't come due shouldn't count as savings,** because members can't turn them into cash. SSI counts property a person "could convert to cash," and "if a property right cannot be liquidated, the property will not be considered a resource" ([20 CFR 416.1201](https://www.law.cornell.edu/cfr/text/20/416.1201)). Food assistance (SNAP) doesn't count "resources having a cash value which is not accessible to the household" either ([7 CFR 273.8(e)(8)](https://www.law.cornell.edu/cfr/text/7/273.8)). That only holds if members really can't get at the money. So the standard bylaws say that **the share and account credits can't be withdrawn early, sold, given away, pledged or borrowed against**, except that they pass to a named person on death and a court can divide them in a divorce ([Member Capital Accounts](capital-accounts.md#how-its-paid-out)). The co-op gives members a statement of the facts for their caseworker: the balance, the payment dates and that clause.
 ### Income
 Profit shares count as income for Medicaid, marketplace health insurance subsidies, food assistance and housing aid. Four things make this harder than it looks.
 **SSI may count a credit when it's made, not when it's paid.** SSI counts income "at the earliest of the following points: when you receive it or when it is credited to your account or set aside for your use" ([20 CFR 416.1123](https://www.law.cornell.edu/cfr/text/20/416.1123); the same for wages in [§ 416.1111](https://www.law.cornell.edu/cfr/text/20/416.1111)). A member under twice the poverty line can already choose to take their whole share in cash, so a credit they leave in the account could be seen as income they set aside. So **members on SSI get their whole share in cash, with nothing credited to an account and nothing held back for the buy-in,** until Social Security says how it counts credits. They're full members all the same.
 **SSI may count the share as the less favorable kind of income.** Wages, including "bonuses... received because of your employment," are earned income ([20 CFR 416.1110](https://www.law.cornell.edu/cfr/text/20/416.1110)), and SSI ignores the first $65 a month and half of the rest ([§ 416.1112](https://www.law.cornell.edu/cfr/text/20/416.1112)). Dividends, "returns on capital investments," are unearned income ([§ 416.1121](https://www.law.cornell.edu/cfr/text/20/416.1121)), and SSI ignores much less of it. The model argues the share is an owner's share for tax purposes ([Owners Are Still Workers](labor-law.md#is-the-profit-share-pay)), and Social Security may take it at its word. So every example shown to a member on SSI assumes the worse answer, and the same question matters for other rules for disabled workers, including the ones that let them keep Medicaid as they earn more. Opting out of membership doesn't change this, because workers who aren't members get a cash share too.
 **Timing helps some programs and hurts others.** SNAP treats a one-time lump sum as savings, not income ([7 CFR 273.9(c)(8)](https://www.law.cornell.edu/cfr/text/7/273.9)). SSI counts it as income in the month it arrives. So a payout from an account can come as one payment or up to 12 monthly payments, and which is better depends on the member's programs. The federation's benefits advice helps each member choose.
 **ABLE accounts protect savings, not income.** A member with an ABLE account, a savings account for people whose disability began young, can have payouts paid into it. Balances up to $100,000 don't count against SSI's savings limit, but the money still counts as income in the month it's paid, and deposits are capped each year ($20,000 in 2026) ([POMS SI 01130.740](https://secure.ssa.gov/poms.nsf/lnx/0501130740)).
 ### What the co-op and federation do
 - **A benefits check before anyone is signed up automatically.** The federation, not the co-op, offers every worker on probation a confidential benefits check in their own language. The co-op doesn't ask anyone about disability or benefits. A worker the check shows is on SSI or disability benefits becomes a member only if they say yes.
 - **A statement at every credit and every payment,** so members can report both to their agencies on time. Members are told they must report them.
 - **Getting an answer from Social Security.** Social Security doesn't give advance rulings. The federation asks it in writing for guidance on how it counts profit shares and credits, and supports a real member's case through appeal if needed. It shares the answer with every co-op.
 - **Benefits advice for every member,** along with the templates and training the federation already supplies ([The Federation](federation.md)).
 The model doesn't shrink the benefit cliffs themselves. A low-paid member on several programs at once can lose much of a profit share to lower benefits and higher rent. The advice can show them that before they decide. It can't change it.
 ## Getting certainty
 The IRS gives binding answers on specific facts, called private letter rulings, but only to the taxpayer who asks, only about its own real transactions, and never as precedent for anyone else ([26 U.S.C. § 6110(k)(3)](https://www.law.cornell.edu/uscode/text/26/6110)). A ruling costs a fee and often takes months, and the IRS can decline to give one. So:
- **The first pilot co-ops ask, and the bank pays.** They ask whether the co-op operates on a cooperative basis with the lock and the reserve, whether the per-hour profit shares and the ramp count as patronage dividends, whether profit shares carry payroll tax when wages meet the going rate, and how charges moved back to the reserve are taxed.
+- **The first pilot co-ops ask, and the bank pays.** They ask whether the co-op operates on a cooperative basis with the lock and the reserve, whether the per-hour profit shares and the ramp count as patronage dividends, whether the founding share is deductible as pay, whether profit shares carry payroll tax when wages meet the going rate, how charges moved back to the reserve are taxed, whether the return on accounts strains the cooperative test and when members are taxed on it, and whether the deferred-pay rules, or the payroll-tax rule for deferred pay ([26 U.S.C. § 3121(v)(2)](https://www.law.cornell.edu/uscode/text/26/3121)), apply to nonqualified credits at all.
 - **Until then, every co-op uses the rules on this page, and gets a tax lawyer's opinion on its bylaws.** None of them depends on a ruling to work.
- **Congress settles it.** The bank's own law needs Congress anyway, and so does [the bankruptcy amendment](bankruptcy.md). That law also says a locked co-op that meets these rules operates on a cooperative basis, and that its profit shares aren't wages for members paid at least the going rate. That's a statement of how existing law applies, not a lower tax rate.
+- **Congress settles it.** The bank's own law needs Congress anyway, and so does [the bankruptcy amendment](bankruptcy.md). That law also says a locked co-op that meets these rules operates on a cooperative basis, and that its profit shares aren't wages for members paid at least the going rate. That part is a statement of how existing law applies, not a lower tax rate, though settling the payroll-tax question is worth real money to members ([How this compares](#how-this-compares-with-other-businesses)). The same law also makes one real change, open to any employer's workers: it refunds the tax they paid on money they lose when their employer fails ([If the co-op fails](#if-the-co-op-fails)).
 ## How this compares with other businesses
-A co-op isn't taxed more lightly than other small businesses, and it isn't taxed much more heavily either:
+A co-op isn't taxed more lightly than other small businesses across the board, or more heavily. It depends on what it's compared with, and on how the payroll-tax question comes out ([above](#payroll-tax-on-profit-shares)).
- **Profit paid to members** is taxed once, at their own rates. Owners of partnerships and S corporations (small corporations taxed like partnerships) are taxed the same way on the profit they take.
+**Profit paid to members** is taxed once, at their own rates. So is the profit of partnerships, sole owners and S corporations (small corporations whose owners are taxed on the business's profit as if it were their own). But those owners can usually deduct up to 20% of their business profit first ([26 U.S.C. § 199A](https://www.law.cornell.edu/uscode/text/26/199A)), a deduction the 2025 tax law made permanent. Co-op members can't. So:
- **Profit the co-op keeps** is taxed at 21% and never again, because nobody can ever take it out. A conventional corporation's kept profit is taxed at 21% and again when it's paid out. A partnership's or S corporation's owners are taxed on it at their own rates, which can be higher or lower, and they own it.
+
- **The difference that matters:** a conventional owner's kept profit is still theirs. The co-op's reserve belongs to no one, and it still pays tax. That's a cost of the lock, and this model doesn't ask for a tax break to cover it.
+- **Against a partnership or a sole owner, the co-op comes out ahead, if its payroll-tax position holds.** Those owners pay self-employment tax, about 15%, on their whole profit. If a member's profit share carries no payroll tax, as the model argues, a $9,000 share avoids about $1,270 of it, against a deduction worth $200 to $400 at the rates most members pay.
 - **Against an S corporation, the co-op is somewhat behind.** An S corporation owner who works in the business takes a reasonable salary, which carries payroll tax and gets no deduction, and takes the rest as profit with no payroll tax. That's the closest match to the model's wages-first rule. The difference is the deduction members don't get.
 - **If the IRS wins on payroll tax, the co-op is behind everyone.** Members would pay payroll tax on their profit shares and still get no deduction. For low-paid members, the loss is partly made up: a profit share that counts as earnings earns Social Security credit and Earned Income Tax Credit, which in its lowest range adds 34 to 45 cents for each extra dollar earned by a worker with children. For them, winning the payroll-tax argument isn't clearly better.
 **Why members can't take the deduction.** It covers profit from a business the taxpayer carries on themselves (§ 199A(c)(1), (d)). Working as someone's employee isn't one (§ 199A(d)(1)(B); [26 C.F.R. § 1.199A-5(d)](https://www.law.cornell.edu/cfr/text/26/1.199A-5)), and owning a share of a corporation isn't either. Patronage dividends count only when the patron does business with the co-op as part of a business of their own, like a farmer selling grain through a marketing co-op ([§ 199A(c)(3)(B)(ii)](https://www.law.cornell.edu/uscode/text/26/199A); [26 C.F.R. § 1.199A-7](https://www.law.cornell.edu/cfr/text/26/1.199A-7)). A worker-member has no business of their own for the dividend to belong to.
 That's the same position the model takes on payroll tax: a profit share is an owner's return on a corporation, not pay and not business income. A member can't have it both ways. Claiming the deduction would mean saying the share is business income, which is the IRS's self-employment theory. So:
 - **Members don't claim it.** The co-op's year-end patronage forms report nothing for it, and the tax lawyer's opinion on the bylaws covers it.
 - **Members join only as individuals on the payroll,** not through companies of their own. Setting up as contractors wouldn't work anyway: the rules presume someone doing the same work for a former employer is still an employee (§ 1.199A-5(d)(3)).
 - **The co-op itself can't take it,** because it's a corporation. The only co-ops with a deduction of their own are farm and garden co-ops (§ 199A(g)). The new $400 minimum deduction (§ 199A(i)) doesn't reach members either.
 **What it's worth.** In the standard example, members share $360,000 of profit. The deduction on that would be worth roughly $9,000 to $16,000 a year across 40 members. It's close to nothing at the bottom, since it's capped at 20% of taxable income and many low-paid members owe little. In a conventional firm, the same profit would go to one owner, whose deduction would be worth about $23,000 to $25,000 a year, and an S corporation owner can deduct on profit kept in the business too. The gap is mostly federal: most states start from a figure that comes before this deduction.
 **The model doesn't ask Congress to extend it.** The deduction is a break for business owners that's worth most to the best-paid. Asking for a share of it would make the pilot a subsidized test. The model does ask Congress to say that profit shares aren't wages for members paid the going rate ([Getting certainty](#getting-certainty)). That isn't nothing: it's worth more than the deduction. It's the same treatment an S corporation owner gets on profit above a reasonable salary, and it's why the going-rate test has to be strict.
 **Profit the co-op keeps** is taxed at 21% and never again, because nobody can ever take it out. A conventional corporation's kept profit is taxed at 21% and again when it's paid out. A partnership's or S corporation's owners are taxed on it at their own rates, which can be higher or lower, and they own it.
 **The difference that matters:** a conventional owner's kept profit is still theirs. The co-op's reserve belongs to no one, and it still pays tax. That's a cost of the lock, and this model doesn't ask for a tax break to cover it.
 ## What this doesn't solve
@@ -127,5 +230,5 @@ A co-op isn't taxed more lightly than other small businesses, and it isn't taxed
 - **Unpaid leave costs profit share.** Mostly for women, unless the co-op pays for leave.
 - **States differ.** Most states follow the federal treatment of co-ops. But some tax a business's gross receipts, like Ohio and Washington, where the patronage deduction doesn't help. And some states' co-op laws may send leftover assets to members when a co-op closes, which would clash with the lock. Each pilot state needs checking.
 - **The federation's form matters.** If the federation fund is a charity, a co-op's payments and a closing co-op's reserve are gifts, and corporations can deduct gifts only up to a limit ([§ 170(b)(2)](https://www.law.cornell.edu/uscode/text/26/170)). If it's a trade association, payments may be deductible as a business expense. The choice isn't made.
- **Interest on accounts may not be deductible.** The formula pays extra interest only in profitable years, which could make it look like a dividend on capital. If so, it's paid from taxed profit.
+- **The return on accounts isn't deductible.** It's most likely a return on capital, so the co-op pays 21% on it, charged to the accounts that earn it, and members may pay tax again when they're paid ([Interest on accounts](#interest-on-accounts)).
 - **It's a lot of paperwork.** A co-op tax return, a patronage form for every worker, written notices, consent records, hours tracking, and the ramp. The federation provides standard software and filing help at cost, and the pilot's business help pays for setting it up.
@@ -17,7 +17,7 @@ Mondragon's history supports the first half of the premise. For decades, apart f
 - **Charter:** lends only to firms that meet the [co-op definition](worker-ownership.md) and accept [the lock](the-lock.md). The bank can't widen its own charter. Mondragon's bank drifted into ordinary lending after a change in the law, and America's co-op bank drifted toward the safest co-ops once nothing held it to its target (see [Has This Been Tried?](precedents.md)). A charter can't stop Congress from changing it, but the fixed measures and deadline in [The Test](the-test.md) mean a mission change can't happen quietly. Drift inside the charter, toward the safest co-ops, is handled by money set aside for co-ops in lower-paid work and results published by group ([Who the Bank Lends To](who-gets-loans.md)).
 - **Priced at market rates.** This is deliberate. The bank's edge must be *willingness* to underwrite a firm structure other lenders refuse, not *cheap money*. If it lends below market, every result is unfalsifiable: success gets dismissed as "free state money," failure gets dismissed as "hobbled by the lock." At market rates, survival and returns mean something.
- **Professional, insulated underwriting.** Loan officers are bankers, not appointees. Lending decisions are walled off from legislators the way monetary policy is walled off from Congress. A bank that funds whichever co-op has the best-connected sponsor fails the experiment and deserves to. Since 2026 the Supreme Court has made clear that any president can replace a board like this one at will, so the protection lives in what the board can't change, not in who sits on it (see [Making It Last](durability.md)).
+- **Professional, insulated underwriting.** Loan officers are career bankers hired by the board, not political appointees. The board can overrule them only in writing and in public. Lending decisions are walled off from legislators the way monetary policy is walled off from Congress. A bank that funds whichever co-op has the best-connected sponsor fails the experiment and deserves to. Since 2026 the Supreme Court has made clear that any president can replace a board like this one at will, so the protection lives in what the board can't change, not in who sits on it (see [Making It Last](durability.md)).
 - **Self-sustaining by design.** One-time capitalization, then it lives on its loan book. Losses are public and published. A permanent appropriation would turn it into a subsidy line, and subsidy lines get captured.
 - **Full transparency.** Portfolio data (default rates, survival, wages, productivity, member retention) published annually, so anyone can check the result, including critics.
@@ -39,7 +39,7 @@ A lock written only into a co-op's own rules can be voted away by its members. A
 1. **A lock share.** Each locked co-op issues one special share to an independent **lock-holder**. The share pays nothing. It votes on only four things: a sale or merger, a change to the lock clauses, a payout on dissolution, and a sale of a large part of the business (below). On those, it has a veto. It **can't approve** a sale to a conventional buyer, because nobody can. And it **must approve** anything that follows the lock, such as a merger with another locked co-op, so it can't hold good deals hostage. A refusal can be challenged in court. State corporate law already allows restrictions of this kind. Delaware, for example, lets a company require consent before its shares change hands, or bar transfers to designated kinds of buyers, as long as the restriction isn't "manifestly unreasonable" ([Delaware Code, title 8, § 202](https://delcode.delaware.gov/title8/c001/sc06/index.html)). This is the same device Ecosia uses.
 2. **The co-op's founding documents.** The lock clauses are written into the articles, and they can be changed only with the lock share's consent. (Articles that simply claim they "can never be amended" may not hold up under state law. A required consent is what actually does the work.)
-3. **The law.** The bank's authorizing statute makes the lock a condition of every loan and says it outlasts repayment. It also changes federal bankruptcy law for locked co-ops (see below). Where states are willing, the lock goes into state co-op law too (see [The Constitution](constitution.md)).
+3. **The law.** The bank's authorizing statute makes the lock a condition of every loan and says it outlasts repayment. It also changes federal bankruptcy law for locked co-ops (see below). Where states are willing, the lock goes into state co-op law too, through a short model law ([The Lock in State Law](lock-state-law.md); see also [The Constitution](constitution.md)).
 4. **A backstop that follows the money.** If a court or a later Congress ever breaks the lock and a co-op converts or is sold anyway, the reserves and any sale value above members' own account balances still go to the federation fund, not to the members. Italy works this way ([Has This Been Tried?](precedents.md#italys-co-op-funds-coopfond-and-the-marcora-law)). So even if the lock on the firm's form fails, nobody gets a windfall from breaking it.
 **Who holds the lock share.** Each co-op picks its lock-holder from a list of approved ones: its [federation](federation.md), or an independent nonprofit lock trust with its own endowment and a successor named in case it ever shuts down. The rules keep the lock-holder honest:
@@ -47,6 +47,7 @@ A lock written only into a co-op's own rules can be voted away by its members. A
 - **It can't be a buyer, or benefit from a sale, in any deal it reviews.** If the co-op's federation might absorb the co-op, or would receive its assets on dissolution, a different lock-holder reviews that deal.
 - **It isn't the only one who can enforce the lock.** Any member, any other locked co-op, the bank and the state attorney general can also go to court.
 - **It publishes an annual review** of the co-ops it holds shares in.
 - **It checks each co-op at least every two years,** including private talks with a random group of workers, for a fee on a scale the bank approves ([What the Rules Cost a Small Co-op](compliance.md#the-lock-holders-review-every-two-years)).
 - **It also guards membership.** Beyond its four votes, it has one more job: it takes workers' decisions to opt out of membership and checks each co-op's membership records, so that the membership requirement means something ([When People Don't Stay Long](high-turnover.md)). It has no say over who is hired, fired or paid what.
 **Where the legal risk really is.** Courts are wary of "restraints on alienation": conditions that stop an owner selling property, especially forever ([Cornell Legal Information Institute](https://www.law.cornell.edu/wex/restraint_on_alienation)). For company shares, reasonable restrictions are generally allowed, so that risk is manageable. **The bigger threat is bankruptcy.** Federal bankruptcy law generally overrides contract terms that restrict transferring a bankrupt company's property ([11 U.S.C. § 541(c)(1)](https://www.law.cornell.edu/uscode/text/11/541)). Without a change to that law, a court-run sale could hand a failed co-op's whole business to any bidder, lock or no lock. So the bank's statute has to amend the Bankruptcy Code for locked co-ops. That needs Congress. [When a Locked Co-op Goes Bankrupt](bankruptcy.md) lays out the amendment, modeled on how bankruptcy law already treats charities.
@@ -68,19 +69,73 @@ The lock stops a co-op being sold to conventional owners. It doesn't freeze it i
 A lock on the company is worthless if the business can walk out the side door. These rules are part of the lock itself, so they last as long as it does, not only while a bank loan is outstanding.
 - **Selling the business piece by piece counts as selling it.** If a co-op sells, leases or licenses more than a quarter of its assets or its revenue-producing business within any three years, counted together, that's treated as a sale of the business, and the lock share can veto it. The same goes for the brand, the core technology, or the main customer contracts, whatever their size.
- **Buying the assets and hiring the workers counts too.** If a buyer of the co-op's assets hires more than a third of its members within two years, the deal is treated as a sale of the whole business after the fact. The buyer owes the federation fund the difference between what it paid and the value of the business as a going concern. People are always free to change jobs. This rule makes a buyer pay full price for a whole business, even if it picks the business up in pieces.
+- **Buying the assets and hiring the workers counts too.** If a buyer of the co-op's assets hires more than a third of its members within two years, the deal is treated as a sale of the whole business after the fact. The buyer owes the federation fund the difference between what it paid and the value of the business as a going concern. The same goes for anyone who gets the use of what the co-op leased, licensed or financed and runs the same business with a third of its workers or its main customers. Leases and licenses of what a co-op can't run without carry the lock's terms too ([When a Locked Co-op Goes Bankrupt](bankruptcy.md#everything-else), point 13). People are always free to change jobs. This rule makes a buyer pay full price for a whole business, even if it picks the business up in pieces.
- **Subsidiaries are covered.** Any company a locked co-op controls is also locked, and its workers are covered by the membership rule. Otherwise a co-op could grow through an ordinary subsidiary and then sell it. That's the pattern behind Mondragon's non-member foreign subsidiaries.
+- **Subsidiaries are covered.** Any company a locked co-op controls is also locked, and its workers are covered by the membership rule. Otherwise a co-op could grow through an ordinary subsidiary and then sell it. That's the pattern behind Mondragon's non-member foreign subsidiaries. How that works, including when a co-op buys a company, is [below](#when-a-co-op-owns-another-company).
 - **No outside control through the back door.** The limits in [Capital, After](capital.md) (outside claims last at most 15 years, rank behind lenders, and carry no vote) apply forever, not just while a bank loan is outstanding. No investor, lender, supplier or licensee can hold a veto over the co-op's budget, hiring or management. No contract can give one outside party an exclusive claim on most of what the co-op produces for longer than five years.
 - **Insiders can't drain it through contracts.** Rent, fees and prices paid to insiders are checked for as long as the lock lasts, not just while the bank's loan is outstanding ([below](#deals-with-insiders)).
 ## Deals with insiders
 While a co-op owes the bank, every contract with an insider is checked each year, and overpaying one is a breach of the loan ([The hidden boss](pilot-safeguards.md#the-hidden-boss)). Once the loan is repaid, that lever is gone. A founder who kept the building could simply wait, then raise the rent. The lock is meant to stop the firm's value leaving through the back door, and an inflated contract is a back door. So the check becomes part of the lock.
 Members take most of the profit, so they have every reason to refuse an inflated contract themselves, which a charity's donors don't. The danger is narrower: the insider controls what members see, or the co-op can't walk away. So the first defenses are telling members in advance and making sure they can leave a bad deal. Outside checking comes second.
 The rules borrow from how federal law polices charity insiders ([26 U.S.C. § 4958](https://www.law.cornell.edu/uscode/text/26/4958)), because the tax law has decades of practice drawing this line. A charity's assets are dedicated to its purpose much as the reserve is dedicated to the people who'll work at the co-op later.
 - **Who counts as an insider.** Anyone who in the last five years was a founder, board member, officer or manager, or was otherwise able to steer the co-op; their family; and any company they, together, own more than 35% of. The charity rule treats founding the organization as one sign of influence; this model counts founders and managers automatically, so it's broader. Anyone who signed a contract with the co-op while an insider stays one for that contract and its renewals, however long it runs, so stepping down and waiting five years doesn't work.
 - **Through a middleman counts.** If the co-op overpays a supplier who passes part of it on to an insider, it's an insider deal, as it is for charities ([26 C.F.R. § 53.4958-4(a)(2)(iii)](https://www.law.cornell.edu/cfr/text/26/53.4958-4)). So is a swap: if an insider of one co-op deals with a second co-op while an insider of the second deals with the first, both deals count.
 - **Members hear about it first.** Every insider deal worth more than $5,000 a year is sent to all members before it's signed, with the price, the terms and the evidence for them, and listed again in the yearly report to members and the lock-holder. Smaller ones are only listed.
 - **A fair process earns a presumption.** A deal is presumed fair if it's approved in advance by people with no stake in it, who had evidence of fair value and wrote down their reasons at the time ([26 C.F.R. § 53.4958-6](https://www.law.cornell.edu/cfr/text/26/53.4958-6)). Having no stake means not being the insider or their family, not working under them, not having one's pay set by them, having no money riding on the deal, and not having a deal of one's own that they approve. For pay, prices from three comparable employers nearby are enough in a co-op with sales under $1 million, as the charity rule allows for small organizations. For rent, buildings, equipment and licenses, the charity rule looks to an independent appraisal or real competing offers, and so does this one. Where a deal runs more than $5,000 a year, the appraiser comes from a list the lock-holder keeps, not one the insider picks, and the co-op pays. The accountant then checks the paperwork, not the price. A deal without that approval gets the full price check.
 - **When nobody is free to judge.** In a small co-op, everyone may work under the manager who owns the building. If there aren't at least three members with no stake, the deal needs an appraiser from the lock-holder's list, and the lock-holder checks the process.
 - **The co-op can always walk away.** Two of the pilot's rules become part of the lock too. Members can end any management or franchise contract by vote on short notice. And a co-op that leases something it needs to operate from an insider has an option to buy it at an appraised price ([The hidden boss](pilot-safeguards.md#the-hidden-boss)). A market price can still be steep, but an insider can't hold the co-op hostage at renewal.
 - **Overpaying costs the insider, not the members.** If a deal cost the co-op more than it would have paid a stranger, the insider repays the difference with interest, plus a quarter of it on top. If it isn't repaid within a year, they owe twice the excess on top instead. Charity law charges an insider those amounts as taxes (§ 4958(a)(1), (b)); here they go to the co-op. The insider and their company are both liable, so an empty shell company doesn't end it. The co-op can take what it's owed out of anything it owes the insider under any contract. The reserve's 30% comes out of what's recovered, not the members' profit pool. If nothing can be recovered after a real attempt, the loss is written off and falls on everyone, like any other bad debt. A member who's also an insider is covered by this rule, not by the pay rule, so the same money isn't charged twice.
 - **Approvers are liable only if they knew.** Board members who approved a deal knowing it was overpriced owe the co-op a tenth of the excess, up to $20,000 per deal, the share and limit charity law puts on charity managers (§ 4958(a)(2), (d)(2)), and their own payouts stop until it's paid. Following the process above, or relying on written, reasoned advice from a professional on the lock-holder's list, counts as not knowing, as it does for charity managers ([26 C.F.R. § 53.4958-1(d)(4)(iii)](https://www.law.cornell.edu/cfr/text/26/53.4958-1)). The federation's group insurance covers the cost of defending an approver who wasn't found to have known. Most worker-directors earn ordinary wages, and this is meant to deter insiders, not scare them off the board.
 - **The members can't wave it through.** Members can pay themselves whatever they decide, and [rule 1](the-long-run.md#the-rules) handles that. What they can't do is hand the co-op's money to someone outside it. An overpayment to an insider who isn't a member is an outside claim on the co-op, and outside claims are allowed only on the terms in [Capital, After](capital.md). An insider's investment in the co-op is an insider deal too: its share of profit has to be priced like a stranger's, and the lock-holder must approve it.
 - **Who checks once the loan is repaid.** The yearly insider test stays in the accountant's package. The lock-holder takes over the bank's part: it keeps the list of approved accountants and appraisers, gets the report, picks the samples and orders a check when [a warning sign](compliance.md#audits-by-lot-and-when-something-looks-wrong) appears, such as payments to insiders growing faster than sales, any insider's price rising faster than inflation, any renewal of an insider's lease, or when any member asks. Nobody tied to the insider can take part in the lock-holder's review of that co-op. A co-op with no insider deals over $5,000 a year isn't drawn. Among the rest, one in ten is drawn by lot each year for a check of its insider deals, not a full audit. The check is paid through the fees of co-ops with insider deals, and by an insider found to have overcharged. One in ten is a judgment. It's about what the charity rule's tax gives up: if a quarter on top is the penalty and the chance of being caught is at least one in ten a year, a long contract overcharged year after year is likely to be found before it pays.
 - **Who can go to court.** The same parties who can enforce the rest of the lock: the lock-holder, any member, any other locked co-op, the bank and the state attorney general. What's recovered goes to the co-op, and a member who wins has their legal costs paid out of it first.
 This is weaker than the check while the loan is out, because the bank's threat to call its loan was the strongest lever there was. An insider who has left and owns nothing the co-op can reach may never pay. A presumption can be gamed with a flattering appraisal. The charity rule has the same weakness, and the IRS can still rebut the presumption with better evidence. Here the lock-holder can too.
 ## When a co-op owns another company
 The membership rule is what stops a co-op from becoming a small club of owners with employees under them. Owning other companies is the easiest way around it. Mondragon's co-ops grew abroad by building and buying ordinary companies. By 2016 they controlled about 100 foreign subsidiaries and joint ventures that weren't worker-owned. Only about half of Mondragon's businesses were co-ops, and only about a third of its employees were members, counting non-co-op businesses at home too ([Kasmir, 2016](https://globaldialogue.isa-sociology.org/articles/the-mondragon-cooperatives-successes-and-challenges)). Its appliance co-op, Fagor, bought the French maker Brandt in 2005, and the workers of its foreign purchases weren't offered ownership. Fagor went bankrupt in 2013 owing €800 million to €1.1 billion, after Spain's housing crash and years of cheaper competition ([Fagor, Wikipedia](https://en.wikipedia.org/wiki/Fagor)). The collapse had several causes. A big purchase adds risk, and more so when the buyer is carrying debt.
 So "controlled companies are locked" needs rules for what control is, what happens to the people who come with a purchase, and how a co-op gets out of a bad one.
 ### What counts as control
 - **More than half, or running it.** Holding more than half the votes or the value counts as control. So does the right to name most of the board, or running the company through a management contract. Stakes held by the co-op's managers, members' relatives, or companies they control are added to the co-op's own. Several locked co-ops holding a company together control it together, and the one with the largest stake is responsible for the rules below.
 - **Even partnerships.** In a 50–50 joint venture with an ordinary company, the co-op has control only if it runs the venture day to day. Otherwise the stake is an investment. That leaves room for joint ventures, and the hours rule below keeps them from becoming a workaround.
 - **Less than control is an investment.** A co-op can hold a smaller stake in an ordinary company as an investment of its reserve, like any investor.
 - **Dependence without ownership.** A co-op doesn't have to own a company to run it. It can franchise its business to others, or use a contract manufacturer that works mostly for it. It can't make an independent company convert, and the model doesn't try. Instead, the hours of any franchisee of the co-op, and of any supplier that sells most of its output to the co-op for two years running, directly or through a middleman, count in the co-op's hours test below. Ordinary buying from ordinary suppliers isn't covered, and isn't meant to be.
 ### What the co-op has to do
 - **No lasting subsidiaries with workers.** Within three years of taking control, a controlled company with employees is either merged into the co-op or turned into its own locked co-op run by its own workers, like a [spin-off](growth.md). Its workers choose which, by secret ballot, once they've had the lock explained in writing. If it becomes its own co-op, the parent's stake becomes an investment on the usual terms: repayment plus a share of profit for at most 15 years, with no vote ([Capital, After](capital.md)). Any other shareholders are bought out first at an independent appraisal. A locked co-op run by its own workers meets this rule, though one that sells most of its output to the parent is counted with the parent for the hours test, as spin-offs are. A company with no employees, like one that only holds a building, can stay under the co-op's control. It's locked like any other asset.
 - **One hours test across the group.** The co-op itself meets the three-quarters rule as usual. Across the co-op, the companies it controls, and the franchisees and dependent suppliers above, members of locked co-ops have to do at least half of all hours, once the co-op's own phase-in is over. So a co-op can't buy companies one after another, or farm its work out, to keep a large workforce outside membership.
 ### The people who come with a purchase
 - **Membership is offered, not imposed.** Acquired workers become members automatically after probation unless they opt out. Their time at the old company counts toward probation. Nobody acquired can be let go at the end of probation except for cause.
 - **Saying no is safe.** Someone who was working there on the day of the purchase and opts out keeps their job and pay, and their hours don't count against any hours test for as long as they stay. The co-op gains nothing by pushing them out.
 - **Unions and contracts carry over.** A buyer that keeps most of a unionized workforce generally has to recognize and bargain with its union ([NLRB v. Burns, 1972](https://www.law.cornell.edu/supremecourt/text/406/272)). The co-op recognizes the union and honors its contract. After that, recognition sticks unless most of the workers the union covers vote to end it, the rule the model already uses for recognized unions ([Labor Law](labor-law.md#union-rights-the-biggest-gap)). The company's pension promises stay with it. Where labor law requires something different, labor law wins.
 ### Buying, and getting out
 - **Big purchases need the members.** Buying a company with more workers than the co-op has members, or paying more than a quarter of the reserve, needs a majority of all members, not just those voting, by secret ballot. The members can vote in advance on a ceiling for the price, so the terms don't have to be made public during the deal. The price includes any debt the co-op takes on, and purchases within three years are added together. The federation gives a written opinion first. It's advice, not a veto.
 - **Selling one back.** Any sale of a controlled company with employees goes through the lock-holder, whatever its size. The company's workers get the first chance to buy it as their own locked co-op. Within three years of the purchase, before it's merged or converted, the co-op can sell it to anyone else at an independent appraisal. Anything above what the co-op paid goes to the federation fund, so buying companies to run without members and then resell them doesn't pay.
 - **Abroad, the same rules, with a substitute.** Where local law has no form for a worker co-op with a lock, the lock-holder can approve a local structure that gives the workers the same control and the same limits on sale, like voting shares held in trust for them. If there's no such structure, the co-op can't keep control past three years. It can hold a smaller stake, or sell as above. That makes plants abroad much harder to run, and it costs co-ops some foreign business.
 ## When a co-op goes bankrupt
 Argentina changed its bankruptcy law in 2011 so that when a firm fails, its workers can form a co-op, keep the business running, and buy it, counting what they're owed toward the price ([Law 26.684, articles 189, 203 bis and 205](https://www.argentina.gob.ar/normativa/nacional/ley-26684-183856/texto)). This model borrows the idea, adapted to American law. The full rules, and the amendment to federal bankruptcy law they need, are in [When a Locked Co-op Goes Bankrupt](bankruptcy.md). In short:
 - **Only co-ops can buy the business whole.** Its own workers (as a new locked co-op), the federation, or any other locked co-op whose members do most of its work can bid. It's sold by open bidding among them. The minimum price is what the assets would bring sold off separately, set by an appraiser the court appoints.
- **Workers can keep it running while it's sold,** and count the unpaid wages they choose to hand over toward their bid, up to the amounts bankruptcy law already puts first.
+- **Workers can keep it running while it's sold,** and count the unpaid wages they choose to hand over toward their bid, up to the amounts bankruptcy law already puts first. The legal minimum wage and overtime aren't handed over. The savings insurance pool pays them in cash first, up to eight weeks.
 - **No buying back your own failure cheaply.** People who managed the co-op in the two years before it failed can't get bank financing to buy it back.
 - **If no co-op buys it**, the assets are sold off separately to anyone. But no single buyer and its related companies may assemble enough of the pieces to add up to the business.
- **A reorganization can't hand over control.** If a locked co-op reorganizes in bankruptcy instead of closing, the plan can't give voting shares to anyone but members. Creditors who vote against the plan still get what the business would be worth on the open market.
+- **A reorganization can't hand over control.** If a locked co-op reorganizes in bankruptcy instead of closing, the plan can't give voting shares to anyone but members. Creditors who vote against the plan still get what the business would be worth on the open market. That value is tested by inviting outside offers, not just appraised.
 - **The buyer answers for the old co-op's products.** A co-op that buys the business takes on injuries from what the old co-op made, its warranty repairs and customers' deposits. So does a co-op whose members keep it through a reorganization.
 **This does cost creditors something.** When only co-ops can bid on the whole business, the price may be lower than an open auction would fetch, and lenders will charge for that risk. Creditors who never chose to lend, like people the co-op injured, are paid the difference from the federation fund. That's part of the lock's price (below).
@@ -90,5 +145,6 @@ The lock has real costs, and they should be stated plainly.
 - **Fewer buyers means lower prices, and sometimes a breakup.** When a failing co-op finds no co-op buyer, a business that a conventional buyer would have kept running may be sold off in pieces, and its workers lose their jobs. Lenders get back less, and they'll charge for it. The pilot publishes the bank's recovery rate on failed loans (see [The Pilot, in Numbers](pilot-spec.md#what-gets-measured)), so this cost shows up in the numbers.
 - **While the sector is small, so is the pool of co-op buyers.**
 - **Owning other companies is harder.** Joint ventures, purchases and plants abroad come with rules ordinary firms don't face ([above](#when-a-co-op-owns-another-company)). Deals are slower, some sellers and partners will walk away, and co-ops may lose business abroad to firms that can own plants there.
 - **Members can't take the firm's value with them.** That's the point of the lock, and it's also the heart of [the founder problem](founder-problem.md).
 - **"Forever" is a long time.** Critics on the right argue that a permanent lock, bought with one loan, binds generations who never chose it. Italy takes a softer approach: a co-op can become an ordinary company, but its accumulated reserves go to the co-op movement's fund, not to the members. Whether this model should follow Italy is an open question (see [Open Problems](open-problems.md)).
@@ -68,9 +68,17 @@ That leaves four ways the horizon problem can still get in.
 - **The going rate for each job** is the higher of two numbers: the median pay for that occupation in the co-op's own metro area, from the government's wage survey (the Bureau of Labor Statistics' [Occupational Employment and Wage Statistics](https://www.bls.gov/oes/)), or the local living wage for a single adult working full time, from [MIT's Living Wage Calculator](https://livingwage.mit.edu/). Both are measured per hour, so part-time work and consultants are compared fairly. The living-wage floor matters. In home care the median wage can be close to poverty pay, and a co-op that raises its aides to a living wage shouldn't owe anything for doing it.
 - **Why a single adult's living wage.** In Salt Lake City in 2026, MIT puts the living wage at $24.64 an hour for a single adult and $41.55 for one adult supporting a child. An earlier version of this rule let pay up to one and a half times the second figure, about $130,000 a year, count as "raising the bottom." That would have let a co-op pay every cleaner six figures without the reserve getting anything. The single-adult figure, about $51,000 a year there, is still well above what most aides earn. Paying more than that is allowed. The reserve just takes its 30% of the difference.
 - **It's checked job by job.** Paying one group below the going rate doesn't make room to pay another group above it. An outside reviewer, the co-op's auditor or the bank's, assigns each person the occupation code for the work they spend most of their hours on, not their title, and the codes are shown to members next to each job. Where the survey has no figure for the metro area, the state figure is used, then the national one.
- **It counts total pay.** Employer retirement contributions above 6% of pay, bonuses, severance beyond two weeks' pay per year worked (up to 26 weeks), and perks like a car, housing or loans to members, valued at cost, all count as pay. So does pay to non-members and to people working through a related company, and the value of any deal with a member or their family on better than market terms, like buying from a relative's firm above the market price. Co-ops can't promise pensions or retiree benefits they don't pay for in full each year.
+- **People who work from home somewhere else.** More than one worker in five teleworked in March 2026 ([BLS](https://www.bls.gov/opub/ted/2026/22-6-percent-of-workers-teleworked-in-march-2026.htm)). The wage survey generally counts remote workers at the employer's reporting location, not at their home ([BLS survey instructions](https://www.bls.gov/respondents/oes/faqs.htm)). So the going rate for them still starts from the co-op's own area. What changes:
  - **The floor can only go up.** Everyone is paid at least the co-op's figure. For someone who lives elsewhere, the living-wage part of the floor is the higher of the co-op's living wage and the one where they live. The minimum wage and wage laws of the state they work in apply too, including higher salary thresholds for overtime. A move that raises the floor counts from the day of the move.
  - **The line for high pay can rise only for jobs hired as remote.** Suppose a co-op filled a job with a posting that advertised it as remote, and the person lives in a metro area where the survey's median for that job is higher than the co-op's. Then that person's pay counts as "above the going rate" only above their own metro's figure. So a co-op in a cheap area can pay what it takes to hire a remote engineer in an expensive city without the reserve taking 30% of the difference. A remote worker in a cheaper place gets no raised line.
  - **Never for insiders.** Board members, officers and managers never get the raised line, and neither does anyone who switches to remote after being hired. "Go remote" can't be used to move insiders' pay out of the reserve's reach.
  - **Fully remote means fully remote.** No more than 10 days a year at a co-op site, logged. Anyone who comes in more than that is held to the co-op's figures. The raised line is counted month by month, so it ends in the month someone stops qualifying.
  - **It's checked, not claimed.** The auditor checks the home address against a lease or state and local tax records, and checks the site logs. The co-op also reports its share of pay above the going rate without the raised line, so any use of it shows.
  - **The floor is what counts for tax.** The raised line only decides what the reserve takes. It isn't a claim about what pay is reasonable. The going rate that [the tax argument](taxes.md#wages-first) relies on is the floor.
  - **Contractors and workers abroad.** Pay to contractors doing a regular job for the co-op, and to staffing or employer-of-record firms supplying workers, counts as pay under this rule, both for the floor and for the line. Workers abroad are held to the co-op's own figure as their floor, with no raised line, and the auditor checks their contracts and payment records. That largely rules out hiring abroad to pay less for the same job. It's a choice: the going rate exists to stop pay being cut because of who does the work, and where they live is part of that. It costs co-ops some hires, and a co-op in an expensive city will hire fewer remote workers in cheaper places for the same reason.
 - **It counts total pay.** Employer retirement contributions above 6% of pay, bonuses, severance beyond two weeks' pay per year worked (up to 26 weeks), and perks like a car, housing or loans to members, valued at cost, all count as pay. So does pay to non-members and to people working through a related company, and the value of any deal with a member or their family on better than market terms, like buying from a relative's firm above the market price. Co-ops can't promise pensions or retiree benefits they don't pay for in full each year. The severance line is there to stop severance from becoming a payout to departing insiders, so it only helps people let go against their will: laid off, or dismissed for anything short of serious misconduct. If the job is filled again within a year, it wasn't a layoff. Severance on retiring or quitting counts as pay in full. Anything the law requires never counts as pay. The weeks are valued at the person's average pay over their last three years, as New Jersey does, so a raise just before leaving doesn't inflate them. For comparison, New Jersey requires one week per full year in mass layoffs and closings ([P.L.2019, c.423](https://pub.njleg.state.nj.us/Bills/2018/PL19/423_.HTM)), and Ontario requires one week per year, up to 26 weeks, of larger employers once someone has worked there five years ([Ontario](https://www.ontario.ca/document/your-guide-employment-standards-act-0/severance-pay)). This line allows twice the rate per year, with the same 26-week cap. The factor of two is a judgment.
 - **How it's settled.** Thirty percent of the excess goes to the reserve, first out of the member's profit share for that year, before it's paid or credited, and then out of their [capital account](capital-accounts.md). No new cash has to be found, because the members already took that money as pay. Taking it from this year's share first avoids a second round of tax on money already credited ([How a Locked Co-op Is Taxed](taxes.md#capital-accounts)). If that isn't enough, the rest comes out of their future account credits, or out of their payout when they leave. For pay to non-members, it comes out of that year's members' profit pool.
- **There's a precedent.** US tax law already treats salaries that aren't "reasonable" as disguised profit ([26 U.S.C. § 162(a)(1)](https://www.law.cornell.edu/uscode/text/26/162)), so owners can't dodge tax by calling profit pay. This rule stops the same disguise being used to dodge the reserve. The tax test is judged case by case. This one is a fixed formula, so it's cruder but much harder to argue about.
+- **There's a precedent.** US tax law already treats salaries that aren't "reasonable" as disguised profit ([26 U.S.C. § 162(a)(1)](https://www.law.cornell.edu/uscode/text/26/162)), so owners can't dodge tax by calling profit pay. This rule stops the same disguise being used to dodge the reserve. The tax test is judged case by case. This one is mostly a fixed formula, so it's cruder but much harder to argue about. The one judgment call is who counts as fully remote, and the auditor checks that against records.
 **2. Gains from selling assets go to the reserve.** If a co-op sells a building, equipment, a brand or a patent for more than its value on the books, the whole gain goes to the reserve, not into the profit split. A sale to an insider, or a sale-and-lease-back, is checked like any [insider deal](pilot-safeguards.md#the-hidden-boss).
@@ -78,16 +86,16 @@ That leaves four ways the horizon problem can still get in.
 - **Only real development qualifies.** It has to meet the test international accounting standards already use to decide when development creates a real asset: it's technically doable, the co-op intends to finish it and can, and it's likely to earn money ([IAS 38](https://www.ifrs.org/issued-standards/list-of-standards/ias-38-intangible-assets/)). Those standards specifically exclude training, advertising and start-up costs, and so does this rule. Those stay costs of the year they're spent.
 - **The people who chose it carry the risk.** If a project is abandoned or written down within five years, the cost that hasn't yet been charged comes out of the capital accounts of the people who were members when it was designated, including former members whose payouts haven't been made yet. Each credit waits three to seven years before it's paid, so much of the money is usually still there. That makes the rule useless for pushing costs onto the next group of workers.
- **Limits.** The total cost still waiting to be charged can't exceed half of the co-op's average profit over the last three years, measured before any spreading. Only co-ops with an independent audit can use the rule, and the auditor checks each open project every year.
+- **Limits.** The total cost still waiting to be charged can't exceed half of the co-op's average profit over the last three years, measured before any spreading. Only co-ops with an independent audit can use the rule, and the auditor checks each open project every year. The lighter review small co-ops get otherwise doesn't count ([What the Rules Cost a Small Co-op](compliance.md#what-a-review-can-and-cant-stand-in-for)).
 - **It only changes how costs are divided between this year's members and future ones.** It doesn't touch the co-op's tax return or its reports to the bank. The co-op publishes both numbers side by side.
-**4. Accounts earn a fair rate while they're at risk.** A current member's account earns the one-year Treasury rate plus two percentage points, credited in years the co-op makes a profit. In a loss year it earns the plain Treasury rate. Money in a current member's account is at risk: it shares in the co-op's losses and ranks behind its lenders. Paying only a risk-free rate on it would push every member to take cash instead. **Once a member leaves, the balance earns the plain Treasury rate.** It no longer shares in losses, so it's no longer at risk, and nobody should collect a premium from the work of people they no longer work alongside. For comparison, Italian law lets co-ops pay members up to 2.5 points above the rate on its postal savings bonds on the capital they've put in (Lomuscio and Tortia, 2023), and Mondragon paid 6% plus an adjustment for inflation (Morris, 1992). The details are on the [capital accounts page](capital-accounts.md#how-the-account-grows).
+**4. Accounts earn a fair rate while they're at risk.** A current member's account earns the one-year Treasury rate plus two percentage points, credited every year, good or bad, so it's a fixed return on capital and not a share of profit ([How a Locked Co-op Is Taxed](taxes.md#interest-on-accounts)). Money in a current member's account is at risk: it shares in the co-op's losses and ranks behind its lenders. Paying only a risk-free rate on it would push every member to take cash instead. **Once a member leaves, the balance earns the plain Treasury rate.** It no longer shares in losses, so it's no longer at risk, and nobody should collect a premium from the work of people they no longer work alongside. For comparison, Italian law lets co-ops pay members up to 2.5 points above the rate on its postal savings bonds on the capital they've put in (Lomuscio and Tortia, 2023), and Mondragon paid 6% plus an adjustment for inflation (Morris, 1992). The details are on the [capital accounts page](capital-accounts.md#how-the-account-grows).
 **5. The reserve doesn't pay for high pay in a loss year.** Mondragon calls its members' pay *anticipos*, advances on profits ([Morris, 1992](https://www.ilsr.org/wp-content/uploads/2013/03/mondragon-3.pdf)). This model treats the part of pay above the going rate the same way: as an advance against profit that hasn't been earned yet.
 - **If the year ends in a loss,** the part of the loss up to the pay above the going rate, in that year and the year before, is charged to the people who got that pay, in proportion to how much each got. It comes out of their [capital accounts](capital-accounts.md), and out of their payouts if they've left since. The 30% rule 1 already moved from their accounts counts toward it, so nobody pays twice. The rest of the loss is shared as usual.
 - **An example.** A co-op loses $50,000. Its managers were paid $30,000 above the going rate that year, and rule 1 already moved $9,000 of that into the reserve. The managers' accounts are charged $21,000 more. The other $20,000 of the loss is shared between the reserve and all members' accounts in the usual way.
- **What their accounts can't cover** comes out of their future profit shares, above the cash they need for tax, and nobody's above-going-rate pay can rise until it's repaid. After three years, anything still owed is written off.
+- **What their accounts can't cover** comes out of their future profit shares, above the cash they need for tax, and nobody's above-going-rate pay can rise until it's repaid. After three years, anything still owed is written off. Three years is a judgment. Much shorter, and the best-paid could wait out a charge. Much longer, and one bad year would hang over people's savings for most of their time at the co-op. Whatever is written off falls on the reserve, which means on the people who work there later.
 - **Pay above the going rate to non-members** is charged to all members in proportion to their profit shares, since members chose to pay it. Members whose household income is under twice the poverty line are left out, and so is the insured slice of anyone's account.
 - **It never touches pay already earned.** Wages and bonuses already paid or earned stay paid. The charge falls on savings in the co-op, not paychecks.
@@ -110,12 +118,12 @@ That still leaves two real ways to run it down, and both come from how accountin
 - **Skipped upkeep.** Repairs count as a cost in the year they're done, so skipping them raises this year's profit, and members share it.
 - **Machines that are "paid for."** Accounting spreads a machine's cost over its expected life, its *depreciation*. Once that time is up, the machine stops counting as a cost, even if it's still running. If nobody replaces it, profit looks higher every year, and members split the difference. That's not savings. It's the machine wearing out.
-**6. Worn-out equipment keeps being charged.** For the profit split only, buildings and equipment that are fully written off but still in use keep being charged at their last yearly rate, adjusted for inflation. That money goes to the reserve, not the split. So a co-op running on old machines builds up the money to replace them, instead of paying it out. Co-ops whose buildings and equipment are worth less than a tenth of their yearly revenue, like most service firms, can skip this.
+**6. Worn-out equipment keeps being charged.** For the profit split only, buildings and equipment that are fully written off but still in use keep being charged at their last yearly rate, adjusted for inflation. That money goes to the reserve, not the split. So a co-op running on old machines builds up the money to replace them, instead of paying it out. Co-ops whose buildings and equipment still in use, at what they originally cost and including leased ones, come to less than a fifth of their yearly revenue, averaged over three years, can skip this. Revenue here leaves out materials and subcontracted work passed on to customers at cost. Measuring at original cost means letting equipment run down can't bring a co-op under the line, and counting leased equipment means selling it and leasing it back can't either. For a rough sense of who that leaves out: on 2022 corporate balance sheets, buildings and equipment at original cost came to about 14% of sales in professional services, 8% for building contractors and 22% for specialty trades like plumbing, 22% in the group that includes home health care, 27% in cleaning and other building and office services, 37% at restaurants and 41% in manufacturing ([IRS, Table 1](https://www.irs.gov/statistics/soi-tax-stats-corporation-complete-report)). Those totals are weighted toward big companies, and the smallest ones don't report balance sheets, so they're a guide, not a measurement. A home care co-op that owns a few laptops is far under the line. The charge only falls on equipment that's fully written off anyway, so for a co-op near the line little turns on which side it's on.
 There's no fair way to set how much every business should spend on upkeep, so this model doesn't try. Instead there's a warning light:
- **Every year, the co-op shows members how much it spent on new buildings and equipment**, including new leases, next to how much its existing ones wore out that year, adjusted for inflation.
+- **Every year, the co-op shows members how much it spent on new buildings and equipment**, including new leases and any unpaid invoices it has sold, next to how much its existing ones wore out that year, adjusted for inflation.
- **If spending stays below wear for three years running, an independent inspector reports** on the condition of the main buildings and equipment. The lock-holder picks the inspector and the co-op pays. The report goes to every member, and to the bank if it's still owed money. The first five years after a buyout or conversion don't count, because buying a business makes its old equipment look like it's wearing out fast.
+- **If spending stays below wear for three years running, an independent inspector reports** on the condition of the main buildings and equipment. The lock-holder picks the inspector and the co-op pays. The report goes to every member, and to the bank if it's still owed money. After a buyout, buying the business puts its used equipment on the co-op's books at today's value, spread over the few years it has left, which makes it look like it's wearing out fast. So for the first five years, wear is measured on the seller's old book values instead. The upkeep the seller put off, which the [pre-sale check](buyouts.md#a-fair-price) already counts, is the starting point: spending that doesn't catch up on it counts as falling behind. A conversion without a sale doesn't re-value anything, so nothing changes for it.
 - **A co-op that's shrinking on purpose,** because its market is, says so in a written plan its members vote on. That's a warning light, not a spending order.
 ### Spending it badly
@@ -131,7 +139,7 @@ The danger is real, but reserve money isn't free to members.
 The risks that remain are the ones Fagor shows: big bets that members can't judge, losses that show up after the people who voted have left, and help from other co-ops that keeps a failing business going. So:
- **A second opinion on big commitments.** Some commitments need an independent written opinion before members vote: a single investment, a purchase of another business, or borrowing, including leases and guarantees, bigger than a quarter of the co-op's own capital (its reserve plus members' accounts) or $250,000, whichever is larger. Related commitments within two years are added together. The lock-holder picks the adviser from an approved list, and the co-op pays. A lender to the project can't give the opinion. The opinion comes with a one-page plain summary, including what the plan means for members' jobs, and there's a members' meeting to ask questions before the vote. It's advice, not a veto. The co-op publishes it with the result of the vote, and three years later reports how the project did against the plan. Replacing worn-out equipment like for like, and loans the bank has already checked, don't need it. [Spin-offs](growth.md) get a similar opinion at a lower threshold.
+- **A second opinion on big commitments.** Some commitments need an independent written opinion before members vote: a single investment, a purchase of another business, or borrowing, including leases, guarantees and selling unpaid invoices, bigger than a quarter of the co-op's own capital (its reserve plus members' accounts) or $250,000, whichever is larger. Anything bigger than the co-op's whole capital needs one too, if it's over $50,000. So does buying any business for more than $350,000, the price above which the SBA requires an independent valuation before it backs a loan to buy a business ([SBA SOP 50 10 8.1](https://legacy.sba.gov/sites/default/files/2026-09/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%2010.1.2026.docx)). The SBA rule protects a lender's price, not members' judgment, but it marks where a purchase is big enough to need an outside look. Related commitments within three years are added together, and the dollar figures rise with inflation. An outside opinion can easily cost thousands of dollars, so for commitments under $250,000 the federation's staff can give it for a flat fee, and the federation's fund pays that fee for co-ops with less than $250,000 of their own capital. The lock-holder picks the adviser from an approved list, and the co-op pays. A lender to the project can't give the opinion. The opinion comes with a one-page plain summary, including what the plan means for members' jobs, and there's a members' meeting to ask questions before the vote. It's advice, not a veto. The co-op publishes it with the result of the vote, and three years later reports how the project did against the plan. Replacing worn-out equipment like for like, and loans the bank has already checked, don't need it, except for buying a business. [Spin-offs](growth.md) get a similar opinion at a lower threshold.
 - **Losing parts of the business are visible.** Where a co-op has separate lines of business, each one reports its own results to members every year ([Does Sharing the Profit Mean Less Effort?](free-riding.md#small-teams-open-books)). A line losing money for years can't hide inside the total.
 - **A board that can follow the plans.** The federation offers training in reading the accounts, on paid time and open to every member, not just the board. The standard bylaws let members elect outside directors, from other co-ops or with business experience, but never more than a quarter of the board. The members choose them and can remove them.
 - **Limits on propping up a firm, decided in advance.** The [federation's fund](federation.md) helps a co-op through a bad year. Help to keep a firm going comes with a recovery plan and a limit set before any crisis, and cuts to members' pay or jobs in that plan need the members' vote. Help for the *workers*, like finding them jobs in other co-ops if the firm closes, has no such limit. Mondragon kept supporting Fagor and then said no. It's better to agree on where the line is before anyone's firm is on the wrong side of it.
@@ -140,6 +148,6 @@ The risks that remain are the ones Fagor shows: big bets that members can't judg
 - **Upkeep.** Nothing forces a co-op to maintain what it has. The warning light shows when upkeep falls behind, but members can still ignore it.
 - **Late failures.** A big project that fails after the members who chose it have left is paid for by the people who came after. The second opinion and the three-year report make bad bets less likely and more visible. They don't move the cost back to the people who made them.
- **Deals with insiders after the loan.** The check on deals with insiders is a condition of the bank's loan ([The Hidden Boss](pilot-safeguards.md#the-hidden-boss)). Rule 1 now counts a sweetheart deal with a member as pay, but who checks for them once the loan is repaid isn't settled.
+- **Deals with insiders after the loan.** The check on deals with insiders now outlasts the bank's loan as part of the lock ([Deals with insiders](the-lock.md#deals-with-insiders)). It's weaker once the loan is repaid, since the bank can no longer call it.
 - **Whether 30% is enough.** Italy requires 30%. Mondragon found 20% too low and moved to 50%. This model uses 30% as a minimum that each co-op can raise. [The pilot](pilot-spec.md#what-gets-measured) measures investment per worker, and the return it earns, against matched conventional firms. So if co-ops invest too little, or waste what they invest, it will show.
 - **Is the account rate right?** Two points above Treasury is well below what investors expect from a small business, so members may still prefer cash. Paying the co-op's own return on its assets instead would reward good investment directly, but it would also make the account more volatile. And lower-income members, who can take their whole share as cash, don't get the two points at all. That's fair only if the two points are a fair price for the risk the account carries, not a bonus. Which is better is unsettled.
@@ -15,4 +15,4 @@ The bank is an experiment, so it runs like one.
 [The Pilot, in Numbers](pilot-spec.md) spells all of this out: the exact measures, the comparison group, the pass and fail thresholds, and an emergency stop.
-**What the test can prove, and what it can't.** At pilot scale, this tests *business viability*: can co-ops compete, survive, and repay market-rate debt? It does **not** test the labor-market effect, meaning the idea that as co-ops grow, conventional firms have to treat workers better or lose them. That effect is real in principle, but it needs a co-op sector big enough to move wages at the margin. Mondragon employs tens of thousands of people and hasn't reshaped Spanish employment practice. The labor-market effect is the long-run payoff of success, not something the pilot can claim. [After a Pass: How Big, How Fast](scale.md) works through how big the sector would need to get, and how the effect could be tested in a few local markets once it grows.
+**What the test can prove, and what it can't.** At pilot scale, this tests *business viability*: can co-ops compete, survive, and repay market-rate debt? It does **not** test the labor-market effect, meaning the idea that as co-ops grow, conventional firms have to treat workers better or lose them. That effect is real in principle, but it needs a co-op sector big enough to move wages at the margin. Mondragon employs tens of thousands of people and hasn't reshaped Spanish employment practice. The labor-market effect is the long-run payoff of success, not something the pilot can claim. [After a Pass: How Big, How Fast](scale.md) works through how big the sector would need to get, and how the effect could be tested in local markets once it grows. On public numbers, that local test could only see a large effect, so it may never run.
@@ -22,21 +22,29 @@ That drift matters for two reasons. It would make the test less useful, because
 Before the first loan, the pilot's filed plan defines two groups the results are reported on. The reviewers, not the bank, decide which group a co-op falls in when it applies.
- **Co-ops in lower-paid work.** In the co-op's industry, the average wage in its county is below the county's average for all private-sector jobs. The figures come from the federal count of employment and wages (the Quarterly Census of Employment and Wages), which covers nearly every employer, rural counties included. Where the county figure is withheld for privacy, the state figure is used, then the national one, and the report says how often that happened. The industry is the one the co-op registers under for its payroll taxes, so it can be checked against government records.
+- **Co-ops in lower-paid work.** The co-op's industry has to pass two checks. Nationally, its average pay is below the average for all private-sector jobs ($75,850 in 2024). In the co-op's county, its average pay is below the county's average for all private-sector jobs. The figures come from the federal count of employment and wages (the [Quarterly Census of Employment and Wages](https://www.bls.gov/cew/downloadable-data-files.htm)), which covers nearly every employer, rural counties included, at the finest industry level it publishes. The details:
  - **Why two checks.** I ran the county check alone on the 2024 figures. In the richest counties, like Santa Clara, San Francisco and Manhattan, the county average is so high that management consulting, accounting, architecture and engineering all count as "lower-paid" there. Those are the co-ops the set-aside exists to look past. The national check closes that. Care, cleaning, restaurants, child care and landscaping pass either way, in counties holding over 90% of those businesses. Consulting, law, software and engineering pass nowhere.
  - **Why averages.** Nobody publishes a typical (median) wage for one industry in one county, so averages are what can be checked. A few high earners pull an average up, which makes the test generous: about 55% of private-sector jobs are in industries that pass both checks where they are. The figures are pay per job per year, not per hour, so long-hours work looks better paid than it is, and part-time work looks worse paid.
  - **A lower tier.** Industries whose national average is below two-thirds of the all-jobs average (about $50,500 in 2024) form a lower tier, about 40% of private-sector jobs. Care, cleaning, restaurants and child care are in it; dentists' offices, trucking and remodeling aren't. **Half the set-aside, $45 million, is held for the lower tier,** under the same rules as the rest. Without that, the bank could fill the whole set-aside from the best-paid end of the group.
  - **When the county figure is withheld.** About a fifth of businesses are in county-and-industry figures the government withholds for privacy, and in counties with under 10,000 private-sector jobs it's about 70%. Then the state's figure for the industry is compared with the state's average for all jobs, not with the county's, because a state figure carries city pay that a rural county average doesn't. In my test, that lets 89% of small-county businesses in nationally lower-paid industries pass, against 66% when the state figure was set against the county average. The state figure is withheld for about 1% of businesses; then only the national check applies. The report says how often each fallback was used, by count and by dollars lent.
  - **Which industry.** The reviewers decide it from what the co-op actually sells: its revenue, its contracts and its members' jobs. The code it registers under for state payroll taxes is only a cross-check, since businesses largely describe themselves to get it. Staffing and "all other" catch-all codes don't qualify on their own; the co-op's real work has to. The reviewers publish the reason for each placement.
  - **Members' own pay is a ceiling.** Even in a qualifying industry, the co-op's planned median hourly pay for members, counting profit shares, has to be below the median hourly wage for all jobs in its area ([BLS area wage figures](https://www.bls.gov/oes/tables.htm)). After each of its first three years, the reviewers check it against real payroll. Pay is only a way out, never a way in: a co-op outside a lower-paid industry can't qualify by paying itself little.
  - **Which county and year.** The county where most of the co-op's hours are worked, by work location on its payroll records, not where members live. The figures are the average of the last three yearly releases, fixed at the start of each lending year, so nobody can time an application around a release.
  - **What moves a co-op.** The group is fixed for the loan unless the co-op misstated its business, or in its first three years most of its revenue moves into work that doesn't qualify, or its members' pay goes over the ceiling. Then its loan is moved to its real group in the published results, and the results are shown both ways. The loan itself isn't penalized. Related co-ops (shared members or control, or much of their revenue from each other) are placed as one family, so a firm can't split into a lower-paid co-op that borrows and a better-paid sister that uses what it buys.
 - **First-time owners without much wealth.** Most founding members, counted by their hours of work, have never owned a business, and their household wealth is below the median for people their age in the Federal Reserve's household wealth survey. Founders report their wealth in bands, sign it under penalty for false statements, and it's checked against their tax records with their consent. Founders count only if they work at least a set number of hours in the co-op's first year.
 A co-op can be in both groups, one or neither.
 ## Money set aside
-**About a third of the loan money, $90 million, is set aside for co-ops in lower-paid work.** Other co-ops can't borrow it. Nobody waits in line. Co-ops outside the group borrow from the rest of the money, the same as before. That's a first guess, sized so the set-aside could fund a large share of the co-ops at the smaller loans this kind of work usually needs.
+**About a third of the loan money, $90 million, is set aside for co-ops in lower-paid work.** Other co-ops can't borrow it. Nobody waits in line. Co-ops outside the group borrow from the rest of the money, the same as before. Half of it, $45 million, is held for the [lower tier](#two-groups-fixed-in-advance). That's a first guess, sized so the set-aside could fund a large share of the co-ops at the smaller loans this kind of work usually needs.
 **The standards don't change.** Each loan is still judged on its own numbers by the same filed standards ([Guarding the Pilot](pilot-safeguards.md)), and the limits on any one industry and county still apply. If the set-aside and the 25% cap on one industry ever clash, the cap wins.
-**Unused money goes back, but only after a check.** At the end of year 4, any money not yet lent goes back to the general pool, but only if the reviewers certify two things:
+**Unused money goes back, but only after a check.** At the end of year 4, lower-tier money not yet lent moves to the rest of the set-aside, and set-aside money not yet lent goes back to the general pool, each only if the reviewers certify two things for the co-ops it was held for:
 1. The bank decided applications from lower-paid co-ops as fast as others, measured from a complete application, within a time limit filed in advance.
-2. An extra-large audit of rejected lower-paid applications found that the bank applied its own standards.
+2. The audit of rejected lower-paid applications found that the bank applied its own standards ([the line](durability.md#when-rejections-mean-not-tested)).
 If they can't certify both, the money stays set aside until the lending window closes. The verdict for lower-paid work is then **"not tested,"** not "failed," unless the reviewers show that good applications really were scarce.
@@ -54,7 +62,7 @@ So the set-aside isn't a subsidy, and it can't excuse a result. The money test i
 ## Published by group
-Every year the bank publishes, for each group: applications, approvals, rejections, offers the co-op turned down, withdrawals, rates, collateral, loan sizes, time to a decision, and how the loans are doing. It also publishes the same figures by industry, by rural or urban county (using the federal government's standard rural codes), and by the founders' wealth band.
+Every year the bank publishes, for each group: applications, approvals, rejections, offers the co-op turned down, withdrawals, rates, collateral, loan sizes, time to a decision, and how the loans are doing. It also publishes the same figures for the lower tier, by where the co-op's industry falls on its county's wage scale (in fifths), by industry, by rural or urban county (using the federal government's standard rural codes), and by the founders' wealth band.
 To protect small businesses, every published table needs at least 10 co-ops in each cell, counting every combination of details shown. Whether individual loans are behind on payments is published only in totals. Loan-by-loan data goes only to vetted researchers under a data-use agreement.
@@ -78,13 +86,27 @@ The yearly audit of rejected applications ([Making It Last](durability.md#riggin
 - **Are the numbers themselves fair?** It checks each part of the bank's scoring, like collateral, credit history and founders' own money, to see whether it counts against a group more than it predicts repayment. Then it publishes whether a different scoring would predict repayment as well with less of that effect.
 - **Is the bar too high?** If approved co-ops in one group repay better than the rest, the bank was demanding too much of that group. The lottery among borderline applicants ([The Pilot, in Numbers](pilot-spec.md#who-co-ops-are-compared-against)) is the cleanest place to check.
-The audit also reports by the founders' gender and race, as the pilot already does, collected separately from the loan file so underwriters don't see it.
+The audit also reports by the founders' gender and race, as the pilot already does, collected separately from the loan file so underwriters don't see it. Answering is optional and changes nothing about the loan.
 **Asking needs its own legal basis.** The fair-lending law forbids discriminating, not asking ([15 U.S.C. § 1691](https://www.law.cornell.edu/uscode/text/15/1691)). The ban on asking an applicant's race, color, religion, national origin or sex is in the rules written under it, with a few exceptions ([12 C.F.R. § 1002.5](https://www.law.cornell.edu/cfr/text/12/1002.5)). The law covers government lenders too ([§ 1691a](https://www.law.cornell.edu/uscode/text/15/1691a)), so the bank is bound by both. None of the ready-made exceptions fits it:
 - **The federal small-business lending data rule** requires lenders to ask, behind a wall that keeps the answers from anyone deciding on the loan ([§ 1002.108](https://www.ecfr.gov/current/title-12/part-1002/section-1002.108)). Since a May 2026 change, it covers only lenders that make at least 1,000 small-business loans in each of two years, starting in 2028 ([§ 1002.105(b)](https://www.ecfr.gov/current/title-12/part-1002/section-1002.105), [§ 1002.114](https://www.ecfr.gov/current/title-12/part-1002/section-1002.114)). The pilot's bank makes far fewer than 1,000 loans a year. Collecting early is allowed only for lenders that expect to be covered, and continuing is allowed only for lenders that used to report. The rule is also being reconsidered again.
 - **A lender's own fair-lending self-test** can ask, if it tells applicants that answering is optional, why it's asking, and that the law forbids using the answer or a refusal against them ([§ 1002.5(b)(1)](https://www.law.cornell.edu/cfr/text/12/1002.5), [§ 1002.15](https://www.ecfr.gov/current/title-12/part-1002/section-1002.15)). But collection the government requires doesn't count as a voluntary self-test, and the pilot requires these figures.
 - **Asking later, through the reviewers,** doesn't escape the rule: it covers "every aspect of an applicant's dealings with a creditor" about a loan ([§ 1002.2(m)](https://www.ecfr.gov/current/title-12/part-1002/section-1002.2)). And applicants who were turned down rarely answer a later survey, which would lose the very people the audit is for.
 So the bank's law uses the route the rules already leave open: information "required by a regulation" to monitor compliance ([§ 1002.5(a)(2)](https://www.law.cornell.edu/cfr/text/12/1002.5)). The law directs the bank's federal regulator to issue that rule, using the categories the small-business data rule uses (ethnicity, race and sex of each principal owner), so the results can be compared with national figures if those are ever collected. The rule copies the self-test notice to applicants and goes further than the data rule's wall. That rule lets a lender skip the wall, with notice, when keeping it isn't feasible, and a bank with a few loan officers would. So the bank never holds the answers at all: a separate custodian collects them under coded IDs and matches them to loan files only after decisions are final. As a fallback, the law authorizes the question directly, "notwithstanding" the rules. A deal with a single agency wouldn't do: it would last only as long as that agency's goodwill. The bank asks nothing about birthplace or language.
 - **Kept apart, kept briefly.** They're used only for the audit and the pilot's published results, never shared with law enforcement or immigration authorities, and kept out of public-records requests. Each answer is deleted three years after the audit that used it, the data rule's own retention period ([§ 1002.111](https://www.ecfr.gov/current/title-12/part-1002/section-1002.111)). Results for fewer than ten people aren't published, and refusal rates are.
 - **Publishing has a price, paid on purpose.** Published results lose the protection the self-test rule gives a lender's own findings, and anyone suing the bank can use them. That's the point of an audit the public can check. The test a replacement scoring rule has to pass is published in advance, so turning one down is a rule being followed, not a judgment call.
 - **If Congress won't include it,** estimates from surname and address, the method the Consumer Financial Protection Bureau uses, can stand in for totals. They say nothing about sex, work poorly for small groups and for co-ops with several founders, and can't be checked by the people they describe. A better fallback is matching founders, with their consent, to their own answers on the census, inside the Census Bureau's secure research program, so the bank never holds a race file. The reviewers compute the surname-and-address estimates from the first year anyway, so if a later Congress repeals the question, there's a comparable series to continue.
 Race and sex measure results; they never decide a loan. If the audit finds a scoring rule that works against a group, a replacement is adopted only if it predicts repayment as well or better for all applicants. That's the bank's own rule, not a claim about what the courts require, so it holds whatever happens to the law on unintended discrimination. Gaps by race are reported both as they are and after taking founders' wealth into account, so it shows how much of any gap runs through wealth and how much doesn't.
 ## What this doesn't solve
 - **It can't make people apply.** The set-aside makes money available. It can't make groups come forward. The [founding lottery](before-launch.md) and sponsors like unions and worker centers do that, and the pilot can only measure how well.
- **The lower-paid group is wide.** It runs from the lowest-paid work to work just under the average. The bank could meet it mostly at the top. The results are also published by fifths of the local wage scale, so that shows, but nothing requires lending at the bottom.
+- **The lower-paid group is wide.** It runs from the lowest-paid work to work just under the average, about 55% of private-sector jobs. The lower tier holds half the set-aside for the bottom of it, but inside each half the bank can still lend mostly at the top. The results are published by fifths of the local wage scale, so that shows.
 - **Market prices aren't neutral.** In home care and cleaning, prices are largely set by whoever buys the work, like Medicaid or a contractor, not by how well the business is run. A co-op that fails there may be failing the price, not the co-op form. Comparing co-ops with conventional firms in the same industry catches some of that, not all.
- **Industry is a rough stand-in.** A co-op in a low-wage industry can still pay well, and the reverse. Industry is used because it can be checked. The pilot publishes members' actual pay too.
+- **Industry is a rough stand-in.** A co-op in a low-wage industry can still pay well; the pay ceiling catches that. The reverse isn't caught: a rural design or computer-repair co-op whose members earn little fails the national check, and borrows from the general pool on the same terms. Letting co-ops in on their own low pay would reward paying yourselves little at application, so it isn't allowed. A determined co-op can still describe its work to fit, and the reviewers' placement is a judgment. The pilot publishes members' actual pay too.
 - **Wealth is hard to check.** Tax records show income, not savings. Some founders will understate their wealth.
- **The numbers are guesses.** $90 million and year 4 are first guesses. The pilot publishes how much of the set-aside was used, so the next design can do better.
+- **The numbers are guesses.** $90 million, the half for the lower tier, its two-thirds line, three years of pay checks and year 4 are first guesses. The pilot publishes how much of the set-aside was used, so the next design can do better.
`@@ -15,4 +15,4 @@ The bank is an experiment, so it runs like one.`

	`[The Pilot, in Numbers](pilot-spec.md) spells all of this out: the exact measures, the comparison group, the pass and fail thresholds, and an emergency stop.`	`[The Pilot, in Numbers](pilot-spec.md) spells all of this out: the exact measures, the comparison group, the pass and fail thresholds, and an emergency stop.`

	What the test can prove, and what it can't. At pilot scale, this tests business viability: can co-ops compete, survive, and repay market-rate debt? It does not test the labor-market effect, meaning the idea that as co-ops grow, conventional firms have to treat workers better or lose them. That effect is real in principle, but it needs a co-op sector big enough to move wages at the margin. Mondragon employs tens of thousands of people and hasn't reshaped Spanish employment practice. The labor-market effect is the long-run payoff of success, not something the pilot can claim. [After a Pass: How Big, How Fast](scale.md) works through how big the sector would need to get, and how the effect could be tested in a few local markets once it grows.	What the test can prove, and what it can't. At pilot scale, this tests business viability: can co-ops compete, survive, and repay market-rate debt? It does not test the labor-market effect, meaning the idea that as co-ops grow, conventional firms have to treat workers better or lose them. That effect is real in principle, but it needs a co-op sector big enough to move wages at the margin. Mondragon employs tens of thousands of people and hasn't reshaped Spanish employment practice. The labor-market effect is the long-run payoff of success, not something the pilot can claim. [After a Pass: How Big, How Fast](scale.md) works through how big the sector would need to get, and how the effect could be tested in local markets once it grows. On public numbers, that local test could only see a large effect, so it may never run.