OP-ED: Contractors, Take These Actions to Avoid Union Pension Liability
Daily Journal of Commerce Oregon
Union pension trustees wield significant legal power over any employer that has contributed to a union pension trust as well as any employer that should have contributed, but failed to do so. Let’s start with an example to demonstrate one way this liability presents itself.
Fred owns a small nonunion electrical company. He bids on a new downtown construction project and understands that there is going to be a labor harmony clause in the subcontract. He bids on nonunion rates and wins. He soon discovers that he must sign a project labor agreement (PLA). Although his profit will now be tight, he goes forward with the project.
At the time, union business agents assure Fred that only the installers have a classification under the collective bargaining agreement (CBA), and service technicians do not. Therefore, the company need not make pension contributions for the service techs. When the project ends, the union notifies Fred that his PLA contained language whereby it automatically converted into a long-term CBA. Fred is furious, but also finds advantages to the union relationship because it gives him better access to larger urban projects. The union again confirms that Fred is obligated to contribute to the pension trust on behalf of the installers, and not service techs.
For 10 years, Fred makes pension contributions as the union instructs, but then he decides to get out of construction to focus on the service side of the business. Prior to terminating the installers, Fred smartly obtains withdrawal liability estimates from the union pension plan. The plan’s actuary sends him an estimate of $400,000 payable in quarterly installments over 20 years, which is expensive, but Fred can afford the payments if the service side is as profitable as he anticipates.
Fred lays off the installers and sells the installation equipment to a competitor. Two months later, the trustees audit Fred and conclude that he owes over $1.5 million in missing pension contributions for the service techs. The trustees ignore Fred’s explanations that the union told him not to contribute for services techs. He next receives a letter from the trustees assessing $2 million in withdrawal liability for discontinuing contributions. The notice of liability states that the liability is five times higher than the original $400,000 estimate because the trustee changed the discount rate from 7.5 percent to around 2 percent. Fred now owes $3.5 million to the pension trust and there is very little he can do about it.
What could Fred have done differently?
- When bidding, recognize any union presence on site.
If there will be a union presence on site, read the bid documents carefully regarding the obligations for labor harmony. Clauses often labeled “labor harmony” are actually requirements that the subcontractor must enter into a PLA or abide by the prime contractor’s CBAs.
- Restrict your bid to nonunion wages. Include in your bid a disclaimer that the bid is based on the understanding that wages are nonunion.
- Review the PLA carefully for language that could automatically convert the PLA into a full-fledged CBA. A bedrock of the National Labor Relations Act (NLRA) is employees’ free choice to determine who (if anyone) will represent them. The construction industry has the only exception – an employer can force unionization onto its employees for the duration of a construction project. This is called an 8(f) agreement. Ordinarily, when an 8(f) agreement ends, unionization ends unless the employees express majority support for continued union representation. However, in 2001, the National Labor Relations Board (NLRB) held that even where there was no evidence of majority employee support for the union, an 8(f) agreement could automatically convert to regular CBA if the 8(f) agreement recited that a majority of the workers supported the union. Many construction companies found themselves unionized because the union slipped this language into what the contractor thought was a temporary PLA. The Trump administration recently overturned this case, so currently an 8(f) agreement will not automatically convert to a full CBA unless the union shows “positive evidence” that a majority of the employees support the union. But as the administration swings back and forth from Democrat to Republican, this rule could continue to waver. Whichever law applies when any given 8(f) agreement ends will govern. Contractors might find themselves in a temporary agreement with the union that automatically converts to a full CBA after the project ends.
- Confirm whether the construction exception to withdrawal liability applies. An employer is not assessed withdrawal liability if the employer stops engaging in work within the jurisdiction of the CBA for which pension contributions were required and does not resume that work for five years (or, if the employer does resume work, it is work under which the contributions are required to continue – i.e., another PLA is agreed to). Therefore, if a construction employer is going completely out of business, it can avoid withdrawal liability.
- Gather and review the pension trust documents. Is the pension trust underfunded? By how much? What is the discount rate that has traditionally been applied? This information can inform a bid before one enters into a PLA.
- Confirm whether the trust plans provide a free-look period. Union pension trust documents might contain provisions that permit an employer to “participate” (i.e., make contributions) for a limited time without any risk of withdrawal liability. Read the plan and understand how long you can continue to make contributions under an 8(f) agreement under the free-look period before withdrawal liability is triggered.
- Will your liability likely be less than $100,000? When an employer discontinues contributions, if the liability that would be assessed is less than $100,000, it is forgiven so long as the plan is not terminated or there is not a mass withdrawal of employers.
- Don’t rely on unwritten union promises. The union and the trust or pension plans are not the same. The union’s oral promises to an employer don’t necessary bind the trust. If a union agent tells you anything about contributions that might be owed to the trust, contact the trust and get an agreement in writing from the trustees.
Column first appeared in the Oregon Daily Journal of Commerce on October 16, 2020.