Employer Withdrawal Liability - Something to consider before signing a CBA

Although the equity markets continue on a record breaking tear, many multiemployer pension plans remain severely underfunded. Unfunded pension liability, also referred to as employer withdrawal liability, creates substantial risks for union employers. Non-union employers contemplating signing on with a local union should consider potential pension plan liabilities as part of the due diligence process.

When it comes to potential liability to multiemployer pension plans, employers should proceed with extreme caution. Here are some considerations for an employer contemplating signing a CBA with a local trade union:

  • The CBA will likely not refer to withdrawal liability and the union is under no legal obligation to disclose this potential liability to you prior to signing the CBA. This is because withdrawal liability is a product of statute, not the agreement.
  • Does the CBA require contributions to be made to one or more defined benefit pension plan(s)?
  • If so, what is the funding status of the pension plans for which you would be obligated to contribute to under the CBA? Under federal law, these pension plans are required to prepare an annual funding notice. Ask for a copy of the funding notice.
  • The funding status of the more severely underfunded plans can be found on the DOL’s website.
  • Does the plan provide for a free look period? Under ERISA’s free look rule, you might qualify for a limited exception to withdrawal lability. This rule is complicated and only applies if the plan has been amended to permit the free look rule. Ask for a copy of the plan document.
  • Will the union provide any indemnification for withdrawal liability? Some unions are willing to accept liability (with substantial limitations) to make union affiliation less risky for employers.

Further, simply refusing to the sign the CBA and hiring union employees is not a good strategy to avoid withdrawal liability. An employer that conducts itself as if  it had signed a CBA (e.g. paying wages under the negotiated wage scale and making fringe benefit payments to the union’s employee benefit plans) is likely subject to the terms of the CBA. For example, an employer that hires union labor (participating in a multiemployer pension plan) may unknowingly create an obligation to make contributions to that pension plan and the cessation of such an obligation may trigger an assessment of withdrawal liability. It’s an expensive one-two punch, first the pension plan may file a collection action in federal district court to collect contributions for all covered work performed and then the plan may issue an assessment of withdrawal liability. This combination could prove to be a TKO for some employers.

These are just a few of the issues to consider when evaluating whether signing a CBA is the best option for your business. Given the complexities of these agreements and the law governing the relationship, it is highly recommended that you seek qualified counsel to assist you in making an informed decision on whether to sign a CBA or hire union labor.

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