Construction companies with union employees often must make contributions to a defined benefit pension plan sponsored by the union. These plans are called “multiemployer” pension plans.
As a general rule, multiemployer plans are not well-funded. In 2015, for example, a federal study showed that 98.3 percent of multiemployer plans were underfunded. Collectively, that underfunding surpassed $560 billion. And nearly 40 percent of multiemployer plans are in the construction industry.
Under the Employee Retirement Income Security Act of 1974 (ERISA), when a construction employer exits an underfunded multiemployer plan, the employer must pay “withdrawal liability.” The withdrawal liability is based on the employer’s share of the plan’s underfunded liabilities, which can be calculated in different ways, but generally, the more a company has contributed over time, the more it will owe.
For small and mid-sized companies, this looming liability can be enormous, sometimes greater than the value of the company itself. This creates a significant problem that must be addressed.
Fortunately, there is an exemption that construction companies can take advantage of under ERISA. Specifically, employers in the “building and construction industry” can get out of withdrawal liability provided several requirements are met. I discussed those rules in more detail here, but most importantly: (1) the employer has to cease its obligation to make contributions under the collective bargaining agreement (CBA); and (2) the employer must not perform covered work under the CBA for at least five years thereafter.
Following are several options for how a construction company can address its withdrawal liability, including:
- Do nothing
- Pay it
- Use subcontractors
- A stock sale of the company
- An asset sale of the company
- Negotiate with the plan
- Terminate your obligations under the CBA
One option is to maintain the union work going forward and keep making required contributions to the multiemployer pension plan. It is possible the amount of withdrawal liability your company faces will go down over time, either as a result of your union work decreasing or the plan becoming better funded. It may be more likely, however, that the funding status of these plans will continue to deteriorate, resulting in your company’s potential withdrawal liability going up, not down. That, in turn, may narrow your company’s options going forward.
Pay the withdrawal liability
If the amount of the withdrawal liability is not prohibitive, it may make financial sense to just pay it while continuing to perform the same covered work with non-union employees. To make this determination, your company will need to request a withdrawal liability estimate from the multiemployer pension plan at issue. That will allow you or your attorney to determine (or estimate) the total amount of liability and the amount of annual installment payments you will have to pay. If it makes sense to pay withdrawal liability now, your company must first terminate its obligation to make contributions to the multiemployer pension plan (see below). The pension plan will then have to make a final assessment of withdrawal liability before it can be paid.
It may be possible to discontinue using employees to perform covered work under the CBA and instead use subcontractors to perform the same work. Whether or not this will work depends entirely on the CBA. If the CBA requires any subcontractors to also have an obligation to make pension contributions, then, practically speaking, it may be difficult to find a suitable subcontractor. And if the CBA is written in a way that your company could be held liable for a subcontractor’s delinquent contributions, then your company has not stopped performing covered work, and the five-year window on the building and construction industry exemption may not begin to run.
If you are considering this option, have an experienced attorney review your CBA and determine what your options are.
Stock sale of the company
This is an easy solution from the seller’s perspective, as the withdrawal liability just becomes the new buyer’s responsibility. However, the prospect of withdrawal liability may significantly drive down the value of the company in any sale, and if the seller remains part of the same controlled group — see here — the seller is still on the hook for the withdrawal liability if it gets triggered. So, depending on the circumstances, this may or may not be a feasible option.
Asset sale of the company
This is a good option for someone looking to retire. In an asset sale, the withdrawal liability stays with the seller, who can then dissolve. After five years of not performing any covered work, the building and construction industry exemption will eliminate the withdrawal liability.
One major pitfall of this option, however, is successor liability, in which the withdrawal liability travels from the seller to the buyer. This will occur if the buyer is “substantially continuing” the seller’s business. This might happen, for example, if a single buyer purchases and continues to use the seller’s name, building, phone numbers, employees, and management. Courts will look at all relevant factors to determine if a buyer has become the seller’s successor.
One issue the courts have not cleared up is whether the seller and its controlled group remain on the hook for withdrawal liability if there is a successor. For example, suppose the seller was part of a large controlled group of businesses. Even though the seller dissolves, the pension plan may go after the remaining members of the seller’s controlled group to pay any withdrawal liability.
As a result, the seller may continue to face a risk of liability within the five-year window for the building and construction industry exemption. To account for this, the terms of your sales agreement(s) must be carefully drafted to avoid inadvertently creating successor liability, and to deal with the fallout should a successor be created. For example, indemnity provisions could be drafted so the buyer would have to reimburse the seller and its controlled group for any assessment of withdrawal liability against them.
Negotiate with the plan
It might be an option, at some point, to negotiate with the plan over withdrawal liability, such as the total amount of liability and the amount of installment payments. A case-by-case analysis of whether it makes sense to approach the plan before any assessment of withdrawal liability should be done. But plans can be pragmatic. If it makes sense for each side to give a little in order to reduce their overall risks, a plan may be willing to negotiate.
Terminate your obligations
Whether you want to start the clock running on the building and construction industry exemption or just pay withdrawal liability, your company’s obligation to make contributions to a plan under all applicable CBAs must first be terminated. There are basically two options.
The first is to terminate or modify the CBA. Typically, CBAs are in effect for several years and can only be modified or terminated by providing notice to the union within a short window (e.g., 60 to 90 days) before the end of the CBA. If you fail to provide any required notice, the CBA will likely continue in effect for one-year periods until otherwise modified or terminated. This process is governed by federal labor laws, and an experienced labor attorney should be consulted on applicable requirements.
If there are multiple CBAs, your company will have to determine the feasibility and potential sequence of terminating the different CBAs. It is possible, for example, that if different CBAs must terminated at different times, partial withdrawal liability could be assessed against your company, if your company’s pension contributions are substantially reduced without being completely terminated.
The second option is to permanently discontinue all work covered by the CBA. This could take the form of terminating the entire business, or just the department that holds the union employees. If your company terminates a department, however, the same covered work cannot be transferred to a different department or a different member of the same controlled group; it must cease altogether.
One option that will not work is to just stop paying required contributions while a CBA is still in effect. That would not result in a withdrawal but would result in delinquent contributions. A union would likely sue to enforce the company’s obligation to make contributions, along with any applicable penalties and late charges.
No matter what route your company decides to take with withdrawal liability, it is important to remember that this is a complex area of law. There are many other ways to potentially reduce or eliminate withdrawal liability, just as there are many other potential pitfalls. For example, Section 4212 of ERISA (29 U.S.C. § 1392) gives plans the right to ignore any transaction your company engages in if a “principal purpose” of the transaction is to “evade or avoid [withdrawal] liability.” And courts typically defer to a plan’s reasonable determination that an employer has engaged in such a transaction.
Play it safe and have an experienced attorney help guide your construction business through withdrawal liability.