Here is an update to our prior client alert titled, "Construction Industry Double-Breasting: Recent Trends and Best Practices," which now includes additional information about a recent court decision impacting employers in the construction field.
Construction unions' firm, if not exclusive, grip on private-sector residential projects in New York City is waning. One reason for this change has been the recent death of the old 421-a tax exemption program, which has been replaced by a far less favorable version called Affordable New York and Mayor Bill de Blasio's push for affordable housing. While public projects are still largely union jobs, the private sector, especially residential, is turning to more cost-effective means to build.
With high demand for housing on one hand and high costs on the other, something had to give, and it appears to be union labor. Although most public projects remain union jobs, the private sector, especially residential construction, is turning to lower-cost means to build. The formation of the New York Construction Alliance, a collaboration of open shop construction firms, is proof positive.
Many major construction managers are refusing to renew collective bargaining agreements (CBAs) and have started creating non-union companies to handle non-union jobs. Operations that run both union and non-union businesses are known in labor law as "double-breasted." Double-breasting is legal, but when established and maintained improperly, it can create liability exposure that can devastate both businesses. Problems commonly arise on two fronts: withdrawal liability and "alter ego" situations.
Ending a relationship with a labor union and, therefore, its pension fund, can expose employers to "withdrawal liability" to an underfunded union pension fund. In the construction industry, there is an exception to the traditional withdrawal liability analysis that burdens companies in other industries. It is important to know the rules to ensure that a withdrawing construction company can avail itself of this exception. This is where careful planning and understanding of the law is paramount.
Considerations for Avoiding Union Withdrawal Liability
- Understand whether withdrawal liability exists, the size and what triggers it. These are key considerations before terminating a union contract.
- Upon withdrawal, establish separate companies, management and operations. Complete and well-planned separation is critical for avoiding union withdrawal liability.
Maintaining a "clean" double-breasted operation is difficult because of the cost involved. From a union's perspective, double-breasted operations take work away from union workers - essentially the operation's non-union company "steals" work from union company. A finding by a court that companies are "alter egos" means that the non-union company is really an extension of the union company, and that any CBAs should have been applied to the "non-union" jobs. This comes with an obligation to make benefit fund contributions. Worlds can also collide when a union company has "shut down operations" while the non-union company continues to run. In this scenario, not only is the non-union company bound by any CBAs, it may also be held responsible for any withdrawal liability of the closed company.
A Case Study in Alter Egos
Maintaining a double-breasted operation is difficult and not all have succeeded in adequately separating management and operations. One of the biggest cases to date involving alter-ego liability is Moore et al. v. Navillus Tile, Inc., et. al, 14 Civ. 8326. The fact pattern in that case lays out a map of landmines to avoid, lest your business be deemed an alter ego.
In September, 2017, a Manhattan federal court handed down a detailed 95-page decision that resulted in a greater than $76 million judgment against Navillus Tile, Inc. D/B/A Navillus Contracting, one of the largest unionized subcontractors in New York serving primarily as a masonry and concrete subcontractor on large union construction projects.
Here are some of the key facts:
(i) In 2013, Navillus formed a Delaware limited liability company, Advanced Contracting Solutions, LLC DBA ACS NY LLC (ACS), to be an open shop subcontractor to primarily perform concrete foundation and superstructure work;
(ii) Navillus is a party to collective bargaining agreements with more than 20 unions;
(iii) Navillus is a member of multi-employer collective bargaining associations: Building Contractors Association, Inc. (BCA) and Hoisting and Scaffolding Trade Association, Inc. (HASTA);
(iv) The CBAs require contributions to the unions for hours worked or paid for employees covered by the CBA;
(v) In 2006, the principal of Navillus formed a new general contractor business which eventually became Time Square Construction, Inc. (TSC); and
(vi) In 2012, a principal of Navillus created a separate legal entity to be the payroll master for TSC. This company was named HDK, which stood for the three O'Sullivan siblings: Helen, Donal and Kevin.
So where did Navillus go wrong? Just some of the actions outlined in the court's decision are:
- TSC borrowed equipment from Navillus and Navillus bought equipment for TSC
- ACS used Navillus-owned concrete form, obscuring this fact by spray painting over Navillus' "N" logos on the forms
- Principals of Navillus made "loans" to ACS with no evidence of repayment
- Employees of Navillus were paid as consultants to TSC to prepare bids
- Principals of Navillus were directly involved in negotiations of TSC's contracts with third parties and project management
- The filing fees for the formation of ACS were paid for with a Navillus credit card
- A principal of Navillus signed a lease for ACS
- Navillus employees worked on TSC projects and then later returned to Navillus projects
- ACS was awarded a project for The Related Companies because Navillus represented to Related that they were an affiliate entity of ACS and as such ACS would have the experience of Navillus on the job
- Navillus guaranteed financing for ACSs' purchase of equipment.
Based on these and other examples set forth in the decision, the court found that TSC, ACS and HDK shared substantially identical ownership, management, supervision, business purpose and customers with Navillus. The court concluded that TSC and HDK were alter egos of Navillus. Because of this alter ego status they were not deemed separate companies and therefore violated the CBAs entered into by Navillus by failing to make fund contributions on behalf of their employees.
The fallout from this decision came quickly: in November 2017, Navillus and ACS filed for bankruptcy. Even if these entities are able to reorganize, they must restructure their operations. Also, the bankruptcy filing placed their existing contracts (and pending bids) in jeopardy as the size of the judgment left them insolvent, thus making reorganization more difficult.
Finally, Navillus' bank accounts were frozen by one or more of the plaintiffs by the service of restraining notices. Certain projects on which Navillus was working were restructured with the approval of the Bankruptcy Court. The restructuring will keep the projects moving but one can imagine that business will be far from usual for Navillus and ACS going forward. There will undoubtedly be a lot more to follow and discuss concerning this case.
Know the Risks
This case should serve as an important lesson as to the risks involved and the importance of following the best practices outlined above. Even with the best of intentions, companies may run afoul of complex rules and should carefully consider their actions and seek legal counsel in making decisions when utilizing both union and non-union labor