The Ninth Circuit Court of Appeals recently issued an important decision regarding unfunded pension liability. Resilient Floor Covering Pension Trust Fund Board of Trustees v. Michael’s Floor Covering, Inc., 801 F.3d 1079 (9th Cir., 2015).

The Ninth Circuit Court of Appeals is one of the most liberal courts in the United States. While the cases are supposed to be assigned randomly, two former union lawyers who are extremely progressive get an unusually large portion of the cases dealing with traditional labor relations issues. The judge who wrote this decision is Marsha Berzon who was formerly a partner at a law firm which represents unions in traditional labor relations matters.

For many years, Studer’s Floor Covering, Inc. ("Studer’s"), a construction industry employer, sold and installed floor covering materials to commercial and residential customers. Studer’s operated out of facilities in Vancouver, Washington and was signed to a collective bargaining agreement with the Linoleum, Carpet and Soft Tile Applicators Local Union No. 1236. Pursuant to that collective bargaining agreement, Studer’s made trust fund contributions to the Resilient Floor Covering Pension Trust Fund ("Fund").

After nearly 40 years in business, the president of Studer’s announced he intended to close the business at the end of 2009. One of the employees started up a new business, Michael’s Floor Covering, LLC ("Michael’s"). Michael’s took over the lease, acquired the old phone numbers and bought about 30% of Studer’s tools, equipment and inventory. Michael’s did not acquire Studer’s customer list or customer information. However, many of Studer’s old customers switched their business relationship to Michael’s.

Michael’s employed eight installers, five of whom had worked for Studer’s at one time or another. The work done by Studer’s was slightly different than the work done by Michael’s.

Michael’s did not sign a collective bargaining agreement.

The Fund decided that Michael’s was legally the successor of Studer’s because Michael’s continued to perform work of the type that was formerly done by Studer’s but was not bound to a collective bargaining agreement. Accordingly, Michael’s was held liable for the unfunded pension withdrawal liability of Studer’s. The Fund assessed withdrawal liability in the amount of $2,291,014 and sued Michael’s to recover that amount.

After a bench trial, the federal District Court for the Northern District of California found that Michael’s was not liable for the unfunded pension liability as the successor employer.

The court made numerous factual findings regarding the relationship between Studer’s and Michael’s of primary importance. The court found that since the workforce employed by Michael’s was not the same as the workforce employed by Studer’s, that Michael’s was not legally liable as a successor employer.

The Court of Appeals reversed and ruled in favor of the fund. The decision contains extensive troubling language.

Some of the largest causes for concerns are as follows:

  1. "There is not, and cannot be, any single definition of successor." This is troubling because it makes it very difficult to know the definition that will be adopted by a court in finding successor liability.
  2. The successorship doctrine provides an exception to the general rule that a purchaser of assets does not acquire a seller’s liabilities. This is old law.
  3. The successorship inquiry in the employment and labor law context is much broader than the strict corporate law definition of successorship. This is not as strange as it may seem. In many areas of law, the courts have found that it is appropriate to use different standards in labor relations matters. Common principles of contract law do not apply to collective bargaining agreements and the common business definition of successor also does not apply in a labor relations context.
  4. Although the composition of the workforce is of preeminent importance in successorship cases involving the duty to bargain under the National Labor Relations Act ("NLRA"), that factor is not of special relevance when considering withdrawal liability. This portion of the decision is troubling because it indicates that the definition of successorship in pension liability cases is broader than the traditional definition of successorship in labor cases.
  5. The primary reason for making the successor responsible for its predecessors is that absent the imposition of successor liability, present and future employer participants in the union pension plan will bear the burden of the predecessor’s failure to pay its share, which will threaten the health of the plan while the successor reaps a windfall.

The court found that the purpose of unfunded pension liability assessments is to effectuate ERISA by assessing proportional liability to individual employers who withdraw from a plan, thus overburdening the remaining employers and increasing the likelihood that a plan will not remain fully funded.

In regards to the construction industry, the court noted that as long as the construction projects in the area covered by the plan continue funding a plan’s obligations, the plan is not threatened by an individual employer’s departure. It is on this premise that an unfunded liability is only applicable to those employers who threaten a plan by reducing the plan’s contribution base by continuing to work in the area without contributing to it.

The court determined that the most important analysis in determining whether successorship triggers the unfunded liability is whether the successor takes over the segment of the market performed by the predecessor employer and whether that successor performs that segment of work on a non-union basis.

The case is very important in understanding the continuing trends regarding unfunded pension liability in the construction industry. The case illustrates the following:

  1. The courts will be extremely diligent in finding a method to collect unfunded liability. The successorship liability found here is in accord with prior decisions finding individuals liable for corporate unfunded pension liability.
  2. The case correctly recognizes the construction industry exception to ERISA, which allows an employer to avoid its unfunded liability if it goes out of business and stays out of business for five years. However, if a company takes over the customers of an employer who ceases doing business and the new employer performs that work on a non-union basis within five years of the cessation of work by the prior employer, there will be a risk that the new employer will be found to be a successor employer and thus, trigger the unfunded liability.

While this decision may not seem fair to the successor employer, the court is much more concerned about fairness to the pension plan. The court wants to make certain that the segments of the market that historically made pension contributions will continue to have pension contributions made on that work.

If you are a contractor taking over the market of a predecessor, even if you do not hire a majority of the predecessor’s employees and even if you only purchase part of the assets of that predecessor, you should understand that you may be liable for the unfunded pension liability if you perform work that was formerly performed on a union basis on a non-union basis.

If you are an employer who decides to cease performing work in the construction industry, you must be very careful that the company that takes over the work you used to conduct does not perform that work on a non-union basis for five years after you cease business operations.

Employers may contact Steven Atkinson or their labor and employment counsel at AALRR with any questions on this issue.