Along with underfunded corporate and public pensions, many union pensions are massively in the red. For employers with union workers who participate in these types of multiemployer plans, the growing liability involved with withdrawing from pension funds represents a serious issue.

Multi-employer pension funds are required to collect withdrawal liability amounts from employers when companies terminate or decrease their contribution obligations for any reason. Essentially, it’s an “exit penalty” assessed against employers. Withdrawal liability can be extraordinarily expensive, ranging into billions of dollars.
Taking shelter

In large part, the law governing withdrawal liability has not been employer-friendly. However, a recent court ruling offers some hope. In Shelter Distribution Inc. v. General Drivers, Warehousemen & Helpers Local Union No. 89, the Sixth Circuit Court of Appeals ruled the law does not prohibit employers from including an indemnification clause against withdrawal liability into a collective bargaining agreement (CBA) with a union.

In that case, Shelter and the union agreed as part of the CBA that the union would “indemnify the Company for any contingent liability, which may be imposed under [MPPAA].” According to the language of the agreement, Shelter would still have to pay the withdrawal liability, but it could then seek reimbursement from the union.

During negotiations for the next CBA, the union disclaimed representation of Shelter’s employees and terminated the collective-bargaining process. Shelter then withdrew from the pension plan, which charged a withdrawal liability of $57,291.50 against Shelter. Shelter paid and then demanded indemnification per the terms of the CBA, which the union refused to pay. During arbitration, the union claimed that the indemnification clause was void when the CBA expired and that the provision for arbitration was unenforceable since it violated public policy. However, the arbitrator, district court and Sixth Circuit all upheld the indemnification clause.

What to do now

With union pensions massively underfunded and burdensome legislation, companies need to understand the financial implications when they could become involved in any type of multi-employer pension plan or face withdrawal liability.

The implications of participating in a multi-employer fund or entering into a CBA – Before beginning contributions to a multi-employer union pension fund, employers need to understand what is involved in leaving one. Withdrawal penalties can be extremely expensive, and payments can drag on for years. When companies face possible union pension fund contributions, they should consult with outside counsel who understand the issues and can explain exactly what the business and financial implications will be.

The implications of withdrawing from a plan – Employers may not even have a choice about withdrawing from a multi-employer union pension plan. Employees can vote to leave the union, businesses may have to do reductions in force, or a merger may happen.

Employers need to carefully monitor anything that could embroil them in a multi-employer pension fund. Withdrawal liability is expensive and time-consuming. Any company that is involved in multi-employer pension plans needs to understand its exposure to the liability and how best to minimize and manage that exposure.

Richard Alaniz is senior partner at Alaniz and Schraeder, a national labor and employment firm based in Houston.