Many pension plans affiliated with unions and paid into by multiple employers are underfunded. For a variety of reasons, those plans are actuarially unable to pay all of the benefits they have promised. Congress has chosen to protect the pension expectations of employees over protecting the traditional contract rights of employers.
Assume, for example, an employer hires a union employee under a collective-bargaining agreement that calls for the employer to pay, say, $3 per hour into the Union’s Pension Fund for each hour the employee works for that employer and that the employer meets its obligation under the collective bargaining agreement by making that $3 per hour payment every payday. If, however, that pension fund is underfunded and that employer ever stops contributing and thereby withdraws from the pension fund, then (unless the employer fits into some narrow exceptions and exemptions) that employer is assessed and must pay its allocated share of the unfunded vested liability of the plan. It usually does not matter why the employer stops or significantly slows contributing – the employer may have gone out of business, the employer’s only union employee may have died or retired, the employees may have decertified the union.
And these assessments are not small sums of money. Take this example from a recent case, Central States, etc., Pension Fund v. Nagy, U.S. Court of Appeals, 7th Cir. (2013). Charles Nagy owned a “small concrete company” which closed its doors and thereby withdrew from the Teamsters’ (Central States) Pension Fund. When the withdrawal occurred, Charles’ small concrete company (that had always paid everything that the collective bargaining agreement called on it to pay) was assessed a withdrawal liability of over $3.6 million. Charles had other small businesses in separate corporations, but it did not matter. The Pension Fund took everything from the concrete company and (disregarding traditional concepts of limited liability) from Charles’ other companies, too.
But the Pension Fund was not done with Charles even then. Here, the company conducted its business on real estate owned by Charles individually and leased to the corporation. There was no suggestion that the lease was at an extraordinary rent or that it was otherwise used as a vehicle to deplete the concrete company’s assets. The Court here held that the Pension Fund can take even the individual assets of the owner of the real estate who leased it to the company that employed the Teamsters members. Not just Charles’ real estate leased by the business – no, Charles became personally liable for the entire $3.6 million. In short, the Pension Fund could take everything that Charles had.
There are a few exceptions (though not many), and not every multi-employer pension plan is underwater, and certainly not to the extent that the Central States’ plan is. However, if the owner of a business risks everything he has and is faced with a huge personal liability even when he had paid every penny he had contracted under the collective bargaining agreement to pay, this is clearly a liability that anyone starting or conducting a business must consider before entering into any labor collective bargaining agreement except on the most limited of bases.