In recent years, much has been reported about public sector pension systems and their severe levels of underfunding. Many such plans have less than 70% of the funds necessary to provide the pensions promised to state and local employees. The latest report from CalSTERS states that the plan was only 64% funded as of March 2017. Because these plans are not covered under the federal Employee Retirement Income Security Act (“ERISA”), state law dictates how such plans must address such underfunding.
Private sector pension plans, particularly multiemployer/union sponsored pension plans, are also now commonly underfunded. For example, the UFCW Northern California Pension Fund recently reported that it was in “critical” status, meaning that it was less than 65% funded. In light of such underfunding, and the dim prospects for the plans ever achieving a fully funded status, union companies bound to such plans may consider ceasing their participation in the plans.
That would likely be a costly decision.
Under the Multiemployer Pension Plan Amendments Act (MPPAA), when an employer ceases its obligation to contribute to an underfunded multiemployer pension plan, it will be assessed withdrawal liability. The assessment would generally represent the withdrawn employer’s proportionate share of the unfunded liability of the plan. For example, if a large grocery chain, which constituted 50% of the contribution base of the UFCW plan mentioned above, withdrew from the plan, its withdrawal liability could exceed one billion dollars.
Non-union companies, of course, do not face this liability; ERISA provides that only “employers” can be assessed with withdrawal liability. An “employer” is an entity that has either signed a union agreement providing for pension plan coverage, or is bound to such an agreement under federal labor relations law.
However, recent case authority has served to extend withdrawal liability to non-union employers in certain circumstances. Most recently, the Ninth Circuit Court of Appeals ruled that a non-union employer can be responsible for withdrawal liability as a “successor” to a union employer who has withdrawn from the union sponsored pension plan.
Pension Fund Withdrawal Liability: Resilient Floor Company
In Resilient Floor Covering Pension Trust Fund v. Michael’s Floor Covering, Inc., a union floor covering contractor went out of business. Its sales manager decided to open his own floor covering business on a non-union basis, leasing the same premises that the old company used. He hired some of the same employees, picked up many of the same customers, used the same type of equipment, sold the same products and services in the same geographic area. Under these circumstances, the court held that the new company could also be liable for the old company’s withdrawal liability as a “successor,” provided the new company had notice of the withdrawal liability.
Accordingly, any non-union company considering the acquisition of a union company’s assets needs to beware. Even if the transaction may be structured in such a way as to avoid any obligations under the seller’s union agreement, the purchaser still can incur liability for the seller’s withdrawal liability under the right circumstances. Employers considering such an acquisition should consult early with competent labor counsel before making a decision that could result in unanticipated liability.