Surprise! You’re on the Hook for Employer Withdrawal Liability
It’s no secret that multiemployer pension plans, like most defined benefit plans, are underfunded. Unfunded pension liability, also referred to as employer withdrawal liability, creates substantial risks for more than the employers obligated to make contributions to these multiemployer pension plans. Multiemployer pension plans are aggressively pursuing all sources of potential recovery to help remedy their funding shortfalls. These plans are having success and non-union entities are paying for it.
Last fall, the Seventh Circuit Court of Appeals expanded the doctrine of successor liability in the context of employer withdrawal liability. In Tsareff v. Manweb Services, Inc, Manweb purchased a union company, which had an obligation to contribute to a multiemployer pension plan. After the asset sale, the pension plan assessed the union company with its share of the pension plan’s unfunded pension liability. The pension plan then sued Manweb on the basis of successor liability. The trial court dismissed Manweb from the case after finding that Manweb lacked sufficient notice of the potential or contingent employer withdrawal liability. On appeal, the Seventh Circuit Court of Appeals rejected the district court’s application of the doctrine of successor liability. The Circuit Court found that notice of a contingent or potential employer withdrawal liability was sufficient. The Circuit Court reasoned that it would be inequitable, or unfair, to allow Manweb to keep the good parts of the union company without assuming its liability to the pension plan.
More recently, a multiemployer pension plan had success collecting withdrawal liability from two private equity funds. Generally, to recover withdrawal liability from an entity, other than the employer that is obligated to the pension plan, a two-prong test must be satisfied: (1) the entity must be under common control with the obligated employer; and (2) the entity must be a trade or business. Common control is satisfied when a parent company owns at least 80% of a subsidiary. On March 28, the U.S. District Court for the District of Massachusetts held that private equity funds were jointly and severally liable for employer withdrawal liability as a trade or business under common control, absent either entity having an 80% ownership in the union company. One private equity fund owned 70% of the obligated employer and the other owned 30%. The District Court found that the two private equity funds had formed a “partnership-in-fact” and engaged in a trade or business. As a result, both private equity funds were on the hook for approximately $4.5M in withdrawal liability.
These recent cases illustrate that it’s more important than ever to understand your employer withdrawal liability and the events that trigger an assessment. Further, entities considering purchasing the assets of or an ownership interest in an employer with obligations to a multiemployer pension plan should carefully evaluate the risks associated with employer withdrawal liability.