Withdrawal Liability May Extend To Alter Ego Employer

In the construction industry, and elsewhere, many businesses are commonly owned but have distinct labor relations issues. In fact many such "double breasted" companies operate with distinct union and non-union businesses. The details of how companies are structured and run matter. This is made clear in a recent ruling by the Ninth Circuit Court of Appeals

In Resilient Floor v. M & M Installation (9th Cir. 09-17064 12/22/10), the Court addressed a claim by labor trust funds against a non-union employer. The claim involves "withdrawal liability" by which a previously unionized company may be obligated to pay a share of a union pension fund's underfunding for future retirement benefits after the unionized company terminates a bargaining relationship with the union. In this instance the key issue became whether a commonly owned company, which had always been non-union, could be held liable for the unionized company's withdrawal liability.

The Ninth Circuit looked to the "alter ego" test under existing labor law to determine whether a non-union employer could be held responsible for the obligations of a unionized employer.  In this regard the Court observed, “The dispute actually raised in this case centers on what is the correct test for determining whether Simas Floor is M&M’s alter ego and how the Pension Fund, which bears the burden of proof, may satisfy the test.  [… The] alter ego test requires proof (1) that the two firms have “common ownership, management, operations, and labor relations,” and (2) that the non-union firm is used “in a sham effort to avoid collective bargaining obligations.” Id.

The Ninth Circuit took the view that coordinated operations demonstrated common control and interdependence of the companies and could support an alter ego finding. The Court expressly acknowledged arguments put forth by the trust funds that, Simas Floor exercised such control over M&M and M&M’s employees to be considered their employer. It did, in the Fund’s view, because there was no written agreement between Simas Floor and M & M; M & M was not an arm’s length subcontractor.

The Court observed that Simas Floor controlled M & M’s work assignments; Simas Floor hired, fired, and disciplined M & M’s installers; Simas Floor supervised M & M installers on site; income received by Simas Floor was used to pay M & M’s pension contributions and later its withdrawal liability; and Simas Floor controlled the cash that flowed through M & M so that M & M would never have sufficient funds to meet its withdrawal liability obligations unless those funds were supplied by Simas Floor. The Court also stated there is an indication that M & M and Simas Floor used Simas Floor to avoid M & M’s withdrawal liability.

Additionally, M & M received all of its contracts and income from Simas Floor, and passed profits through to Simas Floor rather than itself making a profit. One of the reasons for the failure of M & M to make withdrawal liability payments may be that it lacked either the income or capital to do so. The Court saw fit to infer a fraudulent intent, although Simas Floor argued M & M ran out of business in a down economy.

The Court's analysis of these details and use of the alter ego test with a double breasted construction operation makes clear the threat commonly owned companies may face with sharing potential withdrawal liability. These issues have heightened importance in the current economy where construction work is most generally available on a unionized basis, many contractors have an interest in running double breasted operations to take advantage of union markets now and non-union markets when the economy improves, and the general lack of health of union pension funds in the current economic and financial climate. Performing work on a unionized basis may be what is needed to keep a company afloat in the current climate. Doing so with a union having an unhealthy pension fund, where there exist risks of withdrawal liability, must be considered a part of the mix. Where commonly owned union and non-union employers operate, the structural need for separation and distinction in operations cannot be overestimated.

The Ninth Circuit's ruling will generate further proceedings on the liability claim against the non-union employer due to the closeness and circumstances of its operations with the commonly owned unionized company. Other employers are wise to note the example this case provides in structuring and running their own business to minimize legal risks, particularly if double breasting is a consideration.

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