Multiemployer pension plans have a deceptive simplicity for many employers: contributions are paid for hours worked in accordance with the labor agreement and employees accrue pension benefits without the employer incurring actuarial, tax, legal or other administrative expenses. Unfortunately, multiemployer plans create hidden liabilities that potentially impact the employer, its affiliated businesses and possibly its owners.
Most multiemployer plans are not fully funded, and current contributions are just the beginning of the liabilities. Under ERISA, an employer withdrawing from a multiemployer plan is liable for the employer’s share of the plan’s unfunded vested benefits. In addition, all trades or businesses under common control (the controlled-group) are jointly and severally liable for withdrawal liability of the employer.
A recent court case illustrates this unexpected liability. The Seventh Circuit Court of Appeals held an individual personally liable for withdrawal liability because the individual owned the stock of the withdrawing corporate employer and also engaged in activities that qualified as trades or businesses by (i) owning and leasing property to the employer; and (ii) providing management services as an independent contractor. Central States, Southeast and Southwest Areas Pension Fund v. Nagy, 2013 U.S. App. LEXIS 7912 (7th Cir. 2013). In so holding, the Seventh Circuit confirmed that certain leasing activity is categorically a trade or business for purposes of individual liability under ERISA.
Multiemployer Pension Plan Withdrawal Liability
Under ERISA, an employer withdrawing from a multiemployer plan is liable for the employer’s share of the plan’s unfunded vested benefits. Upon that withdrawal, the plan determines the amount of the liability, notifies the employer of that amount and collects it from the employer.
Any significant reduction in the duty to contribute, including layoffs, plant closures, sales or changes in the collective bargaining agreement, can trigger a complete or partial withdrawal from a plan, resulting in imposition of withdrawal liability to the employer and its controlled-group members.
Under ERISA Section 4001(b)(1), all employees of “trades or businesses” (whether or not incorporated) that are under common control are treated as employed by a single employer and all such trades and businesses are treated as a single employer. Based upon that section, the courts have long held that each “trade or business” under common control with an employer contributing to a multiemployer plan is jointly and severally liable, along with that employer, for the employer’s withdrawal liability. See, e.g., IUE AFL-CIO Pension Fund v. Barker & Williamson, Inc., 788 F.2d 118 (3d Cir. 1986). This is the case even though the various trades and businesses may have nothing in common except ownership.
Examples of controlled groups are (i) Companies A and B, where B is a wholly owned subsidiary of A; and (ii) Companies C, D and E, where the same four individuals each own 25 percent of the stock of each company.
As long as the corporate form is observed, a shareholder of a corporate employer is not personally liable for withdrawal liability unless the shareholder owns an unincorporated trade or business under common control with the withdrawing employer. This was the case in Nagy.
Fund Pursues Shareholder Because of His Leasing and Consulting Sole Proprietorships
Charles F. Nagy owned and operated several businesses. One of them, Nagy Ready Mix, Inc. (Ready Mix), had a collective bargaining agreement with the Teamsters and contributed to the Central States Pension Fund (Fund).
In 2007, Ready Mix stopped using Teamsters labor and ended its participation in the Fund. This action constituted a complete withdrawal from the Fund, resulting in the Fund’s assessing Ready Mix withdrawal liability of approximately $3.6 million. Ready Mix challenged this assessment by initiating arbitration. When Ready Mix failed to make withdrawal liability payments while the arbitration was pending, the Fund brought suit, claiming that Nagy’s other businesses, as well as Nagy himself, were jointly and severally liable for the withdrawal liability.
The parties agreed that Nagy’s other businesses were under common control with Ready Mix and therefore jointly and severally liable for the assessment. They disagreed, however, over whether Nagy himself was personally liable.
The Fund argued that certain leasing and management services activities, which Nagy performed as a sole proprietorship, qualified as trades or businesses and triggered personal liability. Common control clearly existed, and so the disputed issue was whether Nagy’s unincorporated leasing and management services constituted “trades or businesses” under ERISA’s controlled-group rules.
Nagy’s Leasing Activity was a Trade or Business
In 1972, Ready Mix purchased property to serve as its base of operations. In 1986, the property was conveyed to Nagy, who then leased the property back to Ready Mix pursuant to a triple-net lease that made Ready Mix responsible for utilities, insurance and tax payments, in addition to maintenance and repair. Though Nagy owned the property individually, it remained the primary facility for Ready Mix.
The district court held that Nagy’s leasing activity was a passive investment and not a trade or business. The court of appeals disagreed, holding that a bright-line “categorical” rule applies when a property owner in common control with a withdrawing employer leases property to that employer: the leasing activity is categorically a trade or business within the meaning of Section 4001(b)(1).
The court justified its categorical rule because it is unlikely that leasing to a commonly-controlled withdrawing employer would ever be a truly passive investment. It is more likely that the goal is to split up the withdrawing employer’s assets. Categorically labeling this activity a trade or business prevents businesses from shirking ERISA obligations by fractionalizing operations into separate entities.
It is likely that Nagy structured his business and real estate holdings to gain the tax advantages arising from personal ownership of the real estate. Unfortunately, the personal ownership of real estate led to his personal liability in his capacity as a controlled-group member.
Nagy’s Management Services Activity Was Also a Trade or Business
From the early 1990s through 2005, Nagy managed the operations of a country club, of which Nagy was a director, shareholder and president. In 2005, when the club’s board of directors decided to sell the club’s golf course, Nagy took the lead in preparing the sale. After the sale, he continued to manage the club’s remaining assets, working from his home. Nagy was paid for these services as an independent contractor, without payroll deductions, as reflected on Forms 1099-MISC for tax years 2005, 2006, 2007 and 2008. Nagy reported this income, which exceeded $200,000 in total, on Schedule C of his federal income tax returns.
The Seventh Circuit affirmed the district court’s decision that Nagy provided management services to the club as an independent contractor. In rejecting Nagy’s argument that he was an employee of the club, the court relied primarily on the method and form by which Nagy was paid. Instead of receiving a salary through a payroll system, Nagy was paid on an hourly basis with no withholdings or fringe benefits, and was only given Forms 1099-MISC to document the compensation. The court noted that in previous cases, Form 1099 tax treatment weighs heavily in favor of independent-contractor status.
Accordingly, Nagy’s management services activity was also found to be a trade or business under common control with Ready Mix, and was a second reason for his personal liability for Ready Mix’s withdrawal liability.
Controlled-Group Liability Also Applies to Single-Employer Unfunded Benefit Liabilities
Similar liability issues can arise where a single-employer pension plan is terminated in a distress or involuntary termination because each member of the sponsoring employer’s controlled group is jointly and severally liable to the Pension Benefit Guaranty Corporation (PBGC) for the plan’s unfunded benefit liabilities.
The PBGC has also been expansive in seeking to impose unfunded benefit liability on unsuspecting putative controlled-group members. In 2007, for example, the PBGC Appeals Board ruled that a private equity fund was a trade or business liable for unfunded benefit liabilities of an employer allegedly under “common control” with the private equity fund.
Continuing Litigation as to Whether Private Equity Funds Have Controlled-Group Liability
Multiemployer plans have cited the 2007 PBGC Appeals Board decision in litigation seeking withdrawal liability against private equity funds as alleged controlled-group members. The district court in Board of Trustees v. Palladium Partners, 722 F.Supp. 2d 854 (E.D. Mich. 2010) accepted this argument. More recently, the district court in Sun Capital Partners v. New England Teamsters Fund, No. 10-10921-DPW (D. Mass. Oct. 18, 2012), appeal pending 12-2312 (1st Cir.), rejected and strongly criticized the PBGC decision.
The Sun Capital case will be argued on appeal June 5, 2013, before the First Circuit Court of Appeals. The PBGC has filed an amicus brief supporting the multiemployer plan and seeking reversal of the district court decision.
Conclusion
In light of the substantial unfunded benefit liabilities of many multiemployer plans and single-employer plans, employers, investors and even lenders should all be alert to the dangers of liability arising from membership in a controlled group.
For further information about withdrawal liability, please contact either of the authors, James P. McElligott Jr. or Robert B. Wynne, or any other member of McGuireWoods’ employee benefits team.