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Union Agreement to Indemnify Employer for Withdrawal Liability Upheld in Issue of First Impression
Posted on March 26th, 2012
By Susan Katz Hoffman and Matthew J. Hank
In Shelter Distribution Inc. v. General Drivers, Warehousemen & Helpers Local Union No. 89, No. 11-5450 (6th Cir. Mar. 16, 2012), the Sixth Circuit Court of Appeals held that nothing in ERISA prohibits a union from contractually agreeing to be held liable for an employer’s withdrawal liability under the Multiemployer Pension Plan Amendments Act (“MPPAA”).  The Sixth Circuit thus joined the Third Circuit in enforcing such indemnity provisions.
The issue arose after the employer and union entered into a collective bargaining agreement (“CBA”) providing that the union would “indemnify the Company for any contingent liability which may be imposed under [MPPAA].”  The indemnification clause did not shift liability – the employer was still financially liable to the fund in the event of a withdrawal, but the employer simply could seek reimbursement for that liability from the union.  [WHICH IN THE END AMOUNTS TO THE FUNDS TAKING THE HIT, THUS - NO SIDE DEALS] Shortly before the CBA was scheduled to expire, the employer and union began negotiating a new agreement.  During negotiations, and before agreeing to a new contract, the union disclaimed its representation of the company’s employees and terminated the collective-bargaining process.  As a result, the employer withdrew from the multiemployer plan and was assessed withdrawal liability.  The employer paid that liability and, under the terms of the CBA, demanded indemnification from the union.  The union refused to honor the CBA’s indemnification clause, arguing in arbitration that the expiration of the CBA rendered the indemnification clause void, and that the arbitration provision was unenforceable because it violated public policy.  The arbitrator rejected both arguments and issued an award in the employer’s favor.  The district court upheld the award.
On March 16, 2012, the Sixth Circuit likewise upheld the award.  The Sixth Circuit’s analysis focused entirely on the public policy issue.  Although the court noted that the question was one of first impression in the Sixth Circuit, it readily concluded that the CBA’s indemnification clause did not violate public policy.  The court observed that the purpose of withdrawal liability under ERISA and MPPAA is to “provide even more security to employee retirement plans,” and reasoned that indemnification was not inconsistent with the statutory purpose, provided that (as was true in this case) the employer remained primarily liable for its own withdrawal liability.
Lessons Learned . . .

Employers may draw several practical lessons and caveats from Shelter Distribution:
 •It is now more likely that provisions in CBAs requiring the union to indemnify the employer for withdrawal liability will be enforced;
 •Indemnification provisions should include explicit language that the duty to indemnify survives the expiration of the CBA;
 •Indemnification provisions should make clear that the employer remains primarily liable for any withdrawal debt;
 •The employer should be prepared to pay its withdrawal debt before seeking indemnification from the union; and
 •Because the issue in Shelter Distribution has not been addressed in most circuits, it is possible that arbitrators or other courts could disagree and conclude that it does violate public policy for a third party to agree to be held liable for an employer’s withdrawal liability.
Contracts (CBA's) and Union By-Laws need to be changed so that Benefit Fund Attorneys, Union Organizers and Officers cannot make or enforce any such deals with any Employer they seek to bring in, or to those who seek to leave.

The UBCJA has organized far too many firms who come in undercapitalized, who have poor management and accounting practices and who fail to make timely payments for member benefits and who never should have been signed in the first instance.

The mindset of signing a firm at any cost has to change as it leads directly to submission of articially low bids, poor quality work which impacts our branding and the contractor looking for a way to make it up somewhere else. That leads directly to fraud, racketeering, cash workers and employment of illegal aliens. In the end, they come running back to the benefit funds looking for a way out and in NYCDCC that has resulted in a past policy of accepting 10 or 20 cents on the dollar for member benefits which result in under-funded pension & welfare funds.

The entire model for Organizing and signing firms in the UBCJA has to change.