Union Can Indemnify Employer through CBA for Withdrawal Liability under ERISA: Sixth Circuit
In Shelter Distribution, Inc. v. General Drivers, Warehousemen & Helpers Local Union No. 89, the US Court of Appeals for the Sixth Circuit held that it is not a violation of public policy for a union to indemnify an employer through a provision in a collective bargaining agreement (CBA) for contingent withdrawal liability under the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA) to a multiemployer pension plan covered under the Employee Retirement Income Security Act of 1974 (ERISA).
The US Court of Appeals for the Sixth Circuit validated a provision in a collective bargaining agreement (CBA) under which a union indemnified an employer from contingent withdrawal liability under the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA) to a multiemployer pension plan under ERISA. In Shelter Distribution, Inc. v. General Drivers, Warehousemen & Helpers Local Union No. 89, the court rejected the union's claim that the provision violated public policy under ERISA. Employers should consider negotiating an indemnification clause into CBA provisions for multiemployer pension plan contributions that survives expiration or termination of a CBA.Close speedread
Key Litigated Issue
On March 16, 2012, the US Court of Appeals for the Sixth Circuit issued a decision in Shelter Distribution, Inc. v. General Drivers, Warehousemen & Helpers Local Union No. 89. The key litigated issue was whether it is a violation of public policy under ERISA (www.practicallaw.com/0-382-3434) Section 410 for a union to indemnify an employer in a collective bargaining agreement (CBA) for any contingent withdrawal liability to a multiemployer pension plan under the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA).
Shelter Distribution, Inc. had a CBA with a union requiring Shelter to contribute to a multiemployer pension plan governed by ERISA. The CBA provision requiring Shelter's contributions to the pension plan for a set weekly sum limited Shelter's liability to the pension plan to the specified weekly contributions and expressly required that the union indemnify Shelter for any contingent liability imposed under the MPPAA. The CBA provision stated:
The Union and the members of the Bargaining Unit have agreed that only the liability of the Company to the [pension plan] are, have been and shall be limited to the actual contributions it makes during the course of the past, present and future Contracts, and the Company shall not be liable for any other obligation or contingent obligation of any kind or nature whatsoever. The Union shall indemnify the Company for any contingent liability which may be imposed under the Multi-Employer Pension Plan Amendments Act of 1980.
In accordance with the CBA, the union informed Shelter before the CBA expired that it intended to negotiate and renew the CBA. However, during negotiations, the union terminated the collective bargaining process with Shelter. As a result, Shelter withdrew from the plan and the pension plan imposed withdrawal liability against Shelter under ERISA.
Under ERISA, as amended by the MPPAA, an employer who partially or completely withdraws from a multiemployer pension plan is subject to withdrawal liability for a portion of the plan's unfunded pension benefits. Shelter demanded indemnification from the union for its portion of the withdrawal liability pursuant to the indemnification provision in the CBA. The union refused to indemnify Shelter. Shelter filed this action in district court to enforce the indemnification provision.
The union opposed the enforcement of the indemnification provision, arguing that:
The indemnification provision is void because the CBA is expired.
The CBA provided for binding arbitration if there was a contractual dispute.
The district court ordered the parties arbitrate about the application of the indemnification provision.
In arbitration, the union argued that the indemnification provision was unenforceable because it violated public policy under ERISA as amended by the MPPAA. In particular it asserted:
The MPPAA established public policy prohibiting employers and unions from shifting withdrawal liability through a negotiated CBA.
Shifting withdrawal liability through a CBA defeats the purpose of the statute.
The arbitrator rejected this public policy argument. Relying on Pittsburgh Mack Sales & Services, Inc. v. International Union of Operating Engineers, the arbitrator concluded that:
The indemnification provision was enforceable.
The union must indemnify Shelter.
Shelter then moved that the district court enforce the arbitrator's award. In opposition, the union again argued that the indemnification provision violated public policy. The district court, also relying on Pittsburgh Mack, rejected the union's argument and upheld the arbitrator's award.
The union appealed to the Sixth Circuit.
The issue in the case, whether a CBA provision under which a union indemnifies an employer for withdrawal liability under the MPPAA is a violation of public policy under ERISA Section 410, is one of first impression in the Sixth Circuit. The court affirmed the holding of the district court that this provision does not violate ERISA.
The court considered Pfahler v. National Latex Products Co., which noted that ERISA Section 410(a):
Only prohibits indemnification agreements as against public policy if they affect the statutory obligations of a fiduciary.
Explicitly allows a fiduciary to purchase insurance to cover any potential liability.
Pfahler clarified that a fiduciary's indemnification agreement with a third party does not prevent the fiduciary from being liable under ERISA Section 410(a), but rather provides that if the fiduciary is liable, then the third party (here, the union) will compensate the fiduciary for that liability.
This court reasoned that:
The statutory obligations of Shelter, as an employer and fiduciary to the plan, were not affected because Shelter:
was still financially liable to the pension plan under the statute and the union merely agreed to reimburse Shelter for this financial obligation; and
satisfied its financial obligation to the pension plan.
There is no logical difference between contracting with an insurance company for fiduciary liability insurance as permitted under ERISA Section 410(a) and negotiating an indemnification provision with a third party such as a union. The CBA and union are analogous to an insurance agreement and the insurance company, respectively. There is no shifting of statutory liability in either situation.
The goals of ERISA and the MPPAA, to provide security to retirement plans when an employer withdraws from a multiemployer plan, will still be achieved as long as Shelter remains primarily liable to the pension plan (Pittsburgh Mack).
The court concluded that the indemnification provision of the CBA is not a violation of any public policy.
Employers that are parties to CBAs that require contributions to a multiemployer pension plan can face significant withdrawal liability to the pension plan. Employers should consider negotiating for an indemnification provision in their CBAs like the one upheld in this case so that the unions will be required to reimburse them should they incur withdrawal liability. The Third and Sixth Circuits, the only two circuits that have considered the validity of this type of CBA indemnity provision, have both:
Held that an indemnification provision in a CBA does not violate public policy.
Enforced an indemnification provision in a CBA.
The National Labor Relations Board (www.practicallaw.com/3-501-8649) considers pension contributions mandatory subjects of bargaining but generally finds CBA indemnification provisions permissive subjects of bargaining (see Subjects of Collective Bargaining Chart). Accordingly, employers may not be able to insist to the point of bargaining impasse that a union agree to a withdrawal liability indemnification, but it may a valuable provision to bargain into a CBA. Employers that negotiate for this type of indemnification should negotiate for language that makes the indemnification provision survive expiration or termination of a CBA.