January 20, 2018

January 19, 2018

Subscribe to Latest Legal News and Analysis

January 18, 2018

Subscribe to Latest Legal News and Analysis

January 17, 2018

Subscribe to Latest Legal News and Analysis

Successor Liability in an Asset Sale: Court Holds Purchaser Liable for Seller’s Delinquent Contributions to a Multiemployer Plan

A federal appellate court recently held that a purchaser in an asset sale was liable for a seller’s unpaid contributions to a multiemployer plan.  In Einhorn v. M.L. Robertson Construction Company, a panel of the U.S. Court of Appeals for the Third Circuit held that liability attached if the purchaser was aware of the liability and there was a sufficient continuity of operations and workforce. 

A multiemployer plan is sponsored by a joint board of trustees, which is typically made up of equal numbers of trustees appointed by the union and management.  Contributions are made by unrelated employers pursuant to the terms of collective bargaining agreements entered into between employers and the union representing the workforce.  The multiemployer plan allows workers to change employers within an industry, where work can be more project based (e.g., construction), but still allow the worker to continue participation in one benefit plan throughout his or her entire career, receiving service credit under one plan for the worker’s career with a variety of employers.  Employers typically contribute for each hour or week in which a covered employee works for the employer (e.g., $0.50/hour worked).  If an employer’s contribution obligation to the multiemployer plan ceases, the employer may also be assessed withdrawal liability, which represents a pro rata allocation of the plan’s funding deficiency. 

Liabilities for delinquent contributions can be substantial, as ERISA (the federal law governing employee benefit plans) provides that delinquent contribution collection actions are subject to automatic adjustments for interest, liquidated damages (up to 20 percent of the delinquency), and attorneys’ fees.

Under the general common law, purchasers in an asset sale are not responsible for a seller’s liabilities, except in cases where:

  1. the purchaser agrees to assume the seller’s liabilities; 
  2. the transaction, though structured as a sale of assets, was a de facto merger;
  3. the purchaser was merely a restructured iteration of the seller’s corporate entity; or
  4. the sale of assets was a fraudulent transfer intended to relieve the seller of its liabilities.

None of the four exceptions applied in the Einhorn case.  Instead, the Third Circuit found that the seller was liable by applying a labor law doctrine of successorship.  Under the doctrine, a purchaser in an asset sale can be legally responsible for the seller’s employment-related liabilities where there is sufficient continuity of operations and the purchaser was aware of the debt prior to the sale.  For example, successor liability for employment discrimination violations committed by a seller can attach to a purchaser, even though the purchaser had no role in the illegal discrimination.  Courts have found that the purchaser is in a better position to bear the loss after it negotiated the purchase and that it is unfair to otherwise provide no recourse for the employee. 

Employee benefit plans are highly regulated under federal law, and there is clear legislative history articulating a policy interest in preserving those benefits for employee participants and their beneficiaries.  Nevertheless, it is unclear how this policy interest is served by shifting liability to a purchaser in an asset sale.  Employer contributions to multiemployer plans do not have a direct bearing on the benefits provided to employees.  Instead, the employer contributions are pooled in a trust and invested.  Plans then hire actuaries and other professionals to decide what benefit levels can be sustained based on the size of the trust assets.  Contributions are made for all covered employees, including short-tenure employees who may never collect any plan benefits because they terminate employment prior to satisfying the plan’s participation and vesting conditions.  Moreover, pension benefits are subject to guarantees by the Pension Benefit Guaranty Corporation, which protect plan participants from funding deficiencies.  Despite these differences, courts have held successor liability for employment-related claims by individual employees equally applies to delinquent contribution claims by multiemployer plans. 

The Court’s decision in Einhorn highlights the need for comprehensive due diligence and planning when union employees and multiemployer plans are involved in a transaction.  Purchasers may consider the following items when a target contributes to a multiemployer plan:

  1. Diligence.  Ensure all multiemployer contribution obligations are identified and that contributions to all plans have been made in a timely manner.  Multiemployer plans periodically conduct audits to ensure employers are properly contributing on behalf of all covered employees for all covered hours.  Make targeted inquiries regarding the employer’s audit history to determine whether discrepancies have been identified in the past.  Note that even if the union collective bargaining agreement has expired, the employer has a legal obligation to continue contributing to a multiemployer plan until the bargaining negotiations reach impasse.
  2. Purchase Agreement Provisions.  Ensure the purchase agreement has strong indemnification language and consider excluding the multiemployer contribution liability (or employee benefit plan representations more broadly) from indemnification caps and baskets/deductibles.
  3. Escrows.  If a delinquency is identified, consider adding an escrow for the liability, a holdback, or a price reduction to account for the liability.  This will ensure the purchaser is not left exposed if the seller does not have sufficient assets to perform on the indemnity. 
  4. Exercise Caution Employers should be aware that union officials do not have authority to bind a multiemployer plan.  When it comes to multiemployer plans, most employers’ first point of contact is with the union officials with whom the employer negotiates the collective bargaining agreement.  Union officials do not have the power to waive the contribution obligation or set a different payment schedule.  Multiemployer plans are the third-party beneficiaries of the collective bargaining agreement, but the union parties to the collective bargaining agreement do not have the power to waive the multiemployer plan’s independent rights. 

The rules governing multiemployer plans are complex.  Significant liability can attach to purchasers, notwithstanding the structure of a purchase agreement.  Careful due diligence review and consultation with qualified attorneys are essential to manage potential liability. 

© 2018 McDermott Will & Emery


About this Author

With offices in the United States, London, France and Germany, and a strategic alliance with MWE Law Offices in Shanghai, the broad geographic dispersion of McDermott Will & Emery’s labor & employment practice enables us to serve clients on international, national, regional and local levels.   Our Firm represents employers in virtually every industry, including manufacturing, financial services, health care, education and construction.

Our goal is to help clients maximize their human resources, while avoiding exposure to liability.   ...

312 984 6905