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Beware of pension pitfalls if terminating union contracts

July 31, 2012

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Labor costs and payroll expenses are difficult burdens for most contractors. So you may try to slash these expenses by parting ways with workers whose price tags have exceeded your limits.
If the employees in question are union laborers, however, think twice: Terminating a union contract can be an expensive proposition for a construction company — especially if the union has a pension fund. Under the Multiemployer Pension Plan Amendments Act, a union pension fund can assess a withdrawal liability to cover unfunded pension benefits.

Significant reductions in participants to the plan can trigger a partial liability even if you did not intend to fully withdraw from the plan.  Make sure when you have a reduction in force you watch your level of participation in the plan.

Try negotiating first

As you know, it’s impossible to predict with 100% certainty what a construction company’s labor needs will be. There are, however, some ways to hedge your bets against complications down the road.

First, early on, try asking union leaders for concessions. In many cases, reaching a concession agreement is the only way for a contractor to keep the doors open and compete for business in the short term. Under these circumstances, union leaders often recognize that not agreeing to revised terms could mean layoffs.

Or try to negotiate out of the union plan by replacing it with a non contributory 401K or other option. This allows you to fund benefits to a defined contribution plan and minimizes your exposure to the plan. Many locals would pefer the money be available and controlled by their workers rather than in a multi employer plan.

This type of negotiation, known as concession bargaining, is prevalent in tough economic conditions. By using this tactic, you can often convince trade unions to forgo or give back improvements in pay and conditions in exchange for job security.

Buffer yourself

Some construction businesses have set up separate enterprises to take on union projects. Although this isn’t a guaranteed safety net against pension-related problems, it may provide a buffer against some financial liability.

If you want to go this route, you’re likely best off creating a limited liability company or an S corporation as the separate branch. Bear in mind: Dividing your company into separate entities could trigger considerable tax and administrative consequences. Professional advice is a must.

Assess risks now

If the notion of terminating a union contract is even a remote possibility, you’ll be doing yourself a favor by assessing your risks now. By recognizing the threat and having strategies in place to cope with it, you’ll stand a better chance of mitigating the financial impact if a worst-case scenario arises.

Check annually with the administrators of the plans for unions you deal with.  Withdraw liability is a function of many things including the investments in the plan, how many other companies have gotten out of the plan, the actuarial assumptions and the number of retirees in the plan. A plan that is funded in one year can turn around in the next. Make sure you are on top of your contingent liabilities on an annual basis.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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