Legal Updates from the Labor & Employment Practice Group at Conn Maciel Carey
An ongoing matter in Chicago federal court may be worth watching, as it centres on the authority of a multiemployer pension fund to expel a participating employer and stick it with millions of dollars in withdrawal liability. Even the threat of the exercise of this “nuclear option” by a multiemployer pension fund may cause an employer to acquiesce to the fund’s desired view, which (surprise, surprise) almost always coincides with the objectives of the union.
In Penske Truck Leasing Co. v. Central States, Southeast and Southwest Areas Pension Plan, 21-cv-05518 (N.D. Ill), filed on October 18, 2021, Penske urged a Chicago federal court to prevent the Central States fund (“Central States”) from expelling the company’s Dallas bargaining unit, a move Penske alleged would trigger well over ten million dollars in withdrawal liability for the company.
By way of background, Penske apparently has multiple bargaining units obligated by their collective bargaining agreements to contribute to Central States. As a result of the ongoing pandemic, Penske and its individual unions agreed to extend these agreements for various terms ranging from six months to eighteen months, which resulted in all but the Dallas agreement having expiration dates in 2022. In the litigation, Central States asserts that Penske is “engaging in a scheme to minimize its withdrawal liability by lining up all ten of its bargaining units for negotiations in 2022 in order to trigger a complete withdrawal from the Fund in 2022 rather than triggering a partial withdrawal in 2021 followed by a complete withdrawal in 2022.” Thus, when Penske and its local union in Dallas also agreed to extend that agreement until 2022, Central States rejected the extension, a move the fund asserted “could significantly reduce Penske’s withdrawal liability exposure.”
Central States said it would consider whether or not to expel the Dallas group to prevent this alignment, precipitating Penske’s suit which asked the Court to enjoin the fund from expelling Penske and creating a partial withdrawal, and to declare that the fund was prohibited from ejecting the Dallas unit from participation in the fund. Just before Christmas, the Court ruled that Penske “face[s] an uphill battle to establish that Local 745’s expulsion from the Fund violates the amended Trust Agreement, particularly in light of the deferential, arbitrary and capricious standard of review.”
As noted by the Court, in general, a pension fund’s decisions are reviewed under a deferential standard. In this case, Central States argues that its Trust Agreement permits the plan to expel employers who could cause the fund economic harm. The Trust Agreement states:
The Trustees are authorized to reject any collective bargaining agreement, participation agreement and/or terminate the participation of an Employer (and all contributions from the Employer) whenever they determine that the agreement is unlawful and/or inconsistent with any rules or requirement for participation by Employers in the Fund and/or that the Employer is engaged in one or more practices or arrangements that threaten to cause economic harm to, and/or impairment of the actuarial soundness of, the Fund … and/or they determine that continued participation by the Employer is not in the best interest of the Fund. Any such rejection and/or termination by the Trustees of a collective bargaining agreement shall be effective as of the date determined by the Trustees … and shall result in the termination of the Employer and all Employees of the Employer from further participation in the Fund on and after such effective date.
Whether a pension fund has the right to expel an employer when, in the fund’s opinion, the employer may be taking steps to minimize its potential withdrawal liability is an important issue. Expulsion truly is a fund’s “nuclear option,” and usually amounts to millions of dollars of withdrawal liability, as well as placing a huge thumb on the union’s side of the scale in any ongoing negotiations. In that regard, Penske says that Central States’ decision was “arbitrary and capricious” because expulsion (and the resulting huge withdrawal liability) contradicts ERISA’s “policy preference that withdrawal liability must not influence ongoing labor negotiations.”
Of course, Central States says that not expelling the unit will cause it economic harm. But withdrawal liability is simply a theoretical number unless and until triggered, so a pension fund should not be allowed to count its “withdrawal liability chickens” before they hatch. For this reason, it is questionable whether a fund should be able to assume a certain amount of withdrawal liability as of a particular date, and then bring about a withdrawal which otherwise might never have occurred, claiming that it is preventing economic harm. The only way this makes sense is if one assumes, before a triggering event, that a fund is entitled to a certain amount of withdrawal liability. Such an argument appears to rest entirely on speculation.
It will be interesting to see what happens. We will keep you apprised.
