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Acquiring another company? Buyer beware on employee benefits

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in Employee Benefits Program,Employment Law,Management Training

by Michael J. Crumbock, Esq.

If your company ever acquires another company that has multiemployer pension or health benefit plan obligations through a union, beware. You could wind up being responsible for any delinquent contributions or underfunded benefit liabilities of the seller.

Generally, a benefit plan is a multiemployer plan if it is maintained by more than one employer in connection with a union collective bargaining agreement.

ERISA benefit obligations

The Employee Retirement Income Security Act (ERISA) gives multiemployer plans the right to collect an employer’s delinquent contributions.

Additionally, an employer that withdraws from a multiemployer plan—for example, by being acquired by another company—may have “withdrawal liability” imposed under ERISA or the terms of the plan. If the assets of the company are sold, that may trigger a withdrawal, unless the buyer agrees to assume the contribution obligations.

A withdrawal may be complete or partial. A complete withdrawal occurs when all contributions to the multiemployer plan cease, typically due to the employer going out of business or closing a plant.

A partial withdrawal generally occurs when the employer’s contributions to the plan decline or partially cease. For example, a partial withdrawal may occur when an employer is obligated to contribute to a plan under more than one collective bargaining agreement, and although one of the agreements expires, the employer continues to perform work in the agreement’s jurisdiction without making plan contributions for the work.

Unmet contributions

In Einhorn v. M.L. Ruberton Construction Co., M.L. Ruberton Construction Company bought Statewide Hi-Way Safety Inc. At the time of the sale, Statewide was operating under two collective bargaining agreements that required it to contribute to a union multiemployer pension trust fund and a multiemployer health and welfare fund. Before the sale occurred, Statewide fell behind in its contributions. Ruberton knew about the delinquency at the time of the sale.

After the sale closed, fund administrator William J. Einhorn filed a lawsuit against Ruberton on the funds’ behalf. The lawsuit sought to require Ruberton to pay Statewide’s delinquent contributions.

The District Court of New Jersey ruled against Einhorn and for Ruberton, holding that Ruberton was not a continuation of Statewide. In reaching this determination, the court applied the common-law rule of successor liability (see box below).

Purchaser may be liable

Einhorn appealed. The 3rd Circuit noted that other courts have ruled that an asset buyer may be liable for the seller’s delinquent ERISA fund contributions in cases in which the buyer knew about the liability before the sale and there was a continuity of operations between the buyer and seller.

Additionally, the 3rd Circuit noted that expanded successorship liability has been extended to cases under Title VII and the National Labor Relations Act. In those cases, courts extended to other contexts the theory of successor liability after an asset sale.

That led the 3rd Circuit to hold that a purchaser like Ruberton may be liable for the seller’s delinquent pension and welfare plan contributions under ERISA.

The 3rd Circuit noted the following relevant factors with respect to the continuing operations requirement:

  • Continuity of the workforce, management, equipment and location
  • Completion of work begun by the predecessor
  • Constancy of customers.

Lesson: Due diligence essential

This decision highlights the increasing scope of successor liability in the context of asset sales. Asset purchasers may be unable to avoid withdrawal liability or liability for a seller’s delinquent contributions to a multiemployer plan, even if the purchase agreement provides that the seller will retain such liability.

Therefore, it’s important for buyers to perform due diligence and carefully assess their risks when a seller has multiemployer plan liabilities.

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Author: Michael J. Crumbock is an associate in the Employee Benefits Group of Pepper Hamilton LLP. His practice encompasses all areas of employee benefits law and executive compensation. Michael can be reached at (215) 981-4499 or crumbockm@pepperlaw.com.

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