What Construction Companies Need to Know About COVID-19 Related Layoffs and Multiemployer Pension Plan Withdrawal Liability

Wed June 10, 2020 - National Edition
Michael G. McNally, Fox Rothschild LLP


Michael G. McNally
Michael G. McNally

The COVID-19 pandemic has dramatically impacted the construction industry with international and domestic supply chains shut down, jobsites closed and projects delayed or outright cancelled.

In response many construction companies have implemented workforce reductions. But for those companies with unionized workforces that contribute to multiemployer defined benefit pension funds, temporary and permanent workforce reductions present the potential of unknowingly withdrawing from a pension fund and incurring a surprise liability.

The general rule is that an employer that fully terminates participation in a plan, or substantially reduces its contributions, has withdrawn from the plan. In the case of an employer that contributes to a plan for work performed in the building and construction industry, a complete withdrawal only occurs if the employer ceases to have an obligation to contribute under the plan and either continues to perform work in the jurisdiction of the collective bargaining agreement of the type for which contributions were previously required or resumes such work within five years after the date on which the obligation to contribute ceases.

In the simplest sense, if a building and construction industry employer moves its operations to a non-union work force, or negotiates out of its collective bargaining agreement the obligation to contribute to the pension plan, the employer will have withdrawn.

This special rule applies only if: 1) substantially all the employees with respect to whom the employer has an obligation to contribute under the plan perform work in the Building and Construction Industry, and; 2) the plan primarily covers employees in the Building and Construction Industry, or is amended to provide that the rules will apply.

The term building and construction industry has generally been defined as work performed at a job site, as contrasted with producing material for installation at a project or delivery of materials to a project. "Substantially all" has been interpreted to mean 85 percent in most cases. Many plans have, however, adopted their own rules defining each of these.

While many companies may understandably consider themselves to be building and construction industry employers, they may not meet the technical statutory definition for withdrawal liability purposes.

For companies that produce materials for installation, either in a traditional fabrication facility or off-site in a modular, pre-construction setting, although the materials will ultimately be installed on a construction site, because this work is performed off-site it is not considered building and construction industry work. Therefore the union members engaged in the off-site work would not count towards the 85 percent test.

The same is true if there are union members whose job it is to transport the materials to the jobsites. In determining whether an employer meets the building and construction industry requirements, the analysis is conducted separately by counting employees together on whose behalf contributions are made to the same pension fund. For example, an employer may meet the building and construction industry exemption with respect to the plumbers it employs, but may not for its teamster employees.

The more common pandemic workforce reduction scenario – temporarily laying off employees and rehiring them when facilities reopen and projects restart - does not present withdrawal liability concerns. This is so whether or not an employer meets the statutory definition of a building and construction industry employer because it lacks permanence.

But if a particular geographic office, or division or even an entire company cannot sustain through the pandemic related challenges and permanently ceases operations, the determination of whether an employer meets the building and construction industry is very important.

In the case of an employer that meets the building and construction industry test, a total cessation of operations does not trigger a withdrawal, while the opposite is true for a non-building and construction industry employer.

More likely to occur through pandemic-related workforce reductions than a complete withdrawal is a partial withdrawal. For non-building and construction industry employers that have a sharp and sustained decline in employment levels, a partial withdrawal can occur when an employer has a decline of seventy percent or more of its contribution base units (CBUs) over a three-year period.

If in the aftermath of a coronavirus related workforce reduction an employer only partly rehires its unionized workforce, and in the years following never returns to its pre-reduction employment levels, a partial withdrawal may have occurred.

For a 70 percent decline partial withdrawal to occur, it must be that in each of the three consecutive prior years an employer's CBUs are less than 30 percent of its average CBUs in the two highest of the preceding five years. Non-building and construction industry employers should carefully monitor their employment levels in the months and years following the pandemic and take proactive steps to avoid a 70 percent decline.

Beyond withdrawal liability, market declines and likely reduction in contribution hours are likely to significantly impact the funding status of these plans, further challenging their stability. Following the 2008 financial crisis Congress passed legislation allowing plans to extend the amortization period for certain losses, freeze their funding status at the prior year's level, and extend the timeframe for funding improvement and rehabilitation plans.

While Congress may do the same this time, recent proposals for more comprehensive reforms to the entire multiemployer pension fund system may gain traction.

Michael G. McNally is a partner in the Minneapolis office of Fox Rothschild LLP. He works with clients in all aspects of benefits and labor law including issues involved in the participation in, and withdrawal from, multiemployer defined benefit pension funds. He can be reached at 612.607.7094 or mmcnally@foxrothschild.com.