Hidden Withdrawal Liability Trap in Outsourcing Provision of H.R. 2830

An easily-overlooked provision in the Pension Protection Act of 2005 (H.R. 2830) would create an entirely new basis for assessing withdrawal liability under the Multiemployer Pension Plan Amendments Act of 1980 (“MPPAA”) based on the existence of double-breasted operations or the use of independent contractors and other non-employees by companies affiliated with contributing employers.  The provision is entitled “Partial Withdrawals by Means of Outsourcing.”  Taken literally, it could be triggered by any practice that might loosely be considered “outsourcing,” including the use of independent contractors and “leased employees,” as well as many forms of franchise, consignment, and ordinary subcontracting arrangements.  Under the “outsourcing” provision, a multiemployer plan could assess withdrawal liability if a contributing employer experiences the slightest decline from an historical contribution average and “the employer continues to perform work of the type for which contributions are made under the plan by means of services of individuals who are not employees of such employer covered by such plan.” 

Furthermore, the “outsourcing” provision of H.R. 2830 has a “stealth” feature.  Under the current language of the bill, withdrawal liability could be assessed because of “outsourcing” by the contributing employer or by any member of the same “controlled group” as the contributing employer.  This feature of the bill is easy to miss.  Understanding the broad scope of the “outsourcing” provision depends on knowing that under existing law, the word “employer” in the MPPAA refers to the trade or business that contributes to a multiemployer plan plus all trades or businesses, whether or not incorporated, that are under “common control” with the contributing employer.  In addition, the bill does not contain any geographic limitation on the activities that could trigger the new partial withdrawal. Thus, if the outsourcing provision is adopted in its current form, a multiemployer plan could assess withdrawal liability against an employer based on the use of “leased employees” or independent contractors, or other undefined “outsourcing” activities, not only in the operations of the contributing employer but also in the operations of any one of the contributing employer’s commonly-controlled affiliates—even if the affiliate is union-free and even if the affiliate and the contributing employer operate entirely in non-overlapping geographic areas. 

A new assessment of partial withdrawal liability could be made each year on the basis of the “outsourcing” provision.  When covered operations are declining, the relentless stream of yearly assessments could be halted only if the entire controlled group ceases to use the services of non-employees for work of the type covered under the contributing employer’s collective bargaining agreement.  Even in this scenario, prior “outsourcing” assessments would remain payable unless the employer expanded its covered operations sufficiently to satisfy certain rules for “abatement” of partial withdrawal liability.

The power to assess withdrawal liability based on “outsourcing” would allow the trustees of a multiemployer plan to use the plan’s underfunding as a threat against employers that use the services of individual independent contractors or franchisees, that contract out certain services, or that have double-breasted operations.  The prospect of repeated annual assessments of partial withdrawal liability will give the multiemployer plans such enormous leverage over participating employers that the multiemployer plans will have a significant degree of control over how the employers operate. 

Should you have any questions or require any additional information, please feel free to call Hal Coxson at 202-887-0855 (hal.coxson@ogletreedeakins.com) or Tom Christina at 864-241-1843 (tom.christina@ogletreedeakins.com).

Note: This article was published in the June 13, 2005 issue of the National eAuthority.