Fourth Circuit Court of Appeals Strikes Down Common Employer Bargaining Tactic as Unlawful Under the Pension Protection Act

On April 26, 2018, the U.S. Fourth Circuit Court of Appeals invalidated an employer’s attempt to freeze participation in a multiemployer pension plan to existing employees, and place new employees in a 401(k) plan. This is a common employer demand in bargaining, but it was held unlawful because of the Pension Protection Act of 2006 (or PPA), as amended (just in time) by the Multiemployer Pension Reform Act of 2014 (or MPRA).

The Background

Just Born, a candy manufacturer that is famous for making Peeps®, Mike & Ike’s® and Goldenberg Peanut Chews®, had a 2012-2015 Collective Bargaining Agreement (CBA) with Bakery Workers Local 6. The CBA provided that Just Born would contribute to the Bakery and Confectionery Union and Industry International Pension Fund for all bargaining unit employees from their first day of employment.

In 2012, the actuary for the fund certified it as being in Critical Status (or in the Red Zone) under the PPA. The trustees of the fund therefore developed a rehabilitation plan pursuant to that statute, which contained different schedules of benefit reductions and contribution increases from which participating employers and unions could select. The company and the union chose a schedule that provided for 5% annual contribution increases, and which still applied to the entire unit.

After negotiations in 2015 failed to produce a new CBA, the company unilaterally imposed its last, best and final offer, which included eliminating pension participation for any newly hired employees in favor of a 401(k) plan. The fund brought a lawsuit under the Employee Retirement Income Security Act of 1974 (or ERISA) , of which the PPA is part, to collect contributions under the updated rehabilitation plan schedule previously adopted by the company and the union for both old and new hires. Importantly, in 2014 as part of MPRA, Congress amended the PPA to state that if bargaining parties cannot agree to a rehabilitation plan schedule in their second round of bargaining after a multiemployer pension plan enters the Red Zone, then the prior agreed-upon schedule, as updated by the trustees, will control until a new CBA is reached.

The Decision

The company’s chief argument on appeal was that it ceased to be a “bargaining party” subject to the PPA’s rules when it reached impasse with the union. It further contended that the PPA could not alter the fundamental labor law right to impose its last, best and final offer when there is an impasse in collective bargaining. Finally, it asserted that a broad reading of the PPA would nullify an employer’s right to withdraw from multiemployer pension plans.

The District Court in Maryland, and now the Fourth Circuit covering that state and the Carolinas, rejected the company’s arguments. The Fourth Circuit held that the company’s reading of the term “bargaining party” in the statute was nonsensical. In the court’s view any fair reading of the term “bargaining party” did not begin and end with the written term of a CBA. The court also ruled that the PPA must be read as amending the normal labor law rules governing impasse. And lastly, it held that an employer’s right to negotiate a withdrawal from a multiemployer pension plan was preserved under the PPA. In its words:

Our interpretation of the [PPA] in no way limits the application of other ERISA provisions governing when and how an employer may withdraw partially or completely from an ERISA-qualified plan…. Instead, our decision centers on what is required of employers who have not sought to withdraw, and who instead remain participants in the plan by virtue of an expired collective bargaining agreement. Here, Just Born has never sought to withdraw from the Pension Fund and our interpretation of the [PPA] does not limit its ability to do so. We simply recognize that the [PPA] applies to entities like Just Born that meet its requirements and have not exercised their option to withdraw. Just Born is attempting a de facto partial withdrawal from the Pension Fund by not covering new employees, which could lead to a complete withdrawal eventually over time through the attrition of its older employees. In so doing, Just Born is seeking to circumvent both the critical-status contributions for an expired collective bargaining agreement under the [PPA] and the withdrawal penalty under [ERISA’s withdrawal liability provisions]. Bakery & Confectionery Union & Industry International Pension Fund v. Just Born II, Inc., No. 17-1369 (CA 4, April 26, 2018), Slip Op. at 13 (citation omitted, emphasis in original).

The Ramifications

This case generated national attention, likely because it has been common for employers to try to negotiate out of single and multiemployer pension plans by freezing eligibility – which really means eliminating participation for new employees. The decision is a cautionary tale for employers looking for an easy exit from a multiemployer pension plan; but there are still options available. In this instance, the company sought to avoid an assessment of partial or complete withdrawal liability, escape additional contributions under the PPA, and keep production at current levels, all at the same time. That the law does not allow.