The Government Contractor: Pension Withdrawal Liability - The SCA trap

I am going to speak at the Thomson Reuters West Government Contractor Year in Review Conference on Friday Feb. 23, 2018. My topic is labor and employment developments in 2017 and how they impact government contractors.  One of the topics I plan to discuss is the Call Henry case decided by the Court of Appeals for the Federal Circuit in 2017.  Thomson was kind enough to let me post an article I previously wrote with my former colleague Andrew Crawford on this subject for The Government Contractor newletter:

Reprinted from The Government Contractor, with permission of Thomson Reuters. Copyright © 2017. Further use without the permission of West is prohibited. For further information about this publication, please visit http://legalsolutions.thomsonreuters.com, or call 800.328.9352.

The Government Contractor, Vol. 59, No. 19, May 17, 2017
Focus
¶ 145

FEATURE COMMENT: Pension Withdrawal Liability—The SCA Trap

Employers hoping to be reimbursed by the Government for pension withdrawal liability payments imposed pursuant to the Multi-Employer Pension Plan Amendment Act (MPPAA) recently had a wrench thrown into their plans. In Call Henry, Inc. v. U.S., 2017 WL 1521788 (Fed. Cir. Apr. 28, 2017), the U.S. Court of Appeals for the Federal Circuit affirmed a U.S. Court of Federal Claims holding that the contractor, Call Henry Inc., failed to state a claim for which relief could be granted because the Government had no contractual obligation to reimburse pension withdrawal liability costs.

Call Henry entered into a contract with the National Aeronautics and Space Administration to provide inspection, maintenance and testing services in 2003. The contract had a base performance period of three years, with up to seven one-year option periods. Notably, the contract was covered by the Service Contract Act, which provides, among other things, that covered employees are entitled to (at least) the wage rates and fringe benefits contained in a predecessor contractor’s collective bargaining agreement (CBA). See Federal Acquisition Regulation Clause 52.222-41(f).

The predecessor contractor had a contract with the International Brotherhood of Teamsters Local Union No. 416, and made contributions to the Teamsters’ sponsored defined benefit pension plan. However, the SCA does not require a successor contractor to sign any particular CBA—only to adhere to the economic terms of the predecessor’s CBA and pay not less than the wages and fringe benefits set forth therein.

After receiving the Government contract in 2003, Call Henry negotiated a new CBA with its service employees who were members of the Teamsters union. If a successor contractor hires the predecessor’s workforce, the union representation typically comes with them, and absent labor strife or even a strike, the successor has little choice but to recognize the union after an election or card check, and negotiate in good faith with the union. The economic reality is that the union and its benefit plans typically follow the workers from contractor to successor contractor.

The Call Henry CBA was effective from 2003 to 2007, and required Call Henry (like its predecessor) to join and contribute to the Teamsters’ pension plan—a multi-employer pension plan which was subject to the MPPAA. The MPPAA imposes a requirement on any employer who withdraws from the plan to pay withdrawal liability to the pension fund to cover its share of the plan obligations incurred during the period of its enrollment in the plan.

Beginning in 2007, NASA began to exercise the option contracts, and Call Henry continued to enter into successive new CBAs with the Teamsters. Each new option year is a new contract for SCA purposes, and triggers the addition of a new CBA-based wage determination to the contract. With each new CBA, Call Henry’s mandatory pension contributions increased, and each time NASA provided a price adjustment pursuant to the applicable SCA Price Adjustment Clause. See FAR 52.222-43(d) (providing for price adjustments due to an increased wage determination which occurred by operation of law, such as when a successor contract is bound by the wages and benefits provided in a predecessor contract’s CBA).

In 2012, Call Henry’s service employees voted to associate with a new union, and as a result, the National Labor Relations Board decertified the Teamsters as the representative for Call Henry’s employees. This NLRB decertification served as Call Henry’s effective withdrawal from the Teamsters’ pension plan. Accordingly, pursuant to the MPPAA, Call Henry was required to pay $6 million in pension withdrawal liability. (This amount was reduced to less than $2 million in arbitration.) Additional withdrawal liabilities outside of the litigation were also sought. Thus, without any fault or action of its own, Call Henry suddenly became liable for the Teamsters plan’s long-term, underfunded pension obligations.

In June 2014, Call Henry sought reimbursement from NASA under the SCA Price Adjustment Clause for the MPPAA pension withdrawal liability payment. NASA denied the claim in September 2014, and in October Call Henry filed suit at the COFC. The Government moved to dismiss the suit, arguing that it had no contractual duty to provide a price adjustment for the MPPAA pension withdrawal liability payment. The COFC granted the Government’s motion, and Call Henry appealed to the Federal Circuit.

Reviewing the COFC’s ruling de novo, the Federal Circuit affirmed the grant of the motion to dismiss. Primarily, the court noted “the SCA Price Adjustment Clause in Call Henry’s NASA contract conditions an upward price adjustment on increased costs made to comply with a ‘wage determination otherwise applied to the contract’ ”  (citing FAR 52.222-43(d)(2)). In Call Henry’s case, the court said, the “MPPAA withdrawal liability is not an increased cost of complying with a wage determination applied to Call Henry’s NASA contract. Therefore, it is not an increased cost covered by the SCA Price Adjustment Clause.”

It appears to have been dispositive that Call Henry’s CBA was silent on withdrawal liabilities, and thus there was no contractual confirmation of that obligation as an SCA fringe benefit required under the contract. The court noted that the contract with NASA (and implicitly the CBA-based wage determination incorporated therein) did not expressly require that Call Henry pay MPPAA liability in the event of a withdrawal from the pension plan.

According to the court, Call Henry independently chose to provide its service employees the benefits associated with joining the Teamsters’ pension plan, and thus, Call Henry independently assumed the risk of MPPAA withdrawal liability. FAR 52.222-41(f) required only that Call Henry provide “wages and fringe benefits” equal in value to those provided in the CBA of the predecessor contract.

The court thus said it did not have to reach the issue that was the crux of the lower COFC decision. As discussed more thoroughly in the COFC opinion, the SCA limits its coverage to “fringe benefits not otherwise required” by federal law, and the pension fund withdrawal liability is specifically required by another federal law: the MPPAA. Therefore, according to the COFC, the MPPAA withdrawal liability is not a “fringe benefit” covered by the SCA. That statutory obligation existed independently from Call Henry’s obligations under the NASA contract. However, the Federal Circuit found that it was unnecessary on these facts to resolve the issue of whether the withdrawal liability was a fringe benefit.

Nor did the Federal Circuit comment on the extensive briefing on the issue of whether the result would have been different if the Call Henry CBA had expressly defined the withdrawal liability as a contractual obligation of the contractor and as a bona fide fringe benefit required by the CBA. The withdrawal liability is just an acceleration of pension benefits that occurs on withdrawal of the pension plan. And pension benefits are expressly defined as bona fide SCA-covered fringe benefits.

In its briefing, the Government formally expressed the view that if the withdrawal liabilities had been set forth in the Call Henry CBA, they would have been allowable. And at oral argument on the case, the Government effectively conceded that this was the case.

There was one particularly interesting exchange with the Government lawyer. The Federal Circuit asked him if the pension withdrawal liability would be an allowable cost under the SCA Price Adjustment Clause if the requirement were expressly set forth in the CBA. Government counsel first equivocated, saying “perhaps” and discussing the Government’s right to bring a substantial variance or arm’s-length challenge to the CBA terms. The questioning judge scoffed at that prospect, since the withdrawal liability requirement is set forth in the law, and Government counsel subsequently appeared to concede that the withdrawal liability cost would be allowable if it were expressly required by the CBA. (See oral argument audio file at 17:36 minutes.)

Thus, the answer to the Call Henry case is for contractors and unions to formally incorporate provisions for pension withdrawal liability in their CBAs and to expressly define the withdrawal payment as a fringe benefit. Such a payment thus would be similar to the severance benefits specified in many CBAs and found in the past by the boards of contract appeals to be bona fide SCA fringe benefit payments. However, whether that would satisfy the Government, boards or courts in any future dispute remains uncertain given the absence of discussion of the issue in Call Henry and the ambiguities in the Federal Circuit’s reasoning.

So what does this mean for contractors? First, it probably means a big barrier to the use of multi-employer union-sponsored pension plans on new Government contracts. Only existing plans are likely to carry forward. It also likely means reduced competition on those existing plans and higher prices to the Government, since rational, profit-maximizing contractors will avoid these procurement situations or be very careful when negotiating the terms of their multi-employer CBAs. Union-sponsored pension plan contributions are a potential trap for Government contractors. Most contractors will avoid bidding on or undertaking new contracts that involve union-managed pension plans of uncertain solvency. It is not a lost opportunity—it is just a trap for the unwary.

And for the unfortunate contractors with existing CBAs with union pension plans that are underfunded, mitigation options are limited. If a contractor must continue in such plans to avoid withdrawal liabilities, then the successor CBA needs to be carefully negotiated at arm’s length with the union. CBA provisions that include responsibility for the withdrawal liability, along with express identification of those sums as SCA pension contributions and fringe benefits, may provide a basis to distinguish the result in Call Henry.

If the CBA-based wage determination expressly calls for payment of the withdrawal liability and defines it as an SCA-covered pension benefit, and that wage determination is thereby incorporated into the Government contract, the court’s determination in
Call Henry may be inoperative. In addition, other contract terms such as a cost-reimbursement clause, the application of the pension benefit cost principles and contract closeout rules may offer some contractor protection from the storm.

What about poor Call Henry—what’s to become of it? This decision is likely the fast track to an insolvency proceeding unless the company has millions of dollars to pay for the pension withdrawal liabilities. Assuming not, this means that the Teamsters’ pension plan likely will not be recovering all that is ostensibly due from Call Henry. Workers may yet find that their pension benefits get crammed down. And the Pension Benefit Guaranty Corporation may have to fund at least part of the deficit, leaving the Federal Government with some liability, notwithstanding the court’s decision.

Contractors should consult an attorney if they have questions regarding an underfunded multiemployer pension plan and the now more-limited potential to get a price adjustment for any withdrawal liability in a post-Call Henry world.

This Feature Comment was written for The Government Contractor by Daniel Abrahams and Andrew Crawford of the Washington, DC office of Brown Rudnick LLP. Mr. Abrahams [was] a partner in the [firms's] Government contracts and wage & hour group. Mr. Crawford is an associate working on bid protests, claims and wage & hour disputes. [Mr. Abrahams presently is a member of Abrahams Wolf-Rodda, LLC.]

Reprinted with permission.