Union Agreement to Indemnify Employer for Withdrawal Liability Upheld in Issue of First Impression

In Shelter Distribution Inc. v. General Drivers, Warehousemen & Helpers Local Union No. 89, No. 11-5450 (6th Cir. Mar. 16, 2012), the Sixth Circuit Court of Appeals held that nothing in ERISA prohibits a union from contractually agreeing to be held liable for an employer’s withdrawal liability under the Multiemployer Pension Plan Amendments Act (“MPPAA”).  The Sixth Circuit thus joined the Third Circuit in enforcing such indemnity provisions.

The issue arose after the employer and union entered into a collective bargaining agreement (“CBA”) providing that the union would “indemnify the Company for any contingent liability which may be imposed under [MPPAA].”  The indemnification clause did not shift liability – the employer was still financially liable to the fund in the event of a withdrawal, but the employer simply could seek reimbursement for that liability from the union.  Shortly before the CBA was scheduled to expire, the employer and union began negotiating a new agreement.  During negotiations, and before agreeing to a new contract, the union disclaimed its representation of the company’s employees and terminated the collective-bargaining process.  As a result, the employer withdrew from the multiemployer plan and was assessed withdrawal liability.  The employer paid that liability and, under the terms of the CBA, demanded indemnification from the union.  The union refused to honor the CBA’s indemnification clause, arguing in arbitration that the expiration of the CBA rendered the indemnification clause void, and that the arbitration provision was unenforceable because it violated public policy.  The arbitrator rejected both arguments and issued an award in the employer’s favor.  The district court upheld the award.

On March 16, 2012, the Sixth Circuit likewise upheld the award.  The Sixth Circuit’s analysis focused entirely on the public policy issue.  Although the court noted that the question was one of first impression in the Sixth Circuit, it readily concluded that the CBA’s indemnification clause did not violate public policy.  The court observed that the purpose of withdrawal liability under ERISA and MPPAA is to “provide even more security to employee retirement plans,” and reasoned that indemnification was not inconsistent with the statutory purpose, provided that (as was true in this case) the employer remained primarily liable for its own withdrawal liability.

Lessons Learned . . .

Employers may draw several practical lessons and caveats from Shelter Distribution

  • It is now more likely that provisions in CBAs requiring the union to indemnify the employer for withdrawal liability will be enforced;
  • Indemnification provisions should include explicit language that the duty to indemnify survives the expiration of the CBA;
  • Indemnification provisions should make clear that the employer remains primarily liable for any withdrawal debt;
  • The employer should be prepared to pay its withdrawal debt before seeking indemnification from the union; and
  • Because the issue in Shelter Distribution has not been addressed in most circuits, it is possible that arbitrators or other courts could disagree and conclude that it does violate public policy for a third party to agree to be held liable for an employer’s withdrawal liability.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.