Gary La Barbera, Lawrence Kudla, Dennis Gartland, Thomas Gesualdi, Theodore King, Chester Broman, Frank Finkel and Joseph Ferrara, as Trustees and Fiduciaries of the Local 282 Welfare, Pension, Annuity, Job Training and Vacation and Sick Leave Trust Funds, Plaintiffs-Counter-Defendants-Appellants v. J.D. Collyer Equipment Corp., and Palmo Leasing Corp., Defendants-Counter-Claimants-Appellees

Citations: 337 F.3d 132; 31 Employee Benefits Cas. (BNA) 1366; 2003 U.S. App. LEXIS 14543Docket: 02-7351

Court: Court of Appeals for the Second Circuit; July 21, 2003; Federal Appellate Court

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The Trustees of Local 282's benefit funds appeal a decision by Judge Hurley that invalidated a policy related to employer contributions owed when the owner or spouse of an owner is employed by a firm. The case involves the Local 282 union, affiliated with the International Brotherhood of Teamsters, which established five trust funds under the Employee Retirement Income Security Act (ERISA) as part of collective bargaining agreements with various employers in the heavy construction industry. These funds include a Welfare Fund, Pension Fund, Annuity Fund, Job Training Fund, and a Vacation and Sick Leave Fund.

Employers are required to contribute to these funds based on the hours worked by employees, with specific thresholds set for benefits eligibility. For instance, employees must work at least 200 hours in a quarter to receive full health care benefits, while a minimum of 120 hours allows for partial benefits. Additionally, employees must work 1,000 hours over a year to maintain benefits for the subsequent year.

Employers are obliged to maintain auditable records of hours worked. Should they fail to provide required reports within twenty days of a demand, the Trustees can estimate hours worked based on the largest reported hours from previous audits, adding 10% to that figure. If no reports exist, a default of 40 hours per week is assumed for contribution calculations. The court upheld the Trustees’ appeal, affirming the summary judgment in favor of the defendants.

Evidence was evaluated favorably for the appellants, highlighting concerns from the Trustees regarding potential misreporting of work hours by certain firms, specifically those owned 100% by individuals or couples. Since the mid-1990s, the Trustees observed that some employers routinely reported their employees, often family members, as working the minimum 120 hours per quarter required for health care benefits. Notable examples included J.D. Collyer Corp., where Brenda Collyer reported her husband, Jeffrey, as working exactly 120 hours in multiple quarters, and Palmo Leasing Corp., where Margaret Palumbo reported her husband, John, within a similar range over 14 of 16 quarters. 

The Trustees suspected that this pattern of reporting, particularly among 100% owners, was contributing to rising contribution rates necessary for maintaining health benefits, as ordinary employees typically worked more than the minimum hours, thereby generating sufficient contributions. Additionally, the Trustees expressed concern that a decrease in average hours worked could negatively impact future retirees' pensions.

To address these issues, the Trustees implemented a rule effective May 20, 1998, mandating that employers reporting hours for individuals who are 100% owners (or their close relatives) must report a minimum of 40 hours per week regardless of actual work performed or compensation received. This resolution aimed to ensure accurate reporting and stabilize the funds' contribution rates.

On May 28, 1998, and July 22, 1999, the Trustees initiated legal actions against Collyer and Palmo under ERISA (Sections 502(a)(3) and 515) and the Labor Management Relations Act (Section 301) to recover delinquent contributions to five funds, seeking retroactive payments dating back to 1993, with interest. The 100% owner rule, adopted in May 1998, was central to these claims, aiming for substantial judgments of at least $172,772.36 against Palmo and $96,607.64 against Collyer. Other cases against additional 100% owners were also filed and later consolidated for a joint summary judgment motion regarding the rule's validity.

The district court ruled that the 100% owner rule was arbitrary and capricious, stating that the collective bargaining agreements did not authorize the Trustees to demand contributions for hours not actually worked, thereby exceeding the agreements' bounds, even when employers reported hours honestly. An appeal followed this ruling.

The appellate review of the summary judgment is de novo under the Declaratory Judgment Act. The parties disagree on the standard of review for the 100% owner rule's validity: appellees argue for de novo review due to its modification of collective bargaining agreements, while appellants advocate for an arbitrary and capricious standard, asserting the Trustees' discretion under ERISA and the Trust Agreement. The appellate court found the rule invalid under both standards, negating the need for further discussion on the review standard.

The validity of the 100% owner rule hinges on the Trustees' authority under statutory law and contract rules. The Trustees' powers derive from ERISA, collective bargaining agreements, and the Trust Agreement, with ERISA prevailing in case of conflict. The court noted that the Trustees have a fiduciary duty to manage fund assets and that employers must maintain records of employee hours to determine benefits due. The collective bargaining agreements establish how employer contributions and employee benefits are calculated based on hours worked.

The Trust Agreement grants Trustees extensive discretion to manage and safeguard the Funds' assets, allowing them to take necessary actions for property protection. They are responsible for establishing provisions related to a welfare plan, including employee eligibility and benefit determinations. Article VI, 1(d) specifically empowers Trustees to determine employer contributions if adequate records are not provided, allowing for a default assumption of 40 hours worked per week.

The court found that neither ERISA, the collective bargaining agreements, nor the Trust Agreement permits the Trustees to implement a "100% owner rule." While the Trustees claimed concerns over misreported hours by 100% owners that could affect the Funds' actuarial integrity and necessitate increased employer contributions, these issues do not justify the adoption of such a rule. The 100% owner rule does not align with ERISA or the Trust Agreement, as it imposes a blanket contribution requirement without considering the accuracy of reported hours. It diverges from the collective bargaining agreements' provisions, failing to require evidence of false reporting to trigger application. Additionally, it imposes harsh penalties on employers even when minimal hours are reported, thus exceeding what is necessary to prevent actuarial harm.

The 100% owner rule requires reporting of 160 or 200 hours worked each month, regardless of accuracy, significantly altering collective bargaining agreements related to benefits for owner/employees and their families. Owner/employees have more discretion in determining their work hours compared to ordinary employees, who must often work beyond the minimum required to qualify for benefits. While the Trustees can establish eligibility regulations, they cannot eliminate the connection between eligibility and actual hours worked, except under specific remedial provisions. This raises concerns about potential inequities in benefits for owner/employees, which should be addressed through collective bargaining rather than Trustee actions.

Altering eligibility rules for a select group of firms could unfairly impact competition and union wage scales, although there is no evidence of malicious intent behind the 100% owner rule. Moreover, the rule's legitimacy is questioned as it lacks express or implied authorization from ERISA, collective bargaining agreements, or the Trust Agreement. The rule invalidly assumes hours worked without regard to factual accuracy and modifies benefit eligibility and costs for owner/employees. While the current formulation of the rule is deemed invalid, there is an acknowledgment of the need for remedies to address false reporting by 100% owners.

The court affirms its decision, establishing that it will have res judicata effect on multiple related cases consolidated in the district court, specifically listing various La Barbera cases. Additionally, it highlights an instance where Palmo reported minimal work hours for its owner’s spouse, but the Trustees attributed a significantly higher number of hours for contribution calculations, illustrating a potential discrepancy in record-keeping. The excerpt further notes that some courts have determined that once trustees of an ERISA fund present evidence questioning the accuracy of an employer's records, the onus shifts to the employer to substantiate the actual hours worked. Relevant case law supports this burden-shifting principle.