Court: Court of Appeals for the Second Circuit; July 21, 2003; Federal Appellate Court
The Trustees of a local union's benefit funds are appealing a district court's summary judgment that invalidated a policy regarding employer contributions for employees related to firm owners. Local 282, an affiliate of the International Brotherhood of Teamsters, had established five ERISA-governed trust funds through collective bargaining agreements with heavy construction employers in the 1990s. Employers are mandated to contribute based on employee hours worked, with specific thresholds set for health care benefits. For instance, employees must work at least 200 hours in a quarter for full benefits or 120 hours to retain partial health care coverage. If employers fail to provide required reports for auditing within a specified timeframe, the Trustees can estimate owed contributions using a defined methodology.
In the mid-1990s, the Trustees noted that some firms reported employees working exactly 120 hours each quarter, the minimum for health care eligibility, raising concerns about potential falsification of records, particularly among firms owned by individuals or couples who reported themselves or their spouses as employees. This led to the legal challenge regarding the validity of the Trustees' policy on contributions owed. The court affirmed the decision against the Trustees.
Appellees J.D. Collyer Corp. and Palmo Leasing Corp. are family-run businesses where the husband is an employee and the wife is the sole shareholder. Audits indicated that Brenda Collyer reported her husband Jeffrey's hours inconsistently, with claims of 120 hours in four quarters, and higher hours in two others, suggesting potential inflation and misreporting to meet minimum requirements. A similar pattern was found with Margaret Palumbo reporting her husband John’s hours between 120 and 152 in fourteen quarters, including seven at the minimum. Concerns arose that such misreporting by 100% owners was driving up required contribution rates for health benefits and could negatively impact future retirees' pensions. Consequently, the Trustees implemented the "100% owner rule" on May 20, 1998, mandating that employers report and pay contributions for 100% owners and their close relatives at a minimum of forty hours per week for each week reported in covered employment, regardless of actual hours worked. Legal actions against Collyer and Palmo commenced on May 28, 1998, and July 22, 1999, respectively, under ERISA and the Labor Management Relations Act, seeking substantial delinquent contributions dating back to 1993, with amounts claimed being at least $172,772.36 for Palmo and $96,607.64 for Collyer. Fourteen related cases were ultimately consolidated for a joint summary judgment motion to assess the validity of the 100% owner rule.
The district court deemed the 100% owner rule arbitrary and capricious, ruling that the collective bargaining agreements did not allow Trustees to require contributions for hours not worked. This exceeded the agreements' scope, particularly when employers accurately reported worked hours and made appropriate contributions. The appeal followed this ruling.
The case is reviewed de novo under the Declaratory Judgment Act. A dispute exists over the standard of review for the 100% owner rule's validity. Appellees argue for de novo review, claiming the rule modifies the agreements beyond the Trustees' authority, while Appellants favor an arbitrary and capricious standard, citing ERISA and the Funds’ Trust Agreement that grant Trustees discretion for contribution collection rules. The court finds the rule invalid under both standards, negating the need to resolve the review standard dispute.
The Trustees' authority stems from ERISA, the collective bargaining agreements, and the Trust Agreement, with ERISA prevailing in conflicts. The Trustees have a fiduciary duty to manage the Funds’ assets and are required to ensure employers maintain employee hour records for benefit calculations as mandated by ERISA. The collective bargaining agreements outline the process for determining employer contributions and employee benefits based on worked hours, while the Trust Agreement grants Trustees broad discretion for asset management and the formulation of welfare plan provisions.
Article VI.1(d) grants Trustees the authority to adjust contributions based on employers' inadequate record-keeping by adding 10% to the highest reported hours in the last 12 months. In the absence of records, Trustees can assume a 40-hour workweek. However, the Trustees do not have the authority to implement the "100% owner rule," which mandates reporting as if an owner/employee worked 40 hours per week regardless of actual reported hours. This rule does not require evidence of false reporting and is seen as a harsh measure that does not align with ERISA or the Trust Agreement's provisions for ensuring accurate employer contributions. The Trustees' concerns about misreporting affecting the Funds' actuarial soundness do not justify the adoption of this rule, which unnecessarily modifies the collective bargaining agreements regarding benefit eligibility and costs. The rule's automatic application disregards the actual work performed, which the collective bargaining agreements intended to govern.
Ordinary employees must typically rely on their employer's request to work sufficient hours for eligibility and often exceed minimum requirements, resulting in higher employer contributions to benefit funds. In contrast, owner/employees can opt to work just the minimum hours necessary for eligibility, a provision allowed under collective bargaining agreements. Trustees possess broad powers to regulate eligibility but cannot sever the connection between eligibility and hours worked, except under specific remedial provisions. While there are discussions about potentially limiting owner/employees' discretion or applying distinct rules to them, such decisions fall within the scope of collective bargaining, not the Trustees' authority. The Trustees lack the power to address perceived inequalities in costs and benefits for owner/employees and their families. Altering eligibility rules could disproportionately affect a small group of firms and potentially disadvantage union workers by creating competition with owner/employees. The existing 100% owner rule, which presumes hours worked regardless of actual reporting, is deemed unauthorized by ERISA, collective bargaining agreements, and the Trust Agreement. This rule also modifies agreements by affecting benefit costs and eligibility. The Trustees' authority does not extend to altering the collective bargaining framework or addressing inaccuracies in owner/employees’ reporting without proper authority. This decision will serve as res judicata in similar consolidated cases. An example highlights the inconsistency in reporting, where a spouse of a 100% owner working one hour was deemed to have worked 160 hours for contribution purposes. Courts have indicated that once trustees raise questions about an employer's records, the burden shifts to the employer to demonstrate the accuracy of reported hours worked.
