What happens if an orchestra stops paying pension?

A case study of the Neshoma Orchestra

Volume 120, No. 9October, 2020

Harvey Mars

What happens if an orchestra stops paying pension?

As a result of the Employee Retirement Income Security Act of 1974 — the statute that guides the operation of defined benefit pension plans — employers that are contractually obligated to remit pension contributions on behalf of their employees may still be required to pay additional contributions even after their contractual obligation expires. The imposition of this payment obligation is known as withdrawal liability and it occurs when an employer who has paid into a multi-employer pension fund for over five years ceases paying benefit contributions to the fund.  The cessation may be due to bankruptcy, termination of operations, failure to achieve a collective bargaining agreement, or simply a failure to pay contributions and, as I will shortly related to you, its impact can often be devastating to both workers and employers.

The rules that guide the calculation of withdrawal liability are exceedingly complex and are based upon the unfunded liability the fund has to pay for vested benefits.  Essentially, the weaker the fund’s financial position is, the greater the amount of withdrawal liability that might be imposed upon an employer, because ERISA requires the withdrawing employer to pay its share of the overall unfunded liability.  The greater the unfunded liability, the greater the employer’s payment may be. This was Congress’ way of trying to preserve the financial solvency of defined benefit pension funds when it loses the investment value of an employer’s contributions.  Many employers are unaware of the hidden pitfalls of the imposition of withdrawal liability.

First, the calculation of the amount owed is a byzantine process and is based upon actuarial assumptions that are often difficult to decipher.  Further, there are limited defenses that an employer may assert to counter a withdrawal liability assessment and only one legal avenue to contest the amount owed.  ERISA is the only federal statute that I am aware of that mandates arbitration as the sole means for contesting a claim.  Mandatory arbitration pursuant to ERISA was also Congress’ way to ensure swift resolution of claims and prompt payment in order to preserve a pension fund’s financial position.  Initiation of time consuming costly federal litigation is strictly forbidden by the statute.  Furthermore, the failure to properly and timely initiate arbitration will cause the acceleration of the withdrawal liability payment and leave the employer entirely defenseless.  There are many legal errors that can be corrected; failure to properly commence an arbitration proceeding to contest a withdrawal liability assessment is not one.  Failure to satisfy ERISA’s strict time constraints is unforgiveable under ERISA.

The unforgiving nature of the law is easily discernible from the United States Court of Appeals for the Second Circuit’s decision in AFM-Employers’ Pension Fund vs. Neshoma Orchestra and Singers, Inc., — F.3d —.  (September 3, 2020).  Neshoma is a club date employer that simply stopped paying pension contributions to the fund in 2013, even though its contractual obligation to do so was still extant.  Not unexpectedly, in 2015 the AFM Pension Fund notified Neshoma that due to its failure to remit contributions for a prolonged period of time, withdrawal liability would be imposed.  Neshoma disputed the assessment of withdrawal liability — but in response, on September 21, 2015, the Fund confirmed that a withdrawal had in fact occurred.  The confirmation of withdrawal commenced a 60-day clock for Neshoma to initiate an arbitration proceeding before the American Arbitration Association — something Neshoma failed to timely do.

During the time period when withdrawal liability was being imposed upon Neshoma, the union was involved in collective bargaining negotiations with it for a successor contract.  In fact, a contract was achieved, a fact that could have abated Neshoma’ s withdrawal liability had they paid outstanding assessments owed to the fund.  Had they done so, the fund’s trustees could have determined that the withdrawal had been cured.  The union even went to the Fund to request that the withdrawal assessment be abated.  However, abatement was impossible because Neshoma failed to even abide by the successor agreement’s pension contribution obligation let alone pay outstanding contributions.

Once the total uncontestable withdrawal liability assessment was imposed against Neshoma — roughly $1.2 million — the fund sued to collect.  Neshoma then counter-sued the union, claiming that the union had promised that the assessment would be extinguished once the agreement was signed and demanded that the union pay the pension fund.   Of course, no such promise was made by the union — nor could such a promise be made.  In order to avoid the consequences of its years-long failure to pay pension contributions, Neshoma blamed the union!

On September 3, 2020, the Second Circuit issued its decision affirming the lower court’s ruling dismissing Neshoma’s third party suit against Local 802 and found that Neshoma had failed to timely commence arbitration and forfeited the legal right to dispute the assessment.  The appeals court thus issued a judgment against Neshoma for the full amount of the withdrawal liability assessment.

This suit and its outcome is a devastating one for Neshoma, which had been a longstanding employer of union musicians.  However, the result was an avoidable one and Neshoma had many opportunities to right the ship. Imposition of  withdrawal liability is an unfortunate situation that should serve as a warning to any employer not to skirt their payment obligation to the pension fund.

Anyone interested in reading the decision may find it here.