Potential Liability of a General Contractor for a Subcontractor’s Union Fund Obligations
If your company is the general contractor (“GC”) on a project, and one of your subcontractors is facing claims of non-payment of pension fund contributions to a union fund – do you know if you can be held liable for the subcontractor’s delinquency?
Typically, whether or not a GC is liable for a subcontractor’s pension fund contribution delinquency is clear from the terms of the collective bargaining agreement (“CBA”): there either is a provision providing for such liability, or there is not. When there is such a provision, the best policy for a GC is to require its subcontractor(s) to provide proof of the payment of pension fund contributions as a condition to disbursing progress payments on a project. Such proof can be the remittance reports submitted to the union funds and cancelled checks, or a confirmation from the union fund directly.
If the CBA does not contain such a provision, it would seem to be the reasonable conclusion that there is no basis for any such a claim against a GC by a union pension fund. It is unfortunately not as cut and dry as that.
In a recent case, a court bent over backwards to allow the union pension fund to sue a GC to try and recover the delinquent pension fund contributions of its subcontractor. In this case, the subcontractor had entered into a settlement of a more than $1 million pension fund delinquency claim. However, the subcontractor defaulted on the settlement agreement and the union fund sued the GC to try and recover the subcontractor’s pension fund delinquency.
The GC asked the court to dismiss the case because the CBA did not in any way provide that the GC was liable for its subcontractor’s pension fund contributions. However, the court permitted the case to proceed.
The court ruled that the union pension fund was allowed to claim that the parties had established a past practice and that the court could find that there was an implied term in the CBA requiring the GC to guarantee its subcontractor’s pension fund contributions. Simply put, the court allowed the union fund to argue that a provision holding the GC secondarily liable for the pension fund contribution delinquency of a subcontractor should be “implied” — or written into — the CBA. The case is still active and the judge’s decision is being challenged. It is unknown if the decision will stand, in whole or in part.
There is a practical lesson to be learned here. Sometimes, a GC will enter into a joint check agreement with union pension fund whereby the GC agrees to pay a subcontractor in the form of a joint check payable to both the subcontractor and the union pension fund. In fact, this was part of the history in the case above, which the union fund argued should permit it to advance such a claim.
Joint check agreements are used because they can sometimes be a useful way to avoid costly problems on a project. However, a joint check agreement may give rise to unexpected potential liabilities if it is not prepared correctly — including but not limited to the problem for the GC in the case discussed above.
The bottom line is that if you ever consider using a joint check agreement, you must make sure it is properly drafted by legal counsel to avoid costly pitfalls. If you do not, you may find yourself on the other end of a claim you would scarcely expect.