{"id":3731,"date":"2022-06-23T08:01:34","date_gmt":"2022-06-23T08:01:34","guid":{"rendered":"https:\/\/fwhtlaw.com\/?post_type=briefing-papers&p=3731"},"modified":"2022-12-13T15:33:39","modified_gmt":"2022-12-13T15:33:39","slug":"responding-to-benefit-fund-audits-legal-framework-and-recommendations-for-union-contractors","status":"publish","type":"post","link":"https:\/\/www.fwhtlaw.com\/blog\/2022\/06\/23\/responding-to-benefit-fund-audits-legal-framework-and-recommendations-for-union-contractors\/","title":{"rendered":"Responding to Benefit Fund Audits: Legal Framework and Recommendations for Union Contractors"},"content":{"rendered":"

Kasia is a member of the firm\u2019s Construction Law Department. She can be reached at 612.359.7601 or kkokoszka@fwhtlaw.com <\/span><\/p>\n

Union contractors covered by collective bargaining agreements (\u201cCBAs\u201d) are normally required to make contributions to union benefit funds on behalf of their employees. These CBAs often incorporate by reference the trust agreements that govern union benefit funds, and union contractors are bound by the terms of both types of agreements. Based on CBAs and trust agreements, benefit fund trustees and their auditors are authorized to audit the books and records of employers to ensure that they are complying with the contribution requirements provided in the governing agreements. However, the authority to audit is not unlimited, the slope of an audit should be limited to the extent it furthers the legitimate purposes of the benefit fund plan. This article discusses the types of records that the benefit funds may – and may not – have the right to access during an audit and provides practical advice for how employers can respond to an audit request.<\/span><\/p>\n

Benefit fund trustees have fiduciary duties imposed by the Employee Income Security Act of 1974 (\u201cERISA\u201d) to ensure that employers are complying with contribution requirements, and the ability to conduct audits of participating employers is generally provided for in CBAs and trust agreements. The CBAs and the trust agreements are contracts between the union, the benefit funds, and the employer, and traditional principles of contract interpretation govern construction of these agreements between the parties. Notably, although some employers understandably operate under the belief that the benefit funds are part of the union, they are in fact separate entities.<\/span><\/p>\n

All union contractors should have a copy of the governing CBAs and trust agreements and review them carefully. When an employer receives notice of a benefit funds audit, they should look to the applicable CBA and trust agreements to ensure that they understand their contractual obligations to comply with an audit. The CBA and trust agreements will provide the basis on which employers contributions are made and address the authority of the benefit fund trustees to conduct audits and access the books and records of the employer.<\/span><\/p>\n

It is important to note that there are variations in the scope of the authority to conduct audits. A comparison among the CBAs and trust agreements of different unions in the Minnesota construction industry illustrates that some agreements provide a specific list of the types of employment and payroll records that the trustee is entitled to access, while other agreements contain broader language that requires the employer to produce any information relevant to the administration of the benefit funds. If the applicable agreement provides that the employer must provide specific tax documents during an audit (such as forms W2s and W3s, federal quarterly 941 forms, forms 1099s and 1096s), then the trustee has a clear right to access those records. However, there may be times when an auditor requests business records, such as the contractor\u2019s general ledger, that are not explicitly permitted under the applicable agreements and may not be directly relevant for the purposes of determining whether the employer is complying with the contribution requirements for the benefit funds. In those circumstances, a contractor will need to understand what it does \u2013 and what it does not \u2013 have a legal obligation to provide.<\/span><\/p>\n

Even if the benefit fund\u2019s demand for books and records is consistent with the broad authority outlined in the CBA and governing trust agreement, the U.S. Supreme Court has indicated that the right to audit is limited to prudent actions that further legitimate purposes of the plan. Cent. States, SE. & SW. Areas Pension Fund v. Cent. Transp., Inc.<\/em>, 472 U.S. 559, 105 S. Ct. 2833 (1985). According to the Court, an audit request would be \u201cillegitimate\u201d in the following circumstances: (1) if it is \u201cactually an effort by plan trustees to expand plan coverage beyond the class defined in the plans\u2019 terms\u201d; (2) if it seeks \u201cto acquire information about the employers to advance union goals\u201d; (3) if it is \u201cclearly wasteful of plan assets\u201d; and (4) if it is \u201cunrelated to legitimate plan concerns.\u201d<\/span><\/p>\n

Based on this reasoning, other courts have excluded certain business records from the scope of a benefit funds audit, such as payroll records for employees not in the collective bargaining unit, wage-related and payroll records for work performed outside the geographic jurisdiction of the CBA, and business records of payments made to an employer\u2019s subcontractors where the CBA did not require contributions to the benefit funds for work performed by subcontractors. New York State Nurses Ass’n Benefits Fund through Buchanan v. Nyack Hosp.<\/em>, No. 17-CV-1899-VB, 2019 WL 4735355 (S.D.N.Y. Sept. 27, 2019); Trustees of Michigan Reg’l Council of Carpenters Employee Benefits Fund v. Exhibit Works, Inc.<\/em>, 868 F. Supp. 2d 592 (E.D. Mich. 2012); Bensi v. El Camino Hosp.<\/em>, No. C-11-03978-CRB, 2012 WL 607979 (N.D. Cal. Feb. 24, 2012).<\/span><\/p>\n

The right of the benefit funds to access an employer\u2019s general ledger has been affirmed by some courts based on the authority conveyed to the trustees in the governing agreements and in furtherance of the trustee\u2019s fiduciary duties under ERISA. Courts have permitted trustees to access an employer\u2019s general ledger based on their authority to act as \u201cwatchdogs\u201d of the benefit funds plan and to cross check the accuracy of other documents produced in the course of an audit. DeMarco v. C & L Masonry, Inc.<\/em>, 891 F.2d 1236, 1240 (6th Cir. 1989). However, courts have also acknowledged the legitimate concerns that employers have about disclosing confidential business records such as the general ledger, and have permitted protective measures such as disallowing removal or copying of records or requiring all inspection of certain business records to occur onsite. Trucking Employees of N. Jersey Welfare Fund, Inc. v. Brockway Fast Motor Freight Co.<\/em>, 130 F.R.D. 314, 324 (D.N.J. 1989).<\/span><\/p>\n

Employers are not permitted to define for themselves which documents are necessary for carrying out the purposes of the audit, and cannot independently decide to provide redacted records. Int’l Union of Operating Engineers Local 98 Health & Welfare Fund v. S & R Corp.<\/em>, 95 F. Supp. 3d 1, 6 (D. Mass. 2015). Rather courts have indicated that \u201cabsent a showing of bad faith, the reasonableness and propriety of an audit are better left to the generally accepted standards of the accounting profession.\u201d Trustees of Plumbers & Pipefitters Local 123 Pension Fund v. Dale C. Rossman, Inc.<\/em>, No. 8:05-CV-1663-T24-TGW, 2006 WL 2523139, at *5 (M.D. Fla. Aug. 30, 2006).<\/span><\/p>\n

A union contractor who receives an audit request from the benefit funds should first review the applicable CBA and trust agreement to understand its obligations to comply with the audit. The CBA and trust agreement may set forth specific types of records and information that the auditor has a clear right to request. The employer should then offer the records that are contractually required and identify any requests that do not further the legitimate purposes of the plan. Before presenting a challenge to the scope of the audit, an employer should carefully evaluate the trustee\u2019s right to audit in the applicable agreements, the purpose of the request, and ensure that any objections to the scope of the audit are put in writing. It would be prudent to consult accounting professionals to obtain their opinion on whether the scope of the audit request is consistent with the legitimate goals of such an audit. When considering a challenge to an audit request, it is also important to note that the CBA and trust agreement may provide that there is no requirement to arbitrate disputes arising from audits, and the trustee can directly bring legal action in court to enforce audit rights. If the trustee commences legal action against the employer in these circumstances and prevails, the employer will have to pay the attorney\u2019s fees incurred by the benefit funds to enforce their rights to conduct an audit. Readers are encouraged to contact counsel regarding any specific questions regarding the topics addressed in this briefing paper.<\/span><\/p>\n

 <\/em><\/span><\/p>\n

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Fabyanske, Westra, Hart & Thomson, P.A.<\/strong> has once again been recognized as one of \u201cThe Top 50 Construction Law Firms<\/strong>\u201d by Construction Executive<\/strong>, a leading construction industry magazine for construction firms.  Fabyanske, Westra, Hart and Thomson was the only firm in the Upper Midwest to be included in the list.<\/p>\n

Fabyanske, Westra, Hart & Thomson, P.A.<\/strong> is pleased to announce that Julia Douglass<\/strong> and Kasia Kokoszka<\/strong> will be giving a presentation “Contract Clauses to Watch Out For<\/strong>” in person June 29th from 11:30 to 1:00 at the Association of Women Contractors<\/strong> off, located at 1337 Saint Clair Avenue, Suite 4, St. Paul, MN 55105. The event will also be videotaped.<\/p>\n

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