United States: Double-Breasted Company Owners, Officers Can Be Indicted For Underpaying Benefit Contributions

Mark L. Shapiro is a Parnter in our Chicago office and Andrew W. Stephenson is a Partner in our Washington DC office.

HIGHLIGHTS:

  • A federal district court in Massachusetts has held that the shareholders and officers of a double-breasted construction company can be indicted and could go to prison for fraudulently misrepresenting that their business was a lawful double-breasted operation with two separate companies, if the government proves the allegations in the indictment.
  • The indictment of individual shareholders and officers in such a case represents a significant escalation of the risk of not properly setting up and properly operating double-breasted operations, which are common in the construction industry.
  • Double-breasting is still lawful, but companies must rigorously maintain separateness in operation, as the decision in this case dramatically increases the risks if a double-breasted operation is alleged to be a single business.

The U.S. District Court for the District of Massachusetts held in September that the shareholders and officers of a double-breasted construction company can be indicted and could go to prison if the government proves they fraudulently misrepresented that their business was a lawful double-breasted operation with two separate companies. According to the indictment, the defendants, who failed to maintain the separateness of their two corporations, reported to the Massachusetts Laborers Benefit Funds (MLBF) the hours worked by employees of their union company but not their non-union company, and based on these false reports, failed to make payments due to the MLBF.

Normally, a dispute over whether an employer had properly reported and paid all the contributions it was obligated to make under a collective bargaining agreement (CBA) would be resolved by civil litigation or arbitration. The indictment of individual shareholders and officers in such a case represents a significant escalation of the risk of not properly setting up and properly operating double-breasted operations, which are common in the construction industry.

The Facts

Air Quality Experts Inc. (Air Quality) is an asbestos abatement company that was incorporated in 1987. AQE Inc. (AQE) is also an asbestos abatement company that was incorporated in 2005. Christopher and Kimberly Thompson together owned and operated Air Quality and AQE. Christopher was the president and treasurer of Air Quality. Kimberly, his wife, was the president of AQE and the clerk of Air Quality.

AQE was a party to a series of CBAs with the Massachusetts & Northern New England Laborers' District Council of the Laborers' International Union of North America since AQE was formed. The CBA required the payment of fringe benefit contributions to a number of employee welfare and pension plans, some of which were subject to Title I of the Employee Retirement Income Security Act of 1974 (ERISA). Under the terms of the CBAs, AQE was required to send monthly "remittance reports" to the MLBF that reported the number of hours worked by union members for AQE and to pay benefit contributions to the MLBF based on these hours.

Air Quality was never a signatory to any of these CBAs.

The Indictment

The indictment alleges that Air Quality operated out of the same location as AQE under the same management, used the same equipment and employed the same workforce. As a result, the companies were actually "a single business," the indictment alleges.

"Whenever conditions permitted," the companies paid employees from the payroll of Air Quality rather than that of AQE because that was "generally financially advantageous," the indictment states. By doing so and reporting to the MLBF only the hours worked by union members paid from the payroll of the union-signatory AQE, the defendants failed to report all the hours they were obligated to report and failed to make the required amount of contributions to the MLBF, according to the government . The indictment also alleges that this "double-breasted shop" arrangement violated the CBA and that the defendants "concealed and caused to be concealed" from the MLBF the payment from the payroll account of Air Quality for hours covered by the CBA.

On Jan. 19, 2016, Christopher Thompson, Kimberly Thompson, Air Quality and AQE were indicted on multiple counts of mail fraud, theft or embezzlement from an employee benefit plan, and making false ERISA statements. Christopher and Kimberly Thompson were indicted individually and were the first-named defendants in the indictment in order to grab the attention of the construction industry.

The Decision

The defendants moved to dismiss the indictment. They argued that the indictment fails to state an offense because the remittance reports properly included only union members' work for AQE and not for Air Quality, which was not a union signatory. The defendants contended that only AQE's hours had to be reported to the MLBF because Air Quality and AQE were part of a lawful "double-breasted" operation.

The court and the government acknowledged that double-breasted arrangements, in which the non-union company bids on jobs that do not require a union contractor, and the union company bids on union jobs, are common and lawful. That is a positive for construction industry members.

But the government alleges in this case that, under the defendants' fraudulent scheme, the union and non-union companies were not actually two separate companies but rather a single company with the same location, workforce, equipment and management. In sum, the government alleges that Air Quality and AQE were actually a single business in which Air Quality was bound by the CBAs that AQE signed, but that the defendants fraudulently misrepresented their business as a lawful double-breasted operation with two separate companies, one subject to the CBA and the other not.

The defendants also argued that there cannot be such liability because, contrary to the usual pattern in unlawful double-breasting cases in which the non-union company is formed after the union company in order to escape pre-existing CBA obligations, in this case the union company was formed after the non-union company. The court rejected that contention, holding that the order of creation of the union and non-union companies of the double-breasted operation is not determinative.

The court denied the motion to dismiss and held that the indictment properly alleges violations of the mail fraud, theft, embezzlement and false statement statutes. Of course, the government still must prove those allegations beyond a reasonable doubt, and the defendants will have an opportunity to present their evidence. But the fact that a dispute over fringe benefit contributions resulted in criminal charges against individual shareholders and officers instead of a civil lawsuit or arbitration against the corporations should concern the contractor community. 

Lessons for Contractors

The good news for industry members is that double-breasting is still lawful – but it must be done right. That means setting up a non-union company with its own separate management, equipment, workforce, location and bank account, and not commingling assets or disregarding the separateness of the two companies. It also means rigorously maintaining that separateness in operation.

The bad news for double-breasted companies is that the decision in this case dramatically increases the risks if a double-breasted operation is found to be a single business. Instead of simply owing some money to the fringe benefit plans and maybe to the employees and the union, the owners and officers of the companies may be criminally indicted personally and face the prospect of prison. This risk gives the unions and their fringe benefit plans tremendous leverage in asserting claims against double-breasted employers that they have not paid fringe benefit contributions, paid union scale or paid union dues for the hours worked by employees of the non-union company. Unions will be emboldened to assert such claims, and fringe benefit plans may think that, after this case, they have a fiduciary duty to assert such claims.

Double-breasted contractors should review with their counsel the structure and actual operation of their double-breasting and evaluate their vulnerability to a claim that they are misrepresenting their business as a lawful double-breasted operation with two separate companies.        

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions