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.

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