Understanding This Pension Rule May Help Contractors Avoid Costly Liability Assessments

This post was guest authored by Stoel Rives employee benefits attorneys Bethany Bacci and Abbey Hendricks.

If you use union employees in your projects, you may contribute to a multiemployer pension plan—perhaps a few cents or few dollars per hour worked. However, some employers are surprised to learn they could be assessed with “withdrawal liability” that greatly exceeds their negotiated contribution rates in certain circumstances. Here’s what you need to know about a special exemption that may help avoid large payments to a multiemployer plan following the cessation of negotiated contribution obligations.

Under the Employee Retirement Income Security Act of 1974 (ERISA), when an employer ceases to contribute to a multiemployer plan, that employer must generally pay “withdrawal liability.” The withdrawal liability rules under ERISA are designed to spread the unfunded pension liability across all participating employers—so that the employers that continue to contribute to the plan are not stuck footing the bill for those that previously exited. A withdrawal liability assessment can be very expensive; some of our clients have received initial assessments in the multimillions.

An employer might cease to contribute to a multiemployer plan for a variety of reasons: a project ended and union employees are no longer needed, operations in a local union’s jurisdiction ended, or an employer phased out its construction business to focus on other types of work. In the building and construction industry, frequent initiation and cessation of projects is the norm. Fortunately, Congress recognized that withdrawals by individual employers in the building and construction industry actually have a minimal effect on the contribution bases of multiemployer plans. This is because, once a project ends, employees often resume work with a different employer in the same area that continues to contribute to the plan. Due to this unique aspect of the building and construction industry, Congress provided for a special statutory exemption to complete withdrawal liability.

Let’s break down the statutory requirements for the special exemption:

  1. The employer must be a building and construction industry employer.

While there is no statutory definition of what it means to be a “building and construction industry” employer, courts and the Pension Benefit Guaranty Corporation (PBGC) generally look to the Labor Management Relations Act of 1947 (also known as the Taft-Hartley Act) for guidance. As interpreted under the Taft-Hartley Act, the term refers to work performed at the site of a building or other structure in connection with the erection or alteration of the building or other structure. Other activities fall outside that scope. For example, an employer that merely manufactures or transports construction materials that are then installed by other contractors on a worksite is likely not considered a building and construction industry employer.

While it is permitted for a building and construction industry employer to have employees who perform work in other industries, “substantially all” of the employees for whom the employer is obligated to contribute to the multiemployer plan must perform work in the building and construction industry. The PBGC has not defined “substantially all” for this purpose; however, court cases have found 85% to be “substantially all.”

  1. The multiemployer plan must be a building and construction industry plan.

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Another Washington Lien Law Resource From Practical Law

Practical Law, a division of Thomson Reuters and an affiliate of Westlaw, now offers another lien law resource for Washington practitioners.  With contributions from Stoel Rives LLP’s Seattle-based construction attorneys Karl Oles, Bart Reed, and Loni Hinton, this new lien resource includes a “flowchart” of important concepts and timelines associated with preserving, perfecting, enforcing, and releasing construction lien claims in Washington.

This resource provides a high-level overview of the significant steps that need to be followed to serve pre-claim notices and to prepare and file an actual construction lien claim in Washington.  This latest offering from Practical Law is designed to give the legal practitioner a quick and convenient resource to general principles regarding Washington construction liens in a concise, user-friendly format.

A complimentary copy of the Washington construction lien flowchart published by Practical Law can be accessed here.

Landlords Take Notice – New Sacramento Rent Control To Take Effect September 12

On August 13, 2019, the Sacramento City Council voted to adopt by a 7-1 margin a rent control and tenant protection measure known as the Sacramento Tenant Protection Act (the “Act”). Citing increasing rent statistics, an influx of in-migration and a shortage of rental units, the Act sets out to provide tenants with protections against rent gouging and unwarranted evictions by landlords, while providing landlords an opportunity to receive a fair and reasonable rate of return on their investment.

The Act, which goes into effect on September 12, 2019, affects all buildings or structures built on or before February 1, 1995 and offered for use or occupancy for residential purposes under a rental agreement of at least thirty (30) days, unless specifically exempted under the Act. Notable exemptions under the Act include single family dwellings, condominiums and stock cooperatives. Key provisions of the Act include the following:

  • In any given twelve (12)-month period, a landlord cannot increase the rent by more than six percent (6%) plus the percentage of the annual increase in the cost of living adjustment as promulgated by the U.S. Department of Labor, Bureau of Labor Statistics, which collectively cannot exceed ten percent (10%). For example, considering that the cost of living adjustment percentage increase from 2019 over 2018 is two and seven-tenths percent (2.7%), a landlord cannot increase the rent by more than eight and seven-tenths percent (8.7%) for this upcoming year. This limitation on rent cannot be waived by a tenant. However, a landlord can establish a new base rent when a new lease is executed, which new base rent will then be subject to the limitations on increases under the Act.
  • A landlord may petition to raise the rent in excess of the limitation described above if the landlord can demonstrate by a “preponderance of the evidence” (more likely than not) that the increase in the rent is necessary to provide the landlord with a fair rate of return. Such showing must be made by the landlord to a hearing examiner at a hearing. The hearing examiner is an official appointed by the city council, and all decisions made by the hearing examiner are final unless the landlord timely seeks judicial review. For a list of factors that the hearing examiner can or cannot consider in his/her determination, the list can be found here.
  • All landlords subject to the Act will be required to pay a new program fee, which amount is to be determined by the city council on an annual basis. Such collected fees will be used to implement and enforce the Act.
  • Once a tenant has resided in a rental unit for more than twelve (12) months, a landlord cannot terminate the rental agreement, evict a tenant or threaten to terminate the rental agreement, unless: (a) the tenant fails to pay rent (after receipt of a notice to quit or pay rent); (b) there is a breach of the rental agreement beyond a reasonable notice/cure period; (c) the tenant engages in criminal activity in violation of law; or (d) the tenant fails to give landlord access to the unit as required under applicable law.
  • However, upon one hundred twenty (120) days’ advance notice, a landlord may recover possession of a rental unit if: (a) necessary and substantial repairs are necessary to bring the rental unit into compliance with applicable law, and the tenant is given an opportunity to reoccupy the unit or occupy a comparable unit owned by the landlord; (b) the landlord or an immediate family member of the landlord moves into the unit as its primary residence for a period of at least twelve (12) months; or (c) the landlord withdraws the unit and all rental units in the building from the rental market for at least twelve (12) months. The landlord must also satisfy certain notice requirements.
  • A tenant may file a petition with the hearing examiner for a landlord’s violation of any provision of the Act. The landlord’s failure to comply with any provision of this Act is an affirmative defense in an unlawful detainer action or any other action brought by the landlord to recover possession of the rental unit. Any person who violates the Act may also be subject to criminal sanctions, civil actions and administrative penalties.

The Act has a sunset date of December 31, 2024. For the entire language of the Act, please click here.

Certifying Subcontractor Claims Under the Contract Disputes Act

When a dispute arises over payment between a contractor and the agency overseeing a Federal government project, the contractor typically submits a request for a reasonable adjustment to the contract price. If the agency disagrees with the adjustment, the contractor may file a formal claim under the Contract Disputes Act (“CDA”), which requires the contractor to certify to the contracting officer all claims submitted in excess of $100,000. In my latest article for the Daily Journal of Commerce, I look at several considerations for a prime contractor in filing a claim when it is made on behalf of a subcontractor that is not willing to certify it. Read the full article here.

Originally published as “OP-ED: Certifying subcontractor claims under the Contract Disputes Act” by the Daily Journal of Commerce, July 18, 2019.

I’m a Developer and My Contractor Refuses to Perform Work Without a Change Order. What Are My Options?

Over the duration of a construction project, changes to its scope are inevitable, and the easiest way to address such changes, and their potential impacts on scheduling and contract price, is for the project owner and the contractor to mutually execute a change order prior to implementing a change. However, for a variety of reasons, disputes will arise over the need for a change order or a contractor will refuse to proceed with the changed work. In an article for the Daily Journal of Commerce, I look at options the owner has under different circumstances – when the parties agree that certain work is a change but dispute the associated cost or time or if the parties cannot come to an agreement that something is a change. Read the full article here.

Originally published as “OP-ED: When a contractor refuses to perform work without a change order” by the Daily Journal of Commerce, June 20, 2019.

Legal Insights for Canadian Product Manufacturers and Suppliers Involved in Cross-border Construction Projects

Seattle and Bellevue’s strong real estate markets present a plethora of lucrative business opportunities for Canadian product manufacturers and suppliers.  Because Washington-based developers and contractors are perhaps more litigious than their Canadian counterparts,  Canadian-based product manufacturers and suppliers should consider a full spectrum of risk management and mitigation strategies before engaging in cross-border business activities. In her latest article for the Journal of Commerce of Canada, Loni L. Hinton provides a high-level checklist of tools for such manufacturers and suppliers to consider before embarking on their first project in Washington. Read the full article here.

Originally published as “Industry Voices Op-Ed: What Canadian-based product manufacturers and suppliers in cross-border construction projects need to know” by Journal of Commerce (of Canada), June 7, 2019.

Upcoming Seminar on Public Works

My partner Colm Nelson and I are on the panel of a seminar on June 5 sponsored by the Seminar Group.  The program is called “Bidding Public Works & Construction Contracts.”  There is still time to sign up at the Seminar Group website.  Colm is talking about insurance.  For my presentation, I took the opportunity to update Chapter 8 in our Stoel Rives treatise on Construction Liens in Washington.  That’s the chapter about “Lien-Like Remedies on Public Projects” and it covers bonds, retainage, and prompt payment requirements.  You can get the updated chapter by going to the seminar, or you can download the whole book by going to the Stoel Rives web page, clicking on “Legal Insights” at the top, and then searching for books with the key word “lien”.

Five Reasons to Get the Contract Signed Before Construction Starts

In the Pacific Northwest, Mother Nature can play a large part in whether or not a construction project will be completed on time and on budget. The importance to both owners and contractors of starting a construction project in order to take advantage of a window of good weather or other factors can make finalizing a contract secondary in importance to commencing work. In my latest article for the Daily Journal of Commerce, I look at five reasons why it is prudent to have an executed contract before work starts. Read the full article here.

Originally published as “Five reasons to get a contract signed before construction starts” on April 18, 2019, by the Daily Journal of Commerce.

Construction Defect Litigation Seminar

On May 16, 2019, I will chair The Seminar Group’s Construction Defect Litigation seminar in Portland, Oregon.  The seminar will include a panel of knowledgeable lawyers with broad experience litigating construction defect and related insurance disputes.  Among those presenting will be two of my colleagues Lou Ferreira and Andrew GibsonClick here to learn more and to register online.

 

What International Developers Needs to Know About Condo Liability in Washington

An international developer considering condominium projects in Washington should be abreast of the potential risks and liabilities arising from the Washington Condominium Act (“WCA”), which provides a broad array of warranty protections for condominium purchasers. The WCA has given rise to a significant increase in the number of construction defect lawsuits — a deterrent to both domestic and international developers in pursuing condominium projects, which has led many developers to construct apartments. In an article for the Journal of Commerce of Canada, Loni L. Hinton addresses several points that international developers should consider early in the development of a condominium project in Washington. Read the full article here.

Originally published as “Industry Voices Op-Ed: Risk mitigation advice for Washington condominium developments” by Journal of Commerce (of Canada), March 18, 2019.

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