By: Alexander A. Miuccio Thomas H. Welby Published: October 2008

Corporate Principal Personally Liable for Fringe Benefit Contributions

Union contracts normally require signatory employers to make periodic fringe benefit contributions to employee benefit funds. The employer’s obligations to the funds are enforceable under the federal Employee Retirement Income Security Act, commonly called “ERISA.” If an employer fails to make contributions to the funds, as required under a collective bargaining agreement, it is liable to the funds under ERISA and for breach of the union contract.

Under federal law, an individual cannot be held personally liable for a corporation’s obligation to make contributions solely because of his role as an officer, shareholder or manager of the corporation.

Federal courts, however, recognize special circumstances that justify the imposition of personal liability for a corporation’s ERISA obligations. Last month, a federal court in New York recognized one of these special circumstances in holding the principal operating officer personally liable for his corporation’s failure to pay fringe benefit contributions.

Background

In the case of New York District Council of Carpenters Pension Fund v. Quantum Contracting Corp., a contractor entered into a collective bargaining agreement (“CBA”) that required it to make periodic fringe benefit contributions to union benefit funds on behalf of its employees. Under the CBA, the contractor was required to make contributions to the Funds for each hour that each of the contractor’s employees performed work covered under the CBA. In 2004, representatives of the Funds conducted an audit, authorized under the CBA, and determined that the contractor was delinquent in its benefit contributions in the amount of $155,591.85. Since the contractor had failed to pay the contributions owed, the benefit funds commenced a lawsuit against the contractor in federal court. The court action resulted in a $214,061.38 judgment against the contractor. As authorized by the CBA and ERISA, the judgment included the principal amount due, 10 percent interest, attorneys’ fees and costs.

In 2005 the Funds again retained an auditor to ascertain whether the contractor was in arrears with respect to benefit contributions that became due since the prior audit. This time, the contractor did not comply with the Funds’ request for records. In reviewing the available documentation, the auditor determined that the contractor was paying some of its employees from a previously concealed bank account. The Funds’ auditor also determined that the contractor had failed to pay fringe benefits on the employee payments made from the previously concealed account.

Upon conclusion of the second audit, the Funds commenced a second action against the contractor, this time including its President as an additional named defendant.

Decision

In addressing the personal liability of the corporate principal, the court first noted than an individual cannot be held liable for a corporation’s obligations under ERISA solely by virtue of his roll as officer, shareholder, or manager. However, the court also noted that special circumstances may warrant the imposition of personal liability for a corporation’s obligations under the union contract and ERISA. In relying upon established case law, the court noted that fraud is one of the special circumstances where courts will impose personal liability.

In reviewing the acts of the contractor’s corporate principal, the court found that the President was principally responsible for the company’s daily operations. He had knowingly paid his employees off the books, signed checks from a concealed bank account, and submitted false documentation and shop steward reports to the Funds that omitted employees covered under the CBA. Based on these findings, the court held that the corporate principal was personally involved in a scheme to defraud the Funds, thereby causing the contractor to violate its obligations under the CBA. Since the company’s President participated in the scheme to defraud the Funds, he was personally liable.

Comment

The primary advantage of the use of the corporate form of conducting business is the protection of officers, directors and shareholders from personal liability for corporate debts. This case shows, however, that a principal officer may not be shielded from personal liability where he engages in the company’s wrongdoing relating to corporate obligations. It is only fair that the individuals involved in a conspiracy to defraud the funds should be held personally liable for the corporation’s debt to the funds.

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