Protecting Fringe Benefit Funds From Fraud and Other Abuse in the Collection of Contributions

James Stenberg, Esq

In this era of heightened scrutiny, fund fiduciaries must pay close attention to the policies and procedures they not only implement but also enforce when it comes to collecting delinquent fringe benefit contributions.While we all understand that the collection of fringe benefit contributions are an integral part of the fiduciary duty of trustees, we must also be cognizant of the heightened scrutiny placed upon trustees by the U.S. Department of Labor.

In addition thereto, the DOL has taken a serious approach to its review of plan 5500 Form filings. In fact, the DOL has rejected a 5500 filing based upon its review of an auditor’s workpapers. To evaluate the level of not only preparedness but implementation that a Board of Trustees should undertake to ensure the proper collection of fringe benefit contributions, it is important to recognize and evaluate those situations in which a contributing employer has failed to satisfy its collectively bargained responsibility of making fringe benefit contributions. The first example of such a situation – and perhaps the most difficult to prove – is where an employer has defrauded the plans. “Fraud” is defined as an “intentional perversion of the truth or a misrepresentation of fact” and while an individual may be held personally responsible under ERISA for fraud, it is extremely difficult to prove.

In the civil case of New York City District Council of Carpenters Pension Fund v. On Par Contracting Corp., the plaintiff trust funds were ultimately awarded a judgment in the amount of $14.7 million against On Par Contracting Corp. and its owner. This case started like most collection cases often do. Initially, a payment plan was established with the defendants (prior to the commencement of litigation) to collect $750,000.00 in contributions estimated to be owing for the period of October 1, 2003 through July 25, 2005. As part of this payment plan, the plaintiff trust funds reserved their right to conduct a payroll audit at a future date. When that audit was ultimately conducted, the plaintiff trust funds determined that they were actually owed approximately $9.5 million in delinquent fringe benefit contributions for the period audited. During the pending civil litigation, the defendants argued that the plaintiff trust funds were not entitled to the audit and that the figure was incorrect. This argument was unsuccessful and for the company’s owner it lead to an indictment.

In 2006, the United States Attorneys’ Office for the Southern District of New York indicted the owner on a number of charges. Of particular interest to the trust fund community is Count Two of the indictment which states: “He participated in a scheme whereby he paid cash to workers employed by On Par, and violated the terms of the collective bargaining agreement between On Par and the District Council of New York City and Vicinity of the United Brotherhood of Carpenters and Joiners, by among other things, not making contributions to the District Council benefit funds.”

In this case, it appears that the audit conducted by the plaintiff trust funds was an important element of the government’s indictment since the audit identified the actual amount owed in fringe benefit contributions. So how can trustees protect the plans, along with the assets and participants of pension and welfare funds? To begin with, it is important for all parties to recognize the parallel responsibilities placed upon trustees and contributing employers under ERISA. Statutorily, ERISA states that every employer who is obligated to make contributions to a multiemployer plan under the terms of plan or under the terms of a collective bargaining agreement “shall make such contributions in accordance with the terms and conditions of such plan or such agreement.” From the trustees perspective, ERISA expects a fiduciary to follow the “prudent man standard.” Particularly, a fiduciary is to discharge his duties with respect to a plan “solely in the interest of the participants and beneficiaries and . . . with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use.”

So while the employer is statutorily responsible for making contributions and the trustees – as fiduciaries – are responsibly for following the prudent man standard, how are trustees to satisfy this requirement and ensure that employers are making these contribution payments and not acting in a fraudulent or dishonest manner in reporting and paying contributions? The answer is quite clear – payroll audits.

Payroll audits should be part of an established audit and collection policy statement that memorializes the following goals of the trustees: (1) the time period in which all contributing employers are expected to be audited; (2) the procedures to be used to request and schedule audits; (3) the procedures to be used to refer matters to legal counsel where a contributing employer has refused to schedule an audit; (4) the rate of interest to be charged for delinquent contributions; (5) the procedures to be used to report an audit deficiency to an employer and the time frame for payment thereof; (6) the procedures to be used to refer scheduled deficiencies to legal counsel for commencement of an ERISA collection action; and (7) the plan’s guidelines for the settlement of an audit deficiency case. In some instances, trustees have decided to establish dedicated committees to collection matters.

These subcommittees can serve a valuable function by providing fund counsel with the ability to converse with the subcommittee on a monthly basis to review pending litigation and proposed settlements. Conversely, where fund counsel must wait for regularly scheduled trustees’ meetings (often quarterly meetings) a great deal of time may pass in situations where otherwise prompt resolution with the assistance of the court (in many instances) could be obtained. Therefore, subcommittees can meet more frequently and provide fund counsel with the necessary authorization that can lead to quicker settlements and much more cost effective litigation.

With regard to the settlement of an audit deficiency case, neither principal nor interest should ever be negotiated. In fact, the DOL has referenced on occasion that by not collecting interest, a plan has engaged in a prohibited transaction in the form of a non-interest loan to a contributing employer. Nevertheless, while the goal must be to collect principal and interest, trustees and the plan’s legal counsel should apply a cost/benefit analysis to determine whether a settlement which does not include attorneys’ fees, liquidated damages and/or costs are in the best interest of the plan and its participants. Particularly, we suggest in this article that expending exorbitant attorneys’ fees to continue a litigation that is fighting over attorneys’ fees and liquidated damages may not be worthwhile, especially if the solvency of the contributing employer may be compromised. Therefore, consideration to this important factor should be taken into consideration when a plan is disputing collecting attorneys’ fees and liquidated damages.

James Steniberg is a partner in the law firm of Brady McGuire & Steinberg, P.C. located in Tarrytown, New York where he represents labor unions along with multi-employer annuity, pension, welfare and training funds. He can be reached via telephone at (914) 478-4293 or via email at This email address is being protected from spambots. You need JavaScript enabled to view it.