BUSINESS LAW 5: ERISA holds employers liable for the promises of pensions.

Private employers are not required to offer pension plans, but if they do, ERISA requires that the pension plans meet certain standards and retain certain protections. That way, if a worker has been promised a defined pension benefit upon retirement—and if he has fulfilled whatever conditions are required to obtain a vested benefit—he actually will receive it.  Before ERISA, lack of oversight and legal standards often left pension plans without enough money, and employees who counted on those funds with nothing for retirement.

Subchapter III of ERISA requires PBGC to charge participating companies premiums so that if a pension plan fails, PBGC can provide for the timely and uninterrupted payment of pension benefits to participants and beneficiaries.

In this case, the company produced auto parts before going out of business in 2009. Since 1964 it had offered pension benefits to some of its employees, and by the time production was stopped, its pension obligation was underfunded by millions of dollars. To satisfy that liability, PBGC looked to assets that might be treated as the company’s—specifically, a trust started by its founder and assets purchased from the company by the founder’s son in 2009.

When an employer terminates its pension plan, ERISA liability does not end with the company that actually promised pension payments. Instead, a trade or business under common control of the employer is treated as part of the employer and so incurs liability under ERISA.

The Trust assumes but does not concede that it and the Company were under common control. The trust contends, however, that it is not a trade or business under ERISA.

ERISA does not define trades or businesses, and neither the Supreme Court nor this court have defined the phrase in the context of ERISA, but courts, instead, have concluded that the entity that leases property to its commonly controlled company is categorically a trade or business for ERISA purposes.

Structurally, ERISA holds employers liable for the promises of pensions that they make to employees. After a PBGC determination that a pension plan has insufficient assets to meet its liabilities, ERISA holds the plan sponsor liable. The statute then guarantees that a liable sponsor cannot evade its responsibility through tactics such as corporate reorganization or sales to avoid liability for an impending plan termination.

Because there is a body of federal common law applying successor liability in employment and labor cases, it is appropriate to apply that law here, too.

The court held that it was appropriate to apply the federal common law of successor liability, rather than the state’s common law. It vacated the district court’s order of dismissal and remanded for further proceedings.

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