The Surety and Unions
August 8, 2023
In this Surety Today blog post we will explore the Surety and Unions. In many circumstances the surety will provide bonds for a principal that employees various union members and is a party to a Collective Bargaining Agreement (“CBA”), or the principal may not be a “union shop,” but has signed a Project Labor Agreement (“PLA”), so that it can participate on a project that has been designated as a union project. In these circumstances, the surety may find itself faced with claims from unions for dues, wages, or from union benefit funds for contributions owed for retirement funds, vacation funds, PAC funds, education funds, etc. Sometimes the surety will issue a bond to the union directly just to secure the union and its benefit funds for a principal. So, in this post we will spend some time talking about unions and the various benefit funds, the law with respect to union claims, and some potential defenses.
I. FRINGE BENEFIT BONDS
The fringe benefit bond is issued specifically and expressly to protect the union trusts and benefit funds like pensions, health and welfare, education, political action committee fund, apprenticeship programs, etc. These bonds are sometimes referred to as “Union Bonds,” “Health and Welfare Bonds,” “Wage and Welfare Bonds” or “Collective Bargaining Bonds.” Under these bonds the union and its various benefit funds are the obligees and the bonded principal is the employer who is obligated under a CBA to make various contributions to the union and such funds. The surety is secondarily liable under such bonds, with liability typically arising when the principal is and is declared to be in default under the terms of the CBA. Fringe benefit bonds can have a specific termination period or may be continuous with termination tied to the CBA. With a continuous bond, as long as the principal is a party to the CBA and the CBA is in force, the fringe benefit bond will remain in place. Some fringe benefit bonds may have a cancellation provision which the surety can avail itself of if it no longer wishes to bond the principal. Of course, cancellation is not typically effective as to liability that has already accrued while the bond was in place.
As with any bond, it is wise to RTFB – Read The Friendly Bond. There is very little uniformity in these types of bonds and while each may have some similar provisions, each also may have unique provisions that might not be favorable to the surety. For example, in one fringe benefit bond there was a $10,000 penal sum limit. But upon closer examination, the penal limit was for each covered employee! So, that bond form gave potentially large exposure depending on how many covered employees the principal employed.
Fringe benefit bonds differ from payment bonds in that a payment bond is issued for one project and is project specific; it remains in place for that project essentially until limitations have run. A fringe benefit bond covers all of the principal’s employees that are subject to the CBA for a designated period of time, regardless of what project they are working on. Payment bonds also are generally limited as to the scope of damages, while fringe benefit bonds typically allow recovery of damages set forth in the CBA, which can include attorney’s fees, liquidated damages, interest, etc.
Union fringe benefit trust funds typically operate by requiring the principal to provide monthly reports detailing the hours worked by each covered union employee and then to remit payment of the fringe benefit deductions to the trust funds monthly. Periodically, sometimes quarterly, the trusts will audit the principal to verify the self-reporting and payments required. A fringe benefit bond for a Maryland union benefits fund provides that if the required payments are not made when due and/or the required reports are not timely filed, then the full penal sum of the bond ($10,000 in this case) was to be paid to the funds upon certification by the union. If the principal subsequently paid the amounts owed or provided the reports the union would refund the remaining amount less liquidated damages, attorneys’ fees, accountant fees and all other costs and expenses of the union. This bond is essentially a forfeiture bond, particularly if the principal has gone out of business and won’t be paying the amounts owed or filing the reports. The question remains under this bond form whether a court would allow a surety to seek a refund if it could establish the proper lesser amounts owed.
While the scope of exposure under a fringe benefit bond may be somewhat broader, the exposure is generally ameliorated by typically smaller penal sum limits, which are generally in the low tens of thousands. In one bond form I reviewed the penal sum of the fringe benefit bond was determined by the number of employees – 1-4 employees $5,000, 5-8 employees $10,000 and 9 or more $25,000. Always be sure to read the bond.
II. PAYMENT BONDS
The typical payment bond provides that the surety and principal bind themselves to pay sums that are justly due for labor, materials, and equipment furnished for use in the performance of the construction contract. In some jurisdictions, the Little Miller Act or other statutory requirement may specifically require payment of union dues and fringe benefits under the payment bond. Under New York’s Little Miller Act the phrase “moneys due to persons furnishing labor to the contractor or his subcontractors” as used in the statute is defined to include:
all sums payable to or on behalf of persons furnishing labor to the contractor or his subcontractors, for wages, health, welfare, non-occupational disability, retirement, vacation benefits, holiday pay, life insurance or other benefits, payment of which is required pursuant to the labor law or by the contract in connection with which the bond is furnished or by a collective bargaining agreement between organized labor and the contractor or subcontractor, and which are computed upon labor performed in the prosecution of the contract. A trustee or other person authorized to collect such payments shall have the right to sue on the payment bond in his own name and subject to the same conditions as if he were the person performing the labor upon which such sums are computed.
N.Y. State Fin. Law § 137(5)(b) (McKinney).
Because of the requirement that a payment bond surety satisfy claims from laborers for wages, the majority of the courts have held that the surety is generally obligated to pay claims for union fringe benefits and that the authorized representative, usually a trustee, of the fringe benefit funds, is entitled to assert such claims on behalf of the union employees. See U.S. for Benefit and on Behalf of Sherman v. Carter, 353 U.S. 210, 77 S. Ct. 793, 1 L. Ed. 2d 776 (1957)(holding that fringe fund trustees stood in the shoes of employees and thus were entitled to recover the sums withheld from their wages as union benefits); Forsberg v. Bovis Lend Lease, Inc., 2008 UT App 146, 184 P.3d 610 (Utah Ct. App. 2008)(allowing recovery under a payment bond for unpaid fringe benefits owed to union-related trusts as constituting payment for “labor” under the applicable payment bond statute); Hartford Fire Ins. Co. v. Trustees of Const. Industry, 125 Nev. 149, 208 P.3d 884 (2009) (allowing recovery of unpaid fringe benefits because the trust “stood in the shoes” of the workers); Fidelity and Deposit Co. of Maryland v. Sheet Metal Workers’ Intern. Ass’n Local Union No. 20, 7 N.E.3d 1024 (Ind. Ct. App. 2014) (surety liable for unpaid union fringe benefits owed to employees of a second-tier subcontractor); United States f/u/b/o/ Vealey v. Suffolk Construction Co., 1998 WL 241628 (S.D.N.Y. 1998) (union benefit fund was a proper party to sue on a payment bond to recover benefits owing to the subcontractor’s union laborers); Operating Engineers Health and Welfare Trust Fund v. United States, 135 F.3d 671 (9th Cir. 1998) (union was a proper claimant against the payment bond for unpaid benefits); Alibrandi Bldg. Systems, Inc. v. Wm. C. Pahl Const. Co., Inc., 187 A.D.2d 957, 590 N.Y.S.2d 370 (4th Dep’t 1992) (union had a claim under the State Finance Law for union dues plus interest against a payment bond); Trustees, Florida West Coast Trowel Trades Pension Fund v. Quality Concrete Co., Inc., 385 So. 2d 1163 (Fla. 2d DCA 1980); Indiana Carpenters Cent. and Western Indiana Pension Fund v. Seaboard Sur. Co., 601 N.E.2d 352 (Ind. Ct. App. 1992); Dobbs v. Knudson, Inc., 292 N.W.2d 692 (Iowa 1980); 3 Bruner & O’Connor Construction Law § 8:165 Payment bonds—Class of covered items—Labor; 11A Couch on Ins. § 165:20 Laborers; employees—Employee pension, benefit, and similar fund trustees.
Courts holding the surety liable under a payment bond for payment of fringe benefits view the concept of “wages” for a laborer broadly; including direct wages and indirect wages. Under a broad view, fringe benefits are seen as being part of the bargained for “complete compensation” for work performed by a laborer. These courts point to the fact that in the CBA or PLA, the principal has agreed that in exchange for work performed by a union employee the various amounts for the wages and funds will be paid.
In United States, ex rel. Sherman v. Carter, supra., the bonded principal, a general contractor, agreed in the CBA to pay 7 ½ cents per hour of labor to the union health and welfare fund for its union laborers. The principal failed to pay the contribution and the trustee of the fund sued the surety. The surety argued that the contributions to the health and welfare fund were different than wages. The surety contended that the laborers were paid their wages due in their paychecks and that the fund contribution was paid directly to the fund and not the laborer and thus such contributions were not wages.
The United States Supreme Court rejected this argument, holding that wages for purposes of the Miller Act was not limited to just the pay check. The Court observed that the unpaid contributions were part of the consideration the principal agreed to pay for the services of the laborers. Thus, the employees were not paid in full for their work until the fund contributions were paid.
Addressing the right of a trustee of the fund to sue on the bond, the Court noted that the trustees are claiming recovery for the sole benefit of the beneficiaries of the fund, and those beneficiaries are the very ones who have performed the labor. The contributions are the means by which the fund is maintained for the benefit of the employees and of other construction workers. The Court stated “[f]or purposes of the Miller Act, these contributions are in substance as much ‘justly due’ to the employees who have earned them as are the wages payable directly to them in cash.”
While the majority of courts have held the surety liable under the payment bond for fringe benefits, some courts have held that a surety is not liable under its payment bond for such benefit claims. In Operating Engineers Local 324 Health Care Plan v. Sentry Ins., 654 F. Supp. 191 (E.D. Mich. 1985), the trustees of fringe benefit trust funds asserted a claim against a payment bond. The surety argued that the Michigan Little Miller Act should be strictly construed and that under such construction the trustees do not have standing because they are not “claimants,” as defined by the statute, and cannot obtain the relief sought because fringe benefits are not included within the provisions of the statute. The Court agreed that the Little Miller Act was required to be strictly construed and that the trustees of the employee benefit funds were not claimants within the meaning of the statute and did not have standing to bring suit against the surety. The Court noted that the statute “did not say that a claimant or its representatives or its assignees may sue and simply identifies a claimant as one who furnishes labor or material.” Similarly, the Court concluded that the Michigan Legislature, through silence, has clearly manifested its legislative intent to exclude fringe benefits from wages. Thus, the Court concluded that the term wages, as set forth in the statute, is limited to the literal definition of that word. The Court noted that there was nothing within any case law or legislative history which would suggest that “wages” was meant to be construed so broadly as to include fringe benefits. The Court stated, “[i]t is presumed that, if the Legislature had intended to include ‘fringe benefits’ within [the statute], it could have said so. It is obvious that the Legislature did not.” But see Trustees for Michigan Laborers’ Health Care Fund v. Warranty Builders, Inc., 921 F. Supp. 471, 479 (E.D. Mich. 1996), aff’d sub nom. Trustees for Michigan Laborers’ Health Care Fund v. Seaboard Sur. Co., 137 F.3d 427 (6th Cir. 1998).
The Court in Trustees Of Sheet Metal Workers’ Local Union No. 17 v. U.S. Fire Ins. Co., 73 Mass. App. Ct. 1117, 899 N.E.2d 919 (2009), held that the provisions of the payment bond extend bond coverage only to those providers of labor and/or material who qualify as defined claimants. The bond expressly defined a “claimant” as “one having a direct contract with the principal for labor, material, or both …” and permits only “Claimant[s] as herein defined” to sue on the bond. Based on the language of the bond, the Court held that the trustees had no rights under the bond or under controlling case law to sue on the bond.
III. UNIONS AND FRINGE BENEFIT FUNDS ARE SUBJECT TO THE SAME DEFENSES AS ANY CLAIMANT
A. The Union/Fringe Benefit Claimant Must Fall Within the Statutory Protection
In J. W. Bateson Co., Inc. v. U.S. ex rel. Bd. of Trustees of Nat. Automatic Sprinkler Industry Pension Fund, 434 U.S. 586, 98 S. Ct. 873, 55 L. Ed. 2d 50 (1978), the general contractor entered into a contract with the United States for construction of an addition to a hospital and pursuant to the Miller Act provided a payment bond. A sub-subcontractor, the sprinkler installer, had entered into a CBA with the Sprinkler Fitters Union and was obligated under the agreement to pay over amounts withheld from employees’ wages for union dues and vacation savings, and to contribute to the union’s welfare, pension, and educational trust funds. When the sub-sub failed to make the payments the union and trustees of the funds filed suit against the general contractor and its surety.
Under the Miller Act, the claimant must have a direct contract with the general contractor or a subcontractor. Accordingly, the Supreme Court held that employees of a sub-subcontractor were not entitled to recover under the prime contractor’s Miller Act payment bond for failure of the sub-subcontractor to turn over fringe benefit funds and union dues which had been withheld from the union employees, since such employees did not have a contractual relationship with prime contractor or a subcontractor.
B. The Union/Fringe Benefit Claimant Must Comply With Notice Requirements
In Trustees of Heating, Piping & Refrigeration Pension Fund v. Milestone Const. Servs., Inc., 991 F. Supp. 2d 713 (D. Md. 2014), the general contractor entered into three contracts with the National Institute of Standards and Technology to perform construction work on three buildings. Pursuant to the Miller Act, the general contractor provided payment and performance bonds. The general contractor then entered into a subcontract with a mechanical contractor to perform pipefitting and related construction work. The subcontractor operated a union shop and had entered into a CBA with the Steamfitters Union in which it agreed to make contributions for each hour worked by a pipefitter. When the subcontractor failed to make the required contributions, the Steamfitters union and its pension fund, medical fund, training fund, promotion fund, communications and productivity fund, and the retirement savings fund filed suit against the surety. The surety contended that it was entitled to summary judgment because the union and its various funds failed to give proper notice under the Miller Act. The Act requires a claimant to give written notice to the contractor within 90 days from the date on which the person did or performed the last of the labor or furnished or supplied the last of the material for which the claim is made. The notice must state with substantial accuracy the amount claimed. The Court noted that the Miller Act requires proper and timely notice as a condition precedent of the right to maintain suit on a payment bond and while the Miller Act as a whole is to be liberally construed, the notice requirements are designed to protect the general contractor and the requirements concerning the notice are to be strictly applied. In this case, the notice provided by the union and its funds failed to state any amount owed in violation of the requirement of the Miller Act. Accordingly, the Court granted summary judgment in favor of the surety because the notice served by the union and funds failed to state the amount claimed with substantial accuracy.
C. Union/Fringe Benefit Claimants Must Comply with Limitations
In Minnesota Laborers Health and Welfare Fund v. Granite RE, Inc., 826 N.W.2d 210 (Minn. Ct. App. 2012), the plaintiffs were union fringe benefit funds that collected funds on behalf of union employees from employers bound by various collective bargaining agreements. The principal under the bond was bound by such a collective bargaining agreement and allegedly failed to pay fringe benefit obligations for work performed by employees on the bonded project. The trial court dismissed the case filed by the funds because the suit was barred by a one year limitation provision in the bond. On appeal, the Minnesota Court of Appeals reversed judgment for the surety and remanded the case for further proceedings on other grounds.
If you have any questions regarding the issues addressed in this blog post please contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group.