The Roach Hotel of Government Service Contracts: Pension Tail Withdrawal Liabilities for Unionized Workers

“I give you bitter pills, in a sugar coating. The pills are harmless - the poison's in the sugar”

― James St. James

I have previously blogged about the pension tail withdrawal liability issue which impacts certain unionized service government contracts. Briefly, service contractors taking over work formerly done by others usually end up being forced into recognizing the incumbent’s union and negotiating their own collective bargaining agreement (“CBA”) under section 4(c) of the Service Contract Act (“SCA”).  In doing so, they enter into CBAs which may necessitate supplemental contributions to a union sponsored pension plan which is underfunded. The problem is that some of these plans have insufficient assets to pay the promised retirement benefits, To shore up the plan, in addition to making  health and welfare payments, the new replacement contractors must make supplemental contributions to the plan to bring it slowly back to solvency, and thus they protect the Pension Benefit Guarantee Corporation (“PBGC”) from liability to the workers for the plan insolvency. See https://www.awrcounsel.com/blog/2024/10/15/heed-the-lesson-service-contractor-misses-an-opportunity-to-fix-a-problem-during-collective-bargaining?rq=tail%20 and https://www.awrcounsel.com/blog/2018/2/19/the-government-contractor-pension-withdrawal-liability-the-sca-trap?rq=Call%20Henry.

Now here is the rub. If those replacement contractors lose their government contract on re-competition, or DOGE decides that those contract services are no longer necessary, or for whatever reason their contract ends (be it termination for convenience or default, or just the natural end of work) then the union then will serve them with notice that they have a true-up obligation to make good on their share of the plan deficit. And this true-up payment obligation, at least ordinarily without some kind of special CBA language, is not deemed to be a compensable SCA fringe benefit which would allow the contractor to recover the cost from the Government. Thus, the contractor become a bag holder for the plan insolvency, which usually accrued before the new contractor’s time, and which they had already been paying additional premiums to resolve. Even though they have finished performing the Government contract, and have no customer to bill, they are still obligated to make additional payments into the pension plan to cover their share of the plan deficit.   

While there may be a CBA workaround to this problem if you implement it in advance, the easier path is to not get enmeshed in these kinds of contracts in the first place. Spot this issue when you are thinking of submitting a bid, and then you should take a pass. No bid is the best bid in this situation, Don’t just walk away from -- run from -- these kinds of procurement “opportunities.”

My first born son was asked to be a safety patrol officer in elementary school. He would have to spend his playground and bus stop time policing the conduct of others and trying to resolve disputes. He declined the prestigious invite. He told me that “other people’s problems are other people’s problem.” He didn’t want to step into that mess. Contractors have to learn the same lesson when it comes to these  kinds of contracts. Pension tail liability encumbered contracts come with a poison pill. They are just not worth the trouble.