decided: August 11, 1978.
EDMUND KNAUSS, APPELLANT
PATRICK E. GORMAN, WILLARD J. CARLSON, R. EMMETT KELLY, IRVING STERN, FRANK CIMINO, FRED CLAVIO, RICHARD A. HEPP, DARRELL V. STIFFLER, JOHN E. BOYD, MONROE M. ROCHESTER AND ORAL MOODY, TRUSTEES SOLELY IN THEIR OFFICIAL CAPACITY, AND AMALGAMATED MEAT CUTTERS AND BUTCHER WORKMAN'S UNION AND INDUSTRY PENSION FUND
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA C.A. No. 76-456
Before Adams, Van Dusen and Rosenn, Circuit Judges.
Opinion OF THE COURT
We are confronted in this case with two questions regarding employee-union joint pension funds established under the Taft-Hartley Act. First, it is necessary to determine whether certain alleged deficiencies in a pension plan represent "structural defects" over which a federal court may exercise supervision. Second, we must adjudge the circumstances under which a pension plan may divest beneficiaries of pension eligibility without violating the Taft-Hartley requirement that plans be operated for the "sole and exclusive benefit" of employees.
Edmund Knauss, the appellant, is a retired butcher. Born in 1908, he began work in 1936 for Oswald & Hess Co., a Pittsburgh meat packing firm. His employment with Oswald & Hess continued until the firm's bankruptcy in 1962.
In 1957, Local 424 of the Amalgamated Meat Cutters, in cooperation with Oswald & Hess and other meat packers, instituted a multi-employer pension fund pursuant to § 302(c)(5) of the Taft-Hartley Act.*fn1 Under the terms of the 1957 Fund, participating employers contributed a stipulated amount per year for each employee to fund pension benefits. As an employee of Oswald & Hess, Knauss became a member of the plan, and from 1957 to 1962 payments were made to the pension fund on his behalf.
The 1957 Fund provided that benefits were to be granted on retirement at age 65 to an employee who had worked a total of twenty or more uninterrupted years for any employer contributing to the plan.*fn2 This twenty year requisite could be fulfilled (a) by years worked for an employer prior to the commencement of employer contributions to the plan, denominated "past service credits," and (b) by employment during which contributions were made, denominated "future service credits." Thus, a portion of the benefits to workers employed at the commencement of the plan may be funded out of payments other than those made on their behalf. However, a break in covered employment of more than one year would cancel all credits for years served before the break, whether those years preceded or followed commencement of employer contributions.
After Oswald & Hess Co. went bankrupt, Knauss applied to the union hall for work with other employers participating in the Local 424 Plan.*fn3 When he failed to obtain such employment, he left Pittsburgh for the West Coast. After holding several non-union jobs there, Knauss returned to Pittsburgh in 1966. In May, 1966, Knauss found work at the Northside Packing Plant in Pittsburgh, another employer which contributed to the Local 424 Fund. Knauss continued to work at Northside until 1972, when he was laid off.
In the meantime, on January 12, 1970, the Local 424 Fund merged into the Amalgamated Meatcutters' National Pension Fund (the National Fund). By the terms of the merger, the assets of the Local 424 Plan were transferred to the National Fund and the Local Fund went out of existence. In return, the Local Fund's beneficiaries became participants in the National Fund. The merger agreement provided that benefits to former participants in the plan of Local 424 would be governed by the National Fund's standards except that the amount of benefits provided to individuals originally covered by Local 424 would be 75% Of those otherwise available to participants in the National Fund.
Under the National Fund's rules, a minimum of ten years of employment with a covered employer was a prerequisite to collecting pension benefits. Like the Local 424 Fund, the National Fund recognized both "past" and "future" service credits to satisfy the prerequisite, but, with some exceptions to be discussed, the National Plan denied credit for employment which occurred prior to a break of more than two years in covered service. DP Upon being laid off by Northside in 1972, Knauss applied to the National Fund for pension benefits. His claim was denied, despite the fact that his employers had contributed to Amalgamated funds on Knauss' behalf for a total of 11 years, and despite the fact that he had registered a total of 32 years of employment with covered employers. The National Fund's administrators determined that only the six years of service following his break in employment could be credited to Knauss' account, and that his remaining twenty-six years of service were to be disregarded.
After attempting unsuccessfully to have this decision reversed administratively, Knauss brought suit against the National Fund and its trustees in the district court under § 302(e)*fn4 of the Taft-Hartley Act. He claimed that the provision denying credits for contributions prior to a break in service was arbitrary and capricious, and therefore violated the requirement of § 302(c)(5) that joint employer-union pension plans be operated for the "sole and exclusive benefit" of employees.
Following a non-jury trial, the district court entered judgment against Knauss. The trial judge determined that he had jurisdiction of the claim under § 302(e). However, despite a belief that the break-in-service clause was "unfair," the trial judge held that because there was no proof that the break-in-service provision affected more than a single individual, the unfairness could not constitute a "structural defect" cognizable under § 302.
Knauss then filed a timely appeal. We vacate the judgment and remand.
B. STRUCTURAL VIOLATION
§ 302 of the Taft-Hartley Act prohibits payments to unions by employers. § 302(c)(5), however, fashions an exception to that prohibition for monies "paid to a trust fund established . . . for the sole and exclusive benefit of the employees of such employer, and their families and dependents," provided that such a trust fund meets certain statutory requirements.*fn5 § 302(e) of the Act affirms that federal district courts have jurisdiction "to restrain violations of this section." Our first inquiry thus must be whether Knauss has set forth a claim cognizable under § 302.
In Associated Contractors v. Laborers International Union,*fn6 we noted that "although the extent of jurisdiction under § 302(e) is not yet settled, this much is certain: a federal court does have jurisdiction under the section to enforce a trust fund's compliance with the statutory standards set forth in subsection (c)(5) by eliminating those offensive features in the structure or operation of the trust that would cause it to fail to qualify for a (c)(5) exception."*fn7 Likewise, in this case we have no occasion to define further the reach of § 302, for as we said in Nedd v. UMW,*fn8 the allegation of such a "structural" violation is sufficient to vest the court with jurisdiction.*fn9
Here, Knauss alleges that the break-in-service provision of the rules of the National Fund arbitrarily excludes employees from benefits, and therefore does not operate for the sole and exclusive benefit of employees as required by § 302(c)(5). On its face, such an alleged defect would appear to support an action under § 302(e).
The trustees suggest, however, and the district court held, that a provision of a pension plan which allegedly violates the "sole and exclusive benefit" standard does not constitute a "structural defect" absent proof that a large number of potential beneficiaries are excluded by its operation. Thus, it is argued, since Knauss has not submitted evidence that other workers are also excluded by the operation of the break-in-service clause which he challenges, the provision cannot constitute a "structural" violation.
We note some tension between this argument by the trustees as to jurisdiction, and the trustees' claim on the merits that the break-in-service clause is necessary to preserve the plan's actuarial viability. If Knauss were the only individual affected by the clause, the actuarial stability of the pension plan would hardly be augmented by the clause's existence. If, as the trustees maintain, the clause is actuarially "necessary," A fortiori it must have effects that are broader than simply excluding Knauss.
In any event, if the break-in-service clause does arbitrarily and without justification bar otherwise eligible workers from pension benefits, it constitutes a "structural violation" cognizable under § 302(e), although only a single individual is currently affected. As the Seventh Circuit noted in Johnson v. Botica,*fn10 there are "some analytic difficulties in the use of the structural deficiency standard." Nonetheless, the distinction is rooted in the perception that Congress did not necessarily intend § 302(e) as a conduit to carry to the federal courts every claim for benefits denied by a § 302(c)(5) pension fund. Day-to-day discretionary decisions by the administrators of funds are not subject to continuous audit by federal courts. However, where a settled requirement capriciously excludes employees from benefits, it is not the prudence of the plan's administration which is at issue, but the fairness of its basic structure. Such an exclusion constitutes a failure to conform to the "sole and exclusive benefit" requirement, and thus may be reviewed in the federal courts without doing violence to the Congressional intent.
While there is language in some opinions asserting that a structural defect is one which excludes " a sizeable number of union members,"*fn11 the holdings of the various courts of appeals which have dealt with the issue consistently support the proposition that a settled eligibility prerequisite which is arbitrary and capricious constitutes a "structural defect," even if no specific enumeration of the beneficiaries excluded by such a requirement is produced at trial. Thus, for example, in Burroughs v. Board of Trustees, the case which contained the language relied on by the trustees, the Ninth Circuit struck down the application of a break-in-service clause to an individual despite the fact that the trial court made no findings*fn12 and the court of appeals adverted to no evidence that the clause affected any employees other than the plaintiff.
Adopting the reasoning of the trial court, the Ninth Circuit declared that a cognizable violation would be present "Whether the unjust exclusion of A pensioner is obtained from the exclusive provisions of the trust fund itself or from the arbitrary and exclusionary implementation procedures of the trustees . . . ."*fn13 This interpretation in Burroughs appears to be a reasonable one. In the case of a generally applicable exclusionary provision, even if only one individual is initially implicated, others who may become eligible in the future are potentially deprived of their rights. There is no justification for holding that the first individual to be arbitrarily denied a pension under a particular provision should be forced to await redress until others are similarly discriminated against.
We therefore hold that Knauss met the burden of establishing the "structural" nature of the alleged violation even though he failed to come forward with evidence that others were currently affected by it.
C. SOLE AND EXCLUSIVE BENEFIT
Section 302(c)(5) exempts from its prohibition of employer payments to labor unions contributions to pension funds established for the "sole and exclusive benefit" of employees and their families. The Taft-Hartley Act itself, however, does not define the dimensions of the "sole and exclusive benefit" requirement.
The legislative history of § 302(c)(5), set forth in Arroyo v. United States,*fn14 indicates that the section was drafted to govern the emerging practice of establishing union-controlled "welfare funds," financed by employer contributions.*fn15 Part of the impetus for Congressional concern lay in the potential for "corruption of collective bargaining through bribery of employee representatives by employers with extortion by employee representatives."*fn16 With equal emphasis, however, Congress wished to safeguard the sums paid into welfare funds "representing as they do the value of the services of the union members which could otherwise be paid to the union members in wages" against the abuse of "arbitrary dispensation by union officers."*fn17
In recognition of this latter element of the policy nourishing § 302, courts have held the "sole and exclusive benefit" standard to embody a prohibition of arbitrary exclusions from pension benefits.*fn18 Thus, for example, in Norton v. IAM Ntl. Pension Fund,*fn19 the court struck down a provision denying pension benefits to an otherwise qualified individual who had been divested of pension rights when his local changed union affiliations, while he retained his original allegiance. The court in Burroughs, supra,*fn20 held that a retroactive application of a length-of-service prerequisite of "employees . . . who had no notice of its existence and hence no reasonable opportunity to protect themselves from its impact" violated the sole and exclusive benefit requirement. And a series of cases in the District of Columbia Circuit have mandated the grant of benefits that had been denied under a requirement that the last employer of pension applicants be a contributor to the plan, when that requirement applied regardless of the amount of prior contributions made on an employee's behalf.*fn21
Here, the break-in-service clause gives rise to apparently arbitrary distinctions. But for the cancellation effected by his interruption in employment, Knauss had accumulated more than sufficient years of service with contributing packers to entitle him to a pension under the standard established by the National Fund. He therefore would have been entitled to a pension absent the break-in-service provision. Similarly, an employee otherwise identical with Knauss whose lapse in employment occurred from 1953 to 1957, instead of from 1962 to 1966, would obtain benefits under the National Fund.
The four-year hiatus barred Knauss' entitlement notwithstanding the fact that his failure to continue work arose not out of any voluntary abandonment by him of employment with contributing packers, but from the bankruptcy of Oswald & Hess and from the unavailability of positions with other covered employers. Yet breaks in service are forgiven under the National Plan in the case of employees whose employment lacunae arise because they were self-employed, were union officers, were striking, were transferred to supervisory roles by their employer or worked part-time.*fn22 And had Knauss been 60 years of age instead of 54 when his employer went out of business, he would have been entitled to benefits with no more contributions than those which had already been offered in his behalf.*fn23
Doubts raised by such disparities are exacerbated by the fact that the break-in-service provision causes Knauss to forfeit entirely the eleven years of employer contributions to the fund made on his behalf, contributions greater than those necessary to support a vested right to a pension under the terms of the National Plan. The architects of § 302(c)(5) understood contributions to a welfare fund to constitute payments in lieu of wages to the fund's beneficiaries, and sought to ensure that employees whose work generated contributions would obtain the benefit of such funds.*fn24 A prerequisite that divests the employee on whose account contributions were made because of an involuntary break in service, and that distributes those contributions to other employees, seems to be at odds with the Congressional intent in enacting the "sole and exclusive benefit" requirement. Indeed, one of the examples adduced by Senator Taft, a principal sponsor of the Act, regarding the difficulties to which § 302(c)(5) was addressed, arose from a proposed welfare fund for the benefit of members of the local painters' union in the District of Columbia. Senator Taft commented:
Painters are notorious drifters. They have something deducted from their wages, and then they drift on to some other city where they may find no fund and lose the money they have already contributed.*fn25
The apprehension expressed by Senator Taft that employees will unfairly "lose" the benefit of contributions made on their behalf is equally applicable when the loss comes about from a formal break-in-service clause. Thus, at least where a break-in-service provision deprives an otherwise eligible employee of all benefits derived from substantial contributions made in his behalf, § 302(c)(5) requires that the defenders of such provision come forward with substantial justification for the stipulation in terms of the Fund's legitimate goals.*fn26 We turn therefore to the possible justifications for the clause at issue.
From an employer's point of view, a pension plan is like other employment benefits; it is an incentive to worker productivity. It may therefore be that an employer or group of employers will wish to encourage the continuity of its workforce by denying benefits to "occasional" employees. Whatever the merits of this justification in other situations,*fn27 it can have little applicability here, for any incentive to employee loyalty is superfluous in the situation where the employer has gone out of business and no new employment opportunities exist.
Rather, the trustees here rely upon the interests of the employees in maintaining the actuarial viability of the pension fund.*fn28 Any harshness that results from the break-in-service clause, the defendants claim, is necessary to ensure that the fund continues to serve the majority of the beneficiaries.
The only testimony offered by the defendants in support of this position was that of Joseph Barron, an official of the National Fund. Barron's testimony is far from pellucid. It appears, however, that Barron, who was not qualified as an expert witness, advanced the position that the break-in-service clause was an effort to obtain "consistent continuous payment for covered employees." Such continuity in turn was said to be necessary to fund the payment of pension obligations accruing on the basis of "past service credits" for which no contributions had been made.*fn29
As support for the break-in-service clause, Barron's comments are open to the same objection previously discussed in relation to justification of ensuring loyalty to employers. If, as in Knauss' case, no jobs are available, the attempt to ensure "consistent and continuous payment" to finance current, unfunded obligations becomes fruitless. With or without the incentive of the break-in-service clause, the payments cannot be more consistent or continuous than the number of jobs available permits. Indeed, as a general rule, the pension funds that have break-in-service clauses do not apply such clauses where the beneficiary terminates employment involuntarily.*fn30
Despite the fact that the defendants have not adduced persuasive evidence of the actuarial necessity for the break-in-service clause, the trustees suggested in their brief and at oral argument that, at least at the time that Knauss was denied benefits, the break-in-service clause was necessary to the viability of the Plan, and that invalidation of the clause would endanger the availability of benefits to pensioners other than Knauss. We are most reluctant to order the entry of any decree that would threaten the solvency of the National Fund, for the purposes of § 302 would be ill-served by sacrificing the security of the Plan's other beneficiaries.*fn31 Thus, rather than order a potentially drastic result on the basis of a scanty factual predicate, we will remand this case for the purpose of allowing the trial court to receive additional testimony, to make findings as to the actuarial necessity of the break-in-service clause, and to enter judgment based on those findings.*fn32
The judgment of the district court will be vacated and the case remanded for action in accordance with this opinion.