Unions, Government Contractors, and ESOPs: Why Non-Union ESOP Companies Stay Non-Union

By Ronald J. Gilbert, President, ESOP Services, Inc.

“Talk to the Union”

On February 5, 2009, Alex Rodriguez, New York Yankee superstar, was asked by a reporter about his alleged steroid use.  “You will have to talk to the union,” was his reply.

On February 2, 2009, executive orders signed by the new administration created a series of new rules that will effectively require the management of government contractors to “talk to the union.”

  1. The first executive order requires that all federal contractors post a notice informing employees of their rights under the federal labor laws.
  2. The second executive order impacts all federal contractors and mandates that costs associated with so-called “persuader activities” designed to influence employees to join or not join a union are not reimbursable by the federal government under the government’s contract with the employer.

The third executive order impacts federal contracts covered by the Service Contract Act.  The order requires that all service contracts include a clause granting a “right of first refusal” to all employees, except managerial and supervisory employees, employed by the predecessor.

In this context, it is appropriate to examine why non-union ESOP companies have a thirty-five year track record of staying non-union.

Union Exclusion

ESOPs normally provide language along the following lines, “Members covered by a collective bargaining agreement are excluded from participation, unless the terms of such agreement specifically provide for participation in the ESOP.”  Thus, if an ESOP participant who is a non-union employee joins a union, he or she will be excluded from participating in the ESOP unless the union successfully bargains for participation in the ESOP.

Union Inclusion

Union members can bargain for participation in any ERISA-covered retirement plan, including an ESOP.  There are certainly examples of successful and unsuccessful union participation in ESOPs.

With a few notable exceptions, union leaders have historically not wanted their members to be ESOP participants.  It may be the certainty of a defined benefit retirement plan, that is, a plan that “fixes” the retirement benefit at some multiple of salary and is partially guaranteed by the federal government, that causes union leaders to avoid ESOPs.  An ESOP is invested in the stock of the sponsoring company, and the ownership of stock carries risk, increasing or decreasing in value.  While the thirty-five year track record of ESOP companies is exceptionally good, there have been examples, such as United Airlines, where a company has gone bankrupt.

Union avoidance of ESOPs is very likely a combination of their preference for a defined benefit plan, even if it delivers a lower retirement benefit in many cases, combined with an aversion to the risks of stock ownership.

Service Contract Act Requirements

ESOP contributions can be counted as a credit towards an employer ’s Davis Bacon contribution obligations.  A plan may include or exclude prevailing wage employees from participation.  However, the exclusion is subject to regular non-discrimination testing.  Including SCA employees in an ESOP can be a complex approach and should be carefully evaluated with qualified professionals.

Timing

Labor legal experts tell us that attempting to install an ESOP, or for that matter any other employee benefit plan, after a union organization has formally begun creates significant problems for management in the context of labor law.  If, however, an ESOP is in place, providing a meaningful benefit to employee owners before a union organizational attempt begins, past experience indicates that a non-union, employee-owned company will remain non-union.