Labor Department Issues Final Rule to Halt Union Trust Fund Abuse

Union health, retirement and other benefit funds all too often serve as incubators for fraud and embezzlement. The U.S. Department of Labor, after over 15 years, may be on the verge of realizing an oft-thwarted tool for dramatically reducing these thefts. On March 6, DOL’s Office of Labor-Management Standards (OLMS) published a final rule requiring labor organizations with total annual receipts of at least $250,000 to file a financial report, Form T-1, detailing how their trust funds are spent. “Full disclosure of trust operations gives workers the information they need to make informed choices, and more information means better decisions,” said OLMS Director Arthur Rosenfeld. The regulation is effective April 6. But unions may go to court to block it – something they did twice, and successfully, during the Bush years.

As with any type of organization, labor unions present opportunities for illegal self-enrichment. That’s especially true for their health, retirement, training and other benefit plans given their sizable assets. These plans are legally separate from the sponsoring unions. Unfortunately, their trustees, who act as fiduciaries on behalf of dues-paying members, though not necessarily corrupt, are often blind to the potential pilferage of what they guard. In recent years, as Union Corruption Update has documented, trust funds affiliated with the Auto Workers, the Boilermakers, the Laborers, the Teamsters and the Electrical Workers, to name several unions, have been ripped off by plan officials, union officials, employers or third-party administrators. These cases eventually resulted in criminal convictions, but not before tremendous damage was done.

To a large extent, thefts from union-managed trust funds occur because the people who manage their books disguise many expenses under such categories as “general” or “miscellaneous” on Labor Department financial reporting forms. The DOL’s Office of Labor-Management Standards under the Bush administration, recognizing there was problem, decided to do something about it. In 2003, OLMS, prodded by then-Labor Secretary Elaine Chao, proposed toughening financial disclosure standards for union trust funds. The centerpiece of this effort was a new document called Form T-1. Trust funds required to comply would be those with at least $250,000 in annual receipts and those which during the most recent fiscal year had derived at least 50 percent of their receipts from the union itself. The rule also would require the form for “trusts in which a labor organization is interested,” such as a strike fund. Form T-1 would replace the less detailed IRS Form 5500 authorized for unions under the Taft-Hartley Act. That was the plan anyway.

Organized labor, led by the AFL-CIO, predictably, was not pleased. The federation quickly went to District of Columbia federal court to invalidate the rule, claiming that the Department of Labor lacked the statutory authority to issue it under the Labor-Management Reporting and Disclosure Act of 1959. The court, though not entirely, upheld the regulation in 2004. But the AFL-CIO appealed and won. While admitting that the rule had statutory authority, the federal circuit court concluded that it was too general in scope. The DOL responded by publishing a revised version in December 2006, but without issuing a Notice of Proposed Rulemaking or specifying a comment period; the department believed that as it already had done this before, this paperwork wasn’t necessary. The AFL-CIO challenged the rule in federal court on this technicality. The court sided with the federation and vacated the regulation in June 2007. The Labor Department went back to the drawing board, this time going through the procedural hoops. It issued a final T-1 rule in October 2008, effective January 1, 2009. Unfortunately for supporters, Barack Obama was set to become president. And the incoming labor secretary was the strongly pro-union Hilda Solis, who did everything possible to stall. The department eventually shelved the rule in late 2010.

The election of Donald Trump as president in 2016 would give the dormant regulation a new lease on life. Once again, the issue of union trust fund reporting was in play. And despite the looming possibility of another union court challenge, the department on May 30, 2019 issued a Notice of Proposed Rulemaking and a request for public comments. The case for such action at this point was especially compelling in the context of ongoing revelations of misuse of millions of dollars in United Auto Workers training center funds by several leading UAW and Chrysler officials. Had Form T-1 been in place, these scandals most likely would not have happened or would have been caught earlier. On March 6, the DOL published its final rule in the Federal Register.

From a cost-efficiency standpoint, it looks like a smart move. According to Labor Department estimates, the aggregate per-union compliance cost in the first year would be $18,513, a seemingly reasonable price to pay for providing honest services for members. Smaller unions would bear a greater proportional burden, the smallest – those with $250,000 to $499,999 in annual revenues – paying slightly under 5 percent of their receipts. Unions that take in $5 million to $8 million in annual receipts, by contrast, would bear a compliance burden of only 0.30 percent. The issue now is whether organized labor once again will try to block the rule. So far neither the AFL-CIO nor any individual union have acted. But that could change. It took 17 years for the trust fund rule to go from proposal to operational reality. It would take far less time to reverse it.