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 anticipated 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 rule is effective April 6. But unions may go to court to block the rule – something they did twice, and successfully, during the Bush years.

As with any organization, union coffers present opportunities for illegal self-enrichment by people who think they can get away with it. And union-sponsored health, retirement, training and other benefit plans are no exception. These plans are legally separate from the unions themselves. Unfortunately, the trustees acting as fiduciaries on behalf of dues-paying members, though not necessarily corrupt, are often blind to the misuse of what they guard. In recent years, as Union Corruption Update has documented, trust funds affiliated with the United Auto Workers, the Boilermakers, the Laborers, the Teamsters and the International Brotherhood of Electrical Workers, to name several unions, have been ripped off by plan officials, union officials, employers or third-party administrators. These thefts 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 keep their books disguise unauthorized expenses by listing illegal diversions of assets as “general” or “miscellaneous” expenses on financial reporting forms to the government. The department’s Office of Labor-Management Standards more than 15 years ago, recognizing the problem, decided to do something about it. In 2003, OLMS, under the guidance of then-Labor Secretary Elaine Chao, proposed new financial disclosure standards for union trust funds. The centerpiece of this effort was a new reporting document called Form T-1. The trust funds required to file would be those with at least $250,000 in annual receipts and who during the most recent fiscal year derived at least 50 percent of those 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, was not pleased with this development. The federation quickly went to District of Columbia federal court to invalidate the rule, claiming that the Department of Labor lacked the statutory authority under the Labor-Management Reporting and Disclosure of 1959 (LMRDA). The court, though not entirely, upheld the regulation in 2004. But the AFL-CIO appealed and won the next year. While concluding that the rule had statutory authority, the court concluded that it was too generalized in scope. The DOL responded by publishing a revised final rule in December 2006, but without issuing a Notice of Proposed Rulemaking or specifying a comment period, as it already had done this before. The AFL-CIO challenged the rule in federal court on the grounds of this technicality. The court, siding with the unions, vacated the rule in June 2007. The Labor Department went back to the drawing board, this time going through the procedural hoops. It then issued a final T-1 rule in October 2008, effective January 1, 2009. But with Barack Obama set to become president, the DOL, whose secretary would be the strongly pro-union Hilda Solis, stalled in putting the rule into effect. The department eventually shelved it altogether in late 2010.

The election of Donald Trump as president in 2016 gave the dormant regulation a new lease on life. Once again, mandatory financial reporting to the DOL for union trust funds, along with intermediate bodies such as district and regional councils, was on the table. And in the face of union threats of a lawsuit, the department issued a Notice of Proposed Rulemaking accompanied by a request for public comments for the T-1 rule on May 30, 2019. The case for such action was especially compelling given the context of revelations of the publicized use of millions of dollars in United Auto Workers training center funds as a private slush fund for certain UAW officials (and in the case of Chrysler, certain company executives as well). Had Form T-1 been in place, these scandals might not have happened or at least might have been caught earlier. On March 6, the DOL issued its final rule.

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 again will go to court to block the rule. So far neither the AFL-CIO nor any individual union has moved in this direction. But that could change soon. It took 17 years for the trust fund rule to go from the drawing board to its currently pending implementation. It would take far less time to reverse it.