Depositions are not routine conversations or idle chit chat; they lock a witness into a story and allow the opposing side insight into the litigation strategy.  As such, when a dispute is taken to court, as a payroll auditor, you must prepare – and be prepared – for a deposition. 

This two-part post will cover five effective strategies for successfully giving a deposition, including:

1. Review the Deposition Process
2. Discuss the Purpose for the Specific Deposition
3. Review Necessary Documents
4. Understand the Role of the Trust Funds Attorney at the Deposition
5. Role play a Deposition

• Audit report
• Correspondence between the auditor and the employer
• Correspondence between the Trust Funds and auditor regarding this particular employer
• Affidavits already provided by the auditor in this case or involving this employer
• Other deposition transcripts that reference the audit of this contractor

As part of this series, I am providing Plan Trustees with a list questions they should ask when requesting proposals from payroll auditing firms.  Click here to view the full list of questions.

Question 4: What is the relationship between your audit findings and your audit costs?

One of the most important tasks annually performed by Plan Trustees with regards to the payroll audit program is to measure the amounts recovered as a result of the payroll audit program in relationship to the cost of the program.  Payroll audits should make money for your benefit plan.  If they are not increasing the assets of your Plan, then perhaps you are conducting too many payroll audits or they are inefficiently performed.

Bond Beebe has been performing payroll audits for one of our clients for over 50 years.  During that period, the amount realized by the client for its payroll audit program has remained relatively constant:  the plan has collected approximately $3.50 for every dollar spent on the payroll audit program.  This is just one example; there is no typical ratio of collections compared to audit costs for payroll audits.

Each year the trustees should compare audit findings to audit costs and use that as a basis for deciding how many payroll audits to perform in the following year.  When hiring a payroll audit firm, it is important to inquire of realization rates for the payroll audits the firm currently performs to help ensure that your plan’s payroll audit program will provide revenue for your benefit plan.

For more in this series, see:

• Question 3: How many of your payroll audits have findings?
• Question 2: How many audits do you perform?
• Question 1: How many years have you been doing payroll audits?

• Question 2: How many audits do you perform?
• Question 1: How many years have you been doing payroll audits?

• During the first three-year cycle, 10% of the employer errors were a failure to report covered employees. This finding type jumped to 14% in the second three-year cycle.
• During the first and second three-year cycle, new hires were incorrectly reported 25% of the time.
• The employers under-reported employee hours 27% of the time during the first cycle and 40% of the time during the second cycle.

• Testing for Vacation
• How Much Should the Payroll Auditor Test?
• Finding Unreported Employees
• Putting New hire Records to the Test – Verifying Accurate Employer Reporting
• To Reconcile or Not to Reconcile – That is the Question
• Scheduling a Payroll Audit

At a recent International Foundation of Employee Benefit Plans conference, I was asked if I have noticed any increases in the number of delinquent employer cases.  The questioner was prodding me to confirm that tough economic times have caused an increase in the number of delinquency matters.  I am not seeing more cases; in fact I am seeing fewer cases.  But, I am seeing more complex cases, and I am using more weapons in my arsenal to help the Funds collect the delinquencies.  Let's take a look at some of these complexities.

Defunct Employers
Our Firm has indeed seen fewer delinquency cases.  Many employers have gone out of business and many did so without having any delinquencies; they paid their last bills and shut down their business.  That may trigger a new batch of withdrawal liability cases for underfunded pension funds, but most of my clients are in the construction trades.  The special rules for construction trades withdrawal liability make it very difficult to assess, let alone collect, withdrawal liability if the employer shuts down operations entirely.  Nevertheless, the payroll auditor is sent to the defunct company to assemble an “exit audit.”  (For more information on auditing techniques for a defunct employer, see Payroll Auditing: A Guide for Multi-Employer Plans, a helpful book written by Payroll Auditing Portal contributors Larry Beebe and Phil Vivirito.)  

Employers Shutting Down Mid-Project
Additionally, I have seen many employers shut down in the middle of projects. That leaves huge liabilities, but it raises new opportunities for the Funds seeking collection of unpaid contributions.  In the District of Minnesota and in many other federal districts throughout the country, Taft-Hartley trust funds may use state law mechanic’s lien or public payment bond actions to collect contributions due and owing on the specific project.  The payroll auditor is then thrust into the complexity of these cases, because the law requires precise statements of claim amount within a tight time deadline. 

The Monthly Audit
A variation on the employer shutting down mid-project is the employer with terrible cash flow that asks to “partner” with the Funds to manage fringe benefit payroll obligations with the general contractor or owner on each project.  This puts the payroll auditor in the unfortunate situation of having to audit the employer’s projects on a monthly basis to verify the hours worked in order for the general contractor to process the draw payments to the delinquent employer.  Nobody really enjoys this process, but our Firm has seen it as the best (and only) way to maximize recovery for the Funds. 

Payment Bonds and Mechanic's Liens
The difficulty arises when the Funds are asked to tender a mechanic’s lien waiver or release upon receipt of payment from the general contractor or owner.  The only way the waiver or release can be done by the Funds is after the payroll auditor completes the review of the records and assesses independently the amounts due on each project.  We ask the payroll auditor to include liquidated damages on the total due on each project.  Each time the payroll auditor completes the project audit, we find discrepancies, which justifies our continuous demand to do ongoing job-by-job audits.  Cases that involve public payment bond and mechanic’s lien enforcement are complex and tedious, but they have increasingly become a part of the Taft-Hartley collections process for attorneys and payroll auditors. 

The Non-Signatory Employer
Other complex cases include the non-signatory employer who has signed a Project Labor Agreement.  In that case, the employer is not accustomed to keeping records, and the payroll auditor often returns home empty-handed.  We have seen these cases require the Funds to come up with more elaborate ways to determine the extent of the employer’s delinquency, either by estimation or by recreating time records.  In estimating a delinquency, trust funds are free to do so, but only if the methodology is reasonable and can be supported by testimony in a courtroom.

It is clear that things have changed during these tough economic times. So my questioner at the conference was on to something, but was asking the wrong question. Attorneys and payroll auditors are not working on more delinquency cases. We are simply dealing with complexity.

In this multi-part series, I will review the intricacies of payroll audit disputes, explaining the many different types of disputes, providing insights for how to establish the validity of a dispute, and delineating the various options for resolving a payroll audit dispute.

Can the Payroll Auditor Resolve the Dispute?
The first post in this series discussed how to determine the validity of a payroll audit dispute.  Once an employer documents their dispute in a manner that details both what their dispute is and why it is considered a dispute, it is up to the payroll auditor to determine whether or not it is a viable dispute, but also more importantly, who can resolve the dispute.  Many times, a dispute can be resolved at the auditor level, but occasionally, the dispute must escalate to the Fund or to the Board of Trustees for their consideration and decision.

When to Resolve
Payroll auditors can resolve employer disputes that concern the amount of units recorded on the audit report or the validity of hire or termination dates. In addition to referencing their documented work papers and notes, the payroll auditor can request that the employer provide supporting documentation for his/her dispute.

Additionally, the payroll auditor can resolve the dispute if it arises from waiting or probation periods or job classifications of employees on the audit report.  In these instances, the auditor should site and reference the terms and clauses of the Collective Bargaining Agreement (CBA) to support their conclusions. With regard to job classifications, the employer must provide the auditor with the employee-in-question’s personnel information before the auditor can make any determination on the validity of the dispute.

When to Escalate
When the dispute reaches the point where the auditor is no longer able to address the employer’s concerns, such as if the employer is disputing language found in the CBA, the dispute should be escalated to the Fund or Board of Trustees. For example, if the employer makes statements such as “that was not our intent,” “this is the way we interpret that clause,” or simply that they were instructed by the Fund to report in this manner or that they have an agreement with a local union outside of the CBA, the payroll auditor should refer the matter to the Fund, the Fund’s counsel, or the Board of Trustees.

Once the auditor determines that they cannot resolve the dispute on their own, it is essential to know:
1)    Who to contact at the Fund or Board of Trustees about the dispute;
2)    How far the auditor is allowed to go in pursuit of resolution before handing the matter over completely to the Fund or Board of Trustees; and
3)    What documentation and/or other information needs to be provided to the Fund or Board of Trustees for their review and resolution of the dispute.

When these items have been determined and confirmed with the Fund and/or Board of Trustees, the payroll auditor can respond to the employer’s dispute and inform them of the next course of action.  In the next post, I'll discuss proper payroll auditor response to the dispute. 


Previous Posts in the this Series:

• Part 1: Establishing the Validity of a Payroll Audit Dispute
  

In this multi-part series, I will review the intricacies of payroll audit disputes, explaining the many different types of disputes, providing insights for how to establish the validity of a dispute, and delineating the various options for resolving a payroll audit dispute.

As payroll auditors, we like to think that our audits will never be disputed.  Unfortunately, this is not always the case.  Part of the payroll audit process is responding to and resolving disputed items with the employer.

Establishing the Validity of a Payroll Audit Dispute
Upon receiving the employer’s dispute, either in writing or verbally, the payroll auditor must decide if the employer’s discrepancy is valid.  “The audit is wrong” or “I disagree with the findings” is not a valid dispute.  In this case, the payroll auditor should inform the employer that their dispute needs to be specific: the disagreement should detail what about the finding they disagree with and why, not simply state a general disagreement.  Just as the payroll audit report provides details for exceptions (ex: employees incorrectly reported with units by month), the employer needs to respond in similar fashion and with like detail.

It is important for the payroll auditor to convey to the employer that the only way a finding or dispute can be discussed is if the employer provides, in writing, specific examples supporting their disapproval of the finding.  At this point, the payroll auditor can determine how to respond to the employer and how to proceed with the dispute.

There are many different types of disputes and a payroll auditor needs to know the appropriate response to each type.  Over the next few weeks, I will discuss different disputes and the proper payroll auditor response.  The next post in this series will review who can resolve the dispute - when the payroll auditor can resolve, and when it needs to be escalated to the Fund or the Board of Trustees.

What Exactly is Employer Withdrawal Liability?
First, some history and background.  In 1980, Congress was concerned that employers were withdrawing from defined benefit plans, leaving liability (for future pensions) to those employers who stayed in the fund.  This resulted in passage of the Multiemployer Pension Plan Amendments Act of 1980 (“MPPAA”).  MPPAA was intended to remedy this problem by requiring employers who withdrew from the fund to pay their fair share of those liabilities.

In actuarial terms, the liabilities are called “unfunded vested benefits” (“UVBs”).  When an employer participates in a defined benefit plan, the promise of future benefits for the participants creates liabilities – UVBs.  No money may have been allocated to pay this pension, and the fund must depend upon future contributions and investment income to make up the difference.  The theory of withdrawal liability is that it is unfair to participating employers to saddle them with UVBs that were left behind by the withdrawing employer.

How EWL is Calculated
MPPAA determines EWL by multiplying the UVBs of the plan by a fraction:  “the numerator of which is the sum of all contributions required to be made by the employer” for the most recent 5 plan years and “the denominator of which is the sum of all contributions made [by all employers]” for the most recent 5 plan years.  29 U.S.C. § 1391(b).  Very simplistically, this calculation identifies the employer’s share of the plan and, consequently, fair share of the plan’s unfunded vested liability.  Note that the statute refers to the numerator as contributions required to be made by the employer.  Thus, if a delinquency is owed, those sums should be included in the numerator in calculating EWL.

Time for the Auditor to Step In
This is where the auditor comes in.  There should be an “exit audit” conducted on every withdrawing employer.  Not only will this enable the fund to recover any delinquency, but it will increase the EWL when those delinquent contributions are added to the numerator.  EWL should not be calculated based solely on the contributions in the fund’s records; rather, it should include all moneys recorded, and moneys “required to be made.”  The audit is the mechanism by which the correct numbers can be ascertained.

What does the auditor do if the employer refuses to allow an exit audit?  One recourse is to have counsel take legal action to allow the audit.  Another is for the auditor to assist the client in estimating contributions.  The general rule of damages is that if the wrongful conduct of a party prevents the other party from assessing damages with specificity, all doubts will be resolved against the wrongdoer.  The auditor should assist the client in estimating contributions owed based on prior contribution history.  Using the rule cited above, the auditor can choose a reasonable method that maximizes the estimated delinquency.

A Special Note for EWL and the Construction Industry
Specifically for funds involved in the construction industry, there is one final way that the auditor can be of assistance.  In the normal case, a cessation of the collective bargaining agreement results in a withdrawal.  However, in the construction industry, there must be (A) a cessation of the obligation to contribute and (B) continuance of the performance of the business in the same jurisdiction (or the employer resumes work, non-union, within 5 years after leaving).  29 U.S.C. § 1383(b)(2).  The exit audit can be very helpful in establishing the second prong of the test; namely, that the employer is operating outside the collective bargaining agreement, doing the same kind of work in the same jurisdiction.

The role of the auditor is therefore central in establishing and enforcing employer withdrawal liability.

A Pennsylvania Superior Court, in a 7-2 decision, ruled that benefit fund trustees have the right to file mechanics’ lien claims for unpaid fringe benefit contributions.  The court ruled that unions were subcontractors who had agreed to furnish labor to the contractor and as subcontractors they had the right to file mechanic’s lien claims for unpaid employer contributions (Bricklayers of Western Pennsylvania Combined Funds Inc. v. Scott’s Development Co., PA. Super. Ct., No. 687 WDA 2012, 1-6-12). 

Trustees should check with their counsel to determine if mechanics' lien claims could be a collection tool for their funds.

Question 2: How many audits do you perform annually?

A firm that performs a large number of audits annually has the ability to complete audits in a given geographic area for many of its clients at the same time.  This saves time and money for each of its payroll audit clients.

A firm performing many audits is likely to understand how payroll audits are done better than a firm that just performs a few audits each year.  Payroll audit firms learn from their experiences.  What they learn on a given audit is likely to benefit a future payroll audit. 

A firm doing a large number of audits should be efficient in terms of fees charged; their overhead is shared by more audits.  The larger payroll audit firms can also afford to spend more money on automated functions, which should also streamline operations and reduce costs.

For more in this series, see:

• Question 1: How many years have you been doing payroll audits?
• You Want to Hire a Firm to Do Payroll Audits?  Here are the Questions to Ask.