ERISA-Seventh Circuit Finds That An Individual Is Engaged In A Trade Or Business And Is Therefore Responsible For Withdrawal Liability

In Central States, Southeast and Southwest Areas Pension Fund v. Nagy, No. 11-3055 (7th Cir. 2013), Nagy Ready Mix (“Ready Mix”) employed Teamsters labor and participated in the Central States, Southeast and Southwest Areas Pension Fund, a multi-employer pension plan (the “Plan”) . In 2007, Ready Mix ceased employing covered workers and thus incurred $3.6 million in “withdrawal liability” to the Plan. Ready Mix was unable to pay the full $3.6 million amount. The question in this case is whether Charles F. Nagy (“Nagy”), its sole owner, is liable for the shortfall under ERISA. The answer turns on whether Nagy is engaged in an unincorporated “trade or business”. If yes, he is engaged in a trade or business under common control with Ready Mix and is therefore personally liable for the withdrawal liability.

In analyzing the case, the Seventh Circuit Court of Appeals (the “Court”) noted two possibilities. First, Nagy owns the property on which Ready Mix conducts its operations and leases the property back to Ready Mix. This rental activity could qualify as a trade or business. Second, Nagy provided management services to a country-club venture. He may have done so as an independent contractor, which likewise would qualify as a trade or business.

The Court said that Nagy’s leasing activity is categorically a trade or business for these purposes. As to the management services, the Court said that, if these services were rendered as an independent contractor, Nagy would be engaged in a trade or business; if these services were rendered as an employee, then the services are not a trade or business. Distinguishing between an employee and an independent contractor depends on an analysis of the following factors: (1) the extent of the employer’s control and supervision over the worker, including directions on scheduling and performance of work; (2) the kind of occupation and the nature of the skills required, including whether skills are obtained in the workplace; (3) responsibility for the costs of operation, such as equipment, supplies, fees, licenses, workplace, and maintenance of operations; (4) the method and form of payment and benefits; and (5) the length of job commitment and/orexpectations. Based on these factors, Nagy is an independent contractor. This was particularly so, since the country-club reported Nagy’s compensation on Form 1099. Nagy did not receive salary through a payroll system, as one would expect for an employee. Rather, the country-club paid Nagy an hourly rate and did not withhold taxes or provide fringe benefits. On his personal tax returns, Nagy reported his Wells Venture income on Schedule C, which covers “Profit or Loss from Business (Sole Proprietorship).”

As such, since Nagy was engaged in at least one-here two-unincorporated trades or businesses, the Court concluded that he is personally liable for Ready Mix’s withdrawal liability.