Originally published May 2008
Keywords: private investment, reporting gifts, union officers, employees, DOL, employer's duty, LM-10, LMRDA, financial reporting forms, LM-30, OLMS, EBSA
The Department of Labor (the "DOL") maintains an "advisory" and a set of Frequently Asked Questions ("FAQ")1 on an employer's duty to report gifts and other payments to any labor organization or its officers, employees, or representatives. Such payments must be reported annually on a form "LM-10." We first reported on the DOL's guidance in a November 2005 newsletter. Following is an updated summary of the most significant statements in the current FAQs, which have been updated twice since 2005.
WHAT IS AN "LM-10"?
The Labor Management Reporting and Disclosure Act of 1959 (the "LMRDA") directs the Secretary of Labor to provide for disclosure and reporting of certain aspects of union and union-related finances. Until 2005, most of the attention had focused on disclosure and reporting by labor organizations of their receipts and expenditures.
Another longstanding, but previously often overlooked, set of financial reporting forms focuses on payments made by employers to labor organizations or affiliated individuals (LM-10), and on payments received by labor organizations or affiliated individuals from employers (LM-30). The DOL has issued a series of FAQs in conjunction with its decision to step up enforcement efforts.
LMRDA reporting requirements have significant implications for companies that do business with union-sponsored retirement plans. Although LMRDA requirements are enforced by the Office of Labor-Management Standards ("OLMS") rather than the Employee Benefit Security Administration ("EBSA"), EBSA may access the information provided in LM-10 filings for ERISA enforcement.
WHO MUST REPORT
According to the DOL guidance, the LM-10 reporting obligation applies to every person who is an "employer", regardless of whether such person employs any union employees. Thus, for example, most consultants, investment management firms, custodians and other service providers to a private sector pension or welfare plan covering individuals represented by a labor union must report gifts or other payments to union-appointed plan trustees or other union officials.. In general, DOL applies a "common law" test to determine whether a person is an "employer." Under this test, sole proprietors and partnerships without employees are not "employers" unless they are deemed to act indirectly, or as an agent of, an entity that is an "employer" in relation to an employee. In its recent updates to the FAQs, the DOL interprets the scope of the agency rules quite broadly. For example, in FAQ 2,2 an individual who has no employees but is a prospective "business partner" of an employer is itself treated as an "employer" subject to LM-10 filing requirements if it provides something of value to a union official as part of an effort to generate business for the entity that is an employer.
The LMRDA's definition of "employer" incorporates by reference virtually all other federal employment laws, and thus in many situations may require aggregation of reporting by affiliates. See FAQ 13 (indicating that each employer in a "consolidated group of affiliated employers" must report separately, unless a "reasonable judgment" on the facts and "non-LMRDA law" shows that two or more entities "are considered to be one.")
FAQ 14 describes reporting requirements when an acquiring corporation must report payments made by the acquired corporation prior to the acquisition. In general, these requirements distinguish between stock sales and asset sales.
TIME FOR FILING
In general, an LM-10 must be filed within 90 days after the end of the employer's fiscal year. For example, an employer with a calendar fiscal year was obligated to file their 2007 report by March 31, 2008. In addition, a corporation that is acquired may be required to file a terminal employer LM-10 within 30 days of the acquisition.
"DE MINIMIS" EXCEPTION
The LM-10 form allows exclusion of "sporadic or occasional gifts, gratuities, or favors of insubstantial value, given under circumstances and terms unrelated to the recipients' status in a labor organization." The DOL has decided that gifts and gratuities with an aggregate annual value of $250 or less per recipient (FAQs 51, 53-54) are insubstantial for this purpose. Transactions with the union itself, as well as each union official, are subject to aggregation. Moreover, payments from each employee of a single employer must also be aggregated for purposes of determining whether the $250 threshold has been exceed. As a practical matter, it may be necessary to track smaller expenditures made over the course of the year. However, to qualify for the $250 de minimis exception, the employer must also be able to establish that the circumstances and terms are unrelated to the recipient's status as a union official or other covered person; e.g., because the employer ordinarily provides similar gifts or other consideration under similar circumstances to individuals who are not union officials or other covered persons. In its updated FAQs, DOL provides additional guidance on how the $250 exception applies. FAQ 54 indicates that, where a company provides meals to union officials within the same union, the value of the meals need not be aggregated because meals are provided to individuals, and not to the union itself. Where an employer conducts educational conferences to a group that includes union-appointed trustees or other union officials, the employer must calculate the value of refreshments, meals, travel and lodging that it provides to attendees (but not overhead costs such as conference room fees) to determine whether the $250 limit has been exceeded with respect to union officials.
The LM-10 requires reporting of payments to "any labor organization or to any officer, agent, shop steward, or other representative or employee of any labor organization" (collectively, "covered persons").
Under the LMRDA, a "labor organization" is defined as "a labor organization engaged in an industry affecting commerce," and which is involved in representing employees under the provisions of the National Labor Relations Act or the Railway Labor Act.
Unions representing only public sector employees generally are not considered to be "labor organizations" for this purpose. However, if any of the union members are employed by a private employer, the expenditures to such union are covered.
Moreover, the DOL has indicated that "intermediate" organizations (that is, unions interposed between a national union and a local union) may also be covered, even if they represent no private sector employees, if they are subordinate to a national (or international) labor organization to includes one or more private-sector local unions. This interpretation was challenged in court, and in 2006 the DOL announced that it will not to enforce LM-10 reporting obligations with regard to intermediate organization "pending final resolution of these court proceedings." FAQ 36.
In December 2006, the D.C. Circuit declined to defer to the DOL's interpretation because it had not provided a reasoned analysis of its position. In response, the DOL published a Policy Statement in January 2007 explaining its reasons for interpreting LMRDA to apply to intermediate labor organizations. In March 2008, the U.S. District Court for the District of Columbia upheld the DOL's position that certain intermediate organizations are covered by LMRDA. (Alabama Educ. Assoc. v Chao, 2008 U.S. Dist. LEXIS 24046 (D.C. 2008). As a result, DOL may decide discontinue its non-enforcement position with respect to these intermediate organizations, which would expand the scope of the LM-10 reporting requirements.
Although union-appointed trustees of a pension or welfare plan clearly are covered person, the plan or trust may have its own employees that are not union officials subject to the reporting rules. See FAQ 41 (gift to Executive Director of Investments of a pension trust is not reportable if the director has no other relationship to the union that would cause him or her to be treated as a union official).
Payments to spouses of covered persons must also be analyzed. In general, since the payment was not made to a covered person, it is not reportable under LM-10 (although the covered person must report under LM-30 the payment that was made to her spouse). In its updated FAQs, however, the DOL indicates that a "facts and circumstances" test must be employed to determine whether the payment to a spouse of a covered person is intended indirectly to benefit the covered person. See, e.g., FAQ 40 (provision of luxury watch to spouse of a union official is reportable where there is not a "meaningful independent relationship" with the spouse).
ALLOCATION AND VALUATION MATTERS
In several FAQs the DOL has discussed how to report certain items. As discussed in FAQ 55, the focus is on the cost to the employer of items that are for the particular benefit of each covered person.
Thus, if covered persons are among the attendees at a conference sponsored by an investment manager, the costs to the employer for the attendees' refreshments, meals, travel, or lodging must be reported. FAQ 55 suggests calculating a total of the costs of refreshments, meals, travel, or lodging, and then dividing that total by the number of attendees. Similar methods are suggested for single meals where both covered persons and other persons attend (FAQ 58), or for receptions where both covered persons and other persons attend (FAQ 61).
An employer should be able to rely on this methodology, but there is a risk that if exceptionally generous items are provided to covered persons but not to others, DOL could assert that the actual costs of those items must be reported.
If the union itself will make the allocation among its members, the payment generally will be treated as a payment to the union itself. For example, in FAQ 21, an employer who contributes golf equipment worth more than $250 to a union to be used as prizes at a union golf tournament must report that payment regardless of how the union allocates the prizes among the players.
WIDELY ATTENDED GATHERINGS
The updated FAQs provide two types of exemptions from the LM-10 reporting rules for the value of refreshments, entertainment, or other goods or services provided in conjunction with "widely attended gatherings." More specifically, FAQ 61 provides a $20 per person exemption for all widely attended gatherings. Where the costs per participant exceed the $20 limit, FAQ 61 also provides a separate exemption with respect to covered persons who attend a maximum of two widely attended gatherings a year sponsored by the employer. In that event, the employer is not required to report expenses if the allocable share of expenses per attendee is no more than $125 per event.
DONATIONS TO CERTAIN ORGANIZATIONS
In its most recent update, the DOL clarified that donations to a tax-exempt organization are generally not reportable even if made at the request of a union official, unless the tax-exempt entity meets the definition of a "labor organization" discussed above. FAQ 62. However, under some unusual circumstances, a payment to a tax-exempt entity may be considered an indirect payment to a labor union. For instance, as discussed in FAQ 62, a payment to a taxexempt entity that is set up fraudulently to benefit a labor union official may be reportable. However, the mere fact that a union official sits on the board of the organization would not, in itself, make the payment reportable.
FAQ 62(A) provides four examples. In each example, the recipient of the donation is an IRC § 501(c)(3) organization. According to FAQ 62(A), a donation to the United Way would not be reportable. Likewise, a donation to a "Union Relief Fund," defined as a fund which "benefits the members of a union and other employees in the industry with assistance during times of natural disaster or similar distress" (emphasis added) would not be reportable. Donations to a union scholarship fund established in accordance with section 302(c)(7) of the LMRDA or to a union apprenticeship fund established in accordance with section 302(c)(6) of the LMRDA do not need to be reported. In updated FAQ 63, the DOL announced a no-enforcement policy on the question of whether a charitable or other tax-exempt organization can itself be treated as an "employer" subject to LM-10 reporting requirement pending completion of its pending rulemaking.
These exceptions to reporting apply only when the donation is being made directly to a qualifying organization. For example, if a union official requests an investment to purchase a $500 ticket to a dinner banquet held for the benefit of a 501(c)(3) organization, the payment is not reportable if it is remitted directly to the tax-exempt organization. However, some unions request that checks to support charity golf tournaments are made payable to the union, with the promise that the proceeds will be going to an independent charity or other qualifying organization. Since the check is paid to the union, updated FAQ 65 indicates that the DOL views the payment as reportable.
GIFTS PURCHASED WITH PERSONAL FUNDS
As a practical matter, as discussed in FAQ 11, most service providers will have to report gifts to covered persons that are purchased with the personal funds of employees. This is most likely to arise when the employee has some role in business relationships with the union or a related trust. For example, assume that an individual is involved on behalf of his employer in either trying to establish a business relationship with a unionrelated pension or welfare trust or is part of the team providing services to the trust. The individual gives four of his personally-purchased football tickets to union officials who are interested in the pension or welfare trust. DOL expects this gift to be reported. This particular feature should be noted in compliance instructions, since there presumably would be no regular business record of such gifts.
REPORTING OF MARKETING EXPENSES
Most payments to covered persons that are made as marketing expenses for business development and client relations are reportable. See FAQ 45 (business development and clients relations expenditures by insurance companies and credit institutions are reportable); FAQ 46 (such payments do not qualify as "payments with respect to the sale or purchase of an article or commodity at the prevailing market price in the regular course of business").
Section 253.070 of the DOL's LMRDA Interpretative Manual states that "expenditures for employer advertisements in union souvenir journals paid to a labor organization" are treated as "sporadic and insubstantial." That section then states that such expenditures are not reportable if the payments are made to "a banquet group or committee of employees of the employer." It appears that these are separate statements, and thus there is a basis to conclude that the first group of expenditures independently are not reportable.
PAYMENTS DUE TO OTHER RELATIONSHIPS
Payments to a covered person who has a separate personal account with the reporting employer (such as a personal brokerage account) may not be reportable. See, e.g., updated FAQ 28 (loan guarantee by an entity subject to LM-10 reporting rules of a loan made to a union official is a "thing of value" that may be required to be reported unless it is made under circumstances and terms unrelated to the individual's status in the union). .. Caution should be observed in relying on this exception, since if a dinner and sporting event tickets are offered to a covered person who has a modest personal account with the employer, enforcement authorities then might question whether this benefit is regularly provided to other individuals with modest personal accounts.
MULTIPLE EMPLOYER MATTERS
If Employer A makes a reportable payment that is reimbursed by Employer B, FAQ 56 directs that Employer B must file the LM-10 form. FAQ 56 gives an example where a service provider hires a marketing firm. If the marketing firm (assuming it is an employer) makes a reportable payment which is reimbursed by the service provider (also assuming that is an employer), the service provider must make the report. Similarly, if two or more employers split the cost of a single reportable payment (e.g., a dinner for covered persons), each employer must report their individual share of that payment. FAQ 57.
All reportable transactions must be reported, even if doing so would violate a confidentiality agreement. In updated FAQ 24, the DOL indicated that it will discuss reporting of competitively sensitive or proprietary information on a case-by-case basis prior to the filing of the report.
SIGNING THE LM-10
Under the LMRDA, the LM-10 must be signed under penalty of perjury by the president and treasurer, or corresponding principal officers, of the employer. There is no civil enforcement mechanism for failures to file complete LM-10s, but such failures are potentially subject to criminal penalties.
RELATIONSHIP TO LM-30
DOL expects that in most cases, an LM-10 can be "matched" with the LM-30 report filed by the recipient. Some donors are conferring with donees to confirm a mutual understanding as to the reportability of certain items. However, some items that would not be reportable on the LM-10, such as payments to the spouse or minor children of a union official, are reportable by the union official on the LM-30.
LM-30 reporting may also require the recipient to disclose the business volume of the relationship between the donor employer and the recipient or the recipient's organization. See FAQ 22, explaining this disclosure on the LM-30.
NOTICE PURSUANT TO IRS CIRCULAR 230
The discussion and conclusions of any federal tax matters in this newsletter are limited to the specific federal tax issues addressed herein. Additional federal tax issues may exist that could affect the federal tax treatment of any transaction that is the subject of this newsletter. This newsletter does not consider or provide any conclusion with respect to any such additional issues. With respect to any federal tax issues that are not addressed by this newsletter, this newsletter was not written, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on any taxpayer under U.S. tax law.
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1 The advisory can be accessed at http://www.dol.gov/esa/regs/compliance/olms/lm10_advisory.html, and the FAQs can be accessed at http://www.dol.gov/esa/regs/compliance/olms/LM10_FAQ.htm .
2 Please note that the DOL periodically updates its "advisory" and may change the current numbering of the FAQs in the future.
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