Separate but the same? Why some construction unions are accusing companies of fraud

Double breasting is legal, but it's messy

Even with a different face and name, a Manhattan-based construction company was deemed a cheap copy of its union affiliate, a doppelgänger barely distinguishable from the original.

In September, a Manhattan Federal Court Judge ordered Navillus to pay $76 million to settle claims that the concrete contractor created a sham nonunion company to skirt agreements with various unions. The judgement — considered the largest of its kind — thrust Navillus into chapter 11 bankruptcy and momentarily imperiled two of the company’s contracts totaling nearly $300 million.

The case is viewed as a cautionary tale in an industry facing immense pressure to keep costs down — especially as union contractors struggle to hold onto dwindling market share. Still, such cases continue to spring up, drawing attention to a practice that first gained traction in the 1980s, when union membership was on the decline. Running a union and nonunion company simultaneously — referred to as double breasting — isn’t inherently illegal, but it’s almost always messy.

“It may sound evil, but it’s no different than operating two completely separate companies,” said Laurent Drogin, who leads Tarter & Krinsky’s labor and employment practice. “If the companies are not set up properly, then the unions and the courts are going to look at them as a single entity.”

Problems arise when there’s glaring commonalities between companies. They can share owners and even office space — but they need to pay rent separately and need formal agreements if they want to share personnel, he said. This can be particularly tricky in construction, where there’s a tendency to borrow tools or lend assistance on a job site. In the Navillus case, the court determined that Times Square Construction and Advanced Construction Solutions (ACS) were merely alter-egos of the concrete contractor. The nonunion companies were accused of taking on work that should’ve — based on Navillus’ collective bargaining agreements (CBAs) with various trades — contributed to the unions’ pension and welfare funds. Though double-breasted operations are permitted under the National Labor Relations Act, the far-reaching language of these CBAs are often what creates the possibility of fraud, said Gerald Francese, a partner at Troutman Sanders.

Now, perhaps more than ever, construction companies are facing pressure to hire both union and nonunion labor on a project. At the same time, unions — their pension funds ravaged by the recession and their market share shrinking — have all the more reason to aggressively go after companies that they perceive may be cheating their funds.

“Some unions, more than others, are losing ground,” Francese said.

“We find that most of this litigation stems from the union trust fund audits.”

Recent allegations show the complicated nature of such cases. This month a member of Local 157, Joe Lauer, renewed calls to investigate a trustee on various union funds, including the New York City District Council of Carpenters. Specifically, he’s asked the District Council to investigate whether or not John DeLollis, executive director of the Association of Wall-Ceiling and Carpentry Industries, defrauded the union funds by running two nonunion interior construction firms at the same time as his two union outfits. Lauer, who formerly worked for the District Council, said he first asked about it three years ago and wants there to be a transparent review of the issue.

“I truly believe that there might be violations of the consent decree,” he said, referring to the agreement the District Council made with the government in the 1990s amid charges of corruption in the organization. “If the membership of the New York City District Council is held to all these work rules that have been sent in place, then we all should be accountable, especially those that have fiduciary responsibilities.”

Joseph Geiger, executive secretary-treasurer of the district council, said the allegations have been “investigated on several occasions by various individuals with oversight authority at the Council” and that no wrongdoing was found.

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“Each investigation found that Mr. DeLollis acted appropriately,” Geiger said in a statement. “There are controls in place at the Council which ensure all types of complaints are heard so an investigation will take place if it is warranted. However, I suspect a majority of our members would disagree with allocating additional resources toward another review of a case that has previously been found to warrant no action.”

Calls and emails to DeLollis were not returned. The former and current independent monitor for the carpenters’ union — which has been under court supervision since 1994 — also didn’t return messages seeking comment.

When asked generally about the prospect of a trustee running a double-breasted operation, Drogin said such a situation could be prone to conflict of interest issues.

“That to me is a little like breaking into jail,” he said. “Nothing necessarily unlawful about it, but the optics would raise some eyebrows.”

Developers can also get dragged into disputes over whether or not a dual shops are defrauding unions. In April, trustees and representatives for the Metallic Lathers Local 46 and the Cement Masons’ Local 780 lobbed a lawsuit against New York Concrete, alleging that its used an alter-ego company — New Leaf — to hire nonunion labor for 50 Hudson Yards. Though Related Companies isn’t named as a defendant, the lawsuit accused the developer of actively taking part in the scheme. The same was the case in the Navillus lawsuit, which claimed that Related hired ACS specifically based on Navillus’ reputation — the implication being that the nonunion company borrowed the clout of its union counterpart to get the job.

“People are drawn to profits,” said Tom Kennedy, an attorney who represented the group of unions in the Navillus case and doing the same in the New Leaf case. “The driving force is that there are tremendous profits to be made by performing construction work by using nonunion labor.”

Attorneys for New York Concrete and New Leaf declined to comment.

“Union carpenters are currently working on 50 Hudson Yards as a part of New Leaf and this frivolous lawsuit is yet another attempt by Terry Moore, Business Manager of Local 46,  to use bullying tactics to try and dictate who gets to have these good paying construction jobs and to deflect attention from his failure  to reform corrupt practices and outdated work rules,” representatives for Related said in a statement.

Navillus has maintained that the companies were separate entities and has appealed the September court ruling.

“Simply put, the decision of the court is at odds with both the purposes of the alter ego doctrine and the evidence presented at trial, which made clear that none of the factors supporting an alter ego finding were established,” the spokesperson said in a statement.

Lou Coletti, president of the Building Trades Employers’ Association, noted that double-breasting issues tend to arise more frequently among subcontractors than construction managers, since the former tends to have more agreements with individual trades. He said the practice isn’t the preferred method for recapturing market share.

“It’s very financially difficult to do and with tremendous risk if you’re not following the letter of the law,” Coletti said. “The financial penalties are tremendous.”