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Since public-sector employees have a First Amendment right not to associate with labor unions and to pay only their “fair share” of the union’s collective bargaining, a local union — no matter how small — must have its financial statements subjected to a formal, independent audit, the 3rd U.S. Circuit Court of Appeals has ruled. “We recognize that our decision might place high costs on some local unions. However, non-members’ First Amendment freedoms may not be eroded simply because they are costly to enforce,” 3rd Circuit Judge Thomas L. Ambro wrote in Otto v. Pennsylvania State Education Association. “We hold that every union collecting fair-share fees from non-members must subject its disclosed financial information to independent auditor verification. The Supreme Court’s mandate cannot be bent simply because the cost to the union is great. The Supreme Court implied no intent to make the audit requirement depend on the size of the reporting union,” Ambro wrote. But in a victory for the unions, the court also held that local unions can require those same non-union-member workers to pay for litigation costs incurred in a pooling agreement with other local unions since such pooling of expenses is “akin to insurance.” “Even if a local union party to such an arrangement does not litigate in any given year, it still derives a tangible benefit from participating in an expense-pooling agreement: the availability of on-call resources greater than those it could muster individually,” Ambro wrote in an opinion joined by Senior Circuit Judge Walter K. Stapleton and visiting Senior U.S. District Judge Thomas N. O’Neill Jr. of the Eastern District of Pennsylvania. And in a second victory for unions, the court rejected the non-union workers’ argument that they should not be required to pay for the union’s work on collective-bargaining issues for other professions. Judge Ambro said unions “may pool costs across occupational groups,” because such an arrangement “generates economies of scale” that benefit all workers. “By spreading the costs of otherwise-chargeable expenses over a pool of employees,” Ambro said, the non-union workers “reduce their risk of being assessed unusually high chargeable expenses in any given year.” In the suit, seven non-union education professionals challenged the fair-share fee procedure and assessments of the Shaler Area Education Association, the exclusive bargaining representative for workers employed by the Shaler Area School District. SAEA is the local affiliate of both the Pennsylvania State Education Association, a statewide union that represents both education and healthcare professionals, and the National Education Association. Because all three unions provide collective-bargaining services to the plaintiffs’ bargaining unit, the plaintiffs paid fair-share fees to all three, the opinion stated. Judge Ambro found that the framework for charging fair-share assessments was established by the U.S. Supreme Court in its 1986 decision in Chicago Teachers Union, Local No. 1 v. Hudson. Under Hudson, a union may not collect fair-share dues to support ideological causes or other expenses unrelated to collective bargaining, such as organizing costs. To comply with Hudson, unions must provide non-members with a “ Hudson notice” that includes “sufficient information to gauge the propriety of the union’s fee.” Ambro found that “when theory meets practice, questions abound.” “Do the financial information requirements apply to small local unions? How much verification of that information must there be? When a union represents more than one bargaining unit, can that union include, in the fair-share fee assessed to non-members of one bargaining unit, costs associated with another bargaining unit’s litigation? What if those bargaining units are in different industries?” Ambro wrote. In the appeal brought by the SAEA plaintiffs, Ambro said, the court had to decide whether Hudson‘s independent auditor requirement applies to a small union such as SAEA that says its costs of conducting such an audit would be greater than the fair-share payments it receives. Lawyers for the unions argued that that SAEA’s finances are so simplistic that non-members can obtain “sufficient information” by simply examining its documents themselves. Ambro found that no other federal circuit has squarely addressed the question. But Ambro found there was no reason to stray from the direct language in Hudson that has been interpreted by several circuits to call for an independent audit. Ambro also rejected the union’s argument that they could comply with Hudson by performing something less than a full audit. “Broadly speaking, auditors can provide three different types of accounting services: compilations, reviews, and audits,” Ambro noted. A “compilation” is the “lowest level of assurance,” Ambro said, since it expresses “neither an opinion nor any level of assurance.” When performing a compilation, an accountant need not “verify or corroborate the financial statement information provided by the client.” A “review” involves an “intermediate level of scrutiny” in which the auditor provides “limited assurance” on the entity’s financial statements and “must make some, but not comprehensive, inquiry into client management, accounting practices, internal control structure, and analytical procedures used by the organization.” By contrast, an “audit” provides “the highest level of assurance on financial statements,” because the accountant provides “verification” of the financial statements’ claims and expresses an opinion on the entity’s financials. Ambro found that Hudson requires a true audit. “Compilations and reviews do not provide an adequate basis for a non-member to decide whether to object to a fair-share fee,” Ambro wrote. The plaintiffs were represented by attorneys Milton L. Chappell and W. James Young of the National Right to Work Legal Defense Foundation in Springfield, Va. The unions were represented by attorneys John M. West and Laurence Gold of Bredhoff & Kaiser in Washington, D.C., and Mark P. Widoff, an in-house attorney with the Pennsylvania State Education Association.

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