Accounting for Labor Unions (#383)

A labor union is officially defined as a collective organization of workers that negotiates with employers over pay, benefits, and working conditions. The overall intent is to give workers greater bargaining power.

Labor Union Tax Treatment

Legally, a labor union is organized as a nonprofit entity under Section 501(c)(5) of the Internal Revenue Code. This is not the better-known 501(c)(3), where donations are treated as tax-exempt. Instead, Section (c)(5) lumps labor unions in with farm bureaus and agricultural cooperatives, where the intent is to improve the conditions of work – that would be unions – or of products – which would be the farm bureaus and cooperatives. For these types of organizations, Section (c)(5) provides a federal income tax exemption, but they are not classified as charities, so you cannot deduct any contributions to them.

Accounting for a Labor Union

So, let’s get to the accounting. A labor union has two main sources of revenue, each of which is tracked separately. The biggest is member dues, which are paid on an ongoing basis. Depending on the situation, they’re usually forwarded to the union by employers, which deduct the dues from member paychecks. The second largest source of revenue is initiation fees, which are charged when a new member joins the union.

All other forms of revenue are supplemental, which is to say that receipts may be few and far between. For example, a foundation might issue a grant to a union, or the union might earn interest on its investments. Or, the union might earn some modest revenues from the sale of merchandise or training programs. Maybe the most interesting one is the special assessment, where the union charges its members for a special activity, such as to increase the size of a strike fund, or to help pay for a lawsuit.

But out of all the revenue sources, the key one by far is member dues. This has got to be tracked separately, which is why – of course – there’s union management software. These systems have automated dues tracking that reconciles employer remittance reports with individual member accounts. The software also posts receipts to the general ledger. Some examples of these software packages are UnionWare and Union Impact.

Now as for operating expenses, I’ll only deal with the unique items. A labor union incurs a bunch of expenses in the area of representation and negotiation. This means paying for negotiators, grievance handling, and arbitration. This does not just involve the cost of labor – there’s also a significant expense for travel, and meeting facilities, and in specialized cases, the union might also need to pay consulting fees.

But there’s more. A union might also pay benefits directly to its members, of which a massive one is strike benefits during a work stoppage. And on top of that, a union might pay for training programs and educational assistance. The training cost may include holding workshops for members, as well as sending the staff to conferences and conventions.

In addition, unions like to engage in a lot of lobbying to influence legislation in their favor. This means incurring expenses for political action committees and lobbying.

And finally – one more unique area – unions can spend a lot of money on recruiting new members, which means paying for outreach campaigns, putting on events, and paying staff organizers. This is actually a really critical area for unions, since there is such a thing as member churn. You have to bring in enough new members to replace the ones that leave, which means that this expense can be substantial.

So, that covers revenue and expenses. What about accounting issues? The biggest one is always the tracking of member dues, since that’s where the bulk of their revenues come from. Dues reconciliations can be fairly hard, because you have to adjust for members who’ve changed employers, or who work multiple jobs, or who shift between full-time and partial-time status – all of which can impact their dues obligations.

Here's another accounting issue. Unions have lots of layers. There may be a local, which is a subdivision of a national union that represents workers in a specific area. Above the locals is the national union, and there might be an international organization above that. When this is the case, you have to allocate member dues between each of these organizational layers. And, while doing so, you also have to account for the transfer of funds between each of these entities.

Another accounting issue is the handling of funds. An accountant for a union might set up a strike fund to pay members during a strike, and a defense fund to pay for any number of member legal issues, and a political action fund, and a training fund. These are needed to ensure that funds are set aside for specific purposes, but are also needed to ensure that a union doesn’t break the law – which it will if it diverts strike funds to some other purpose, like lobbying.

Another unique accounting area relates back to all of those funds being spent on political action committees and lobbying. When you do that, you have to segregate these expenses in order to comply with campaign finance laws.

Labor Union Reporting

And along a similar line, the Department of Labor requires that unions sent it a very detailed annual report; the level of detail that has to be reported depends on the volume of receipts that a union receives. For example, if a union receives at least $250,000 in a year, then it has to file the most complex form, which is the Form LM-2; it requires information about receipts and disbursements, itemizations of the larger disbursements, employee compensation, and a bunch of asset and liability ending balances. The main issue here is that unions have more reporting requirements than other types of nonprofits, which can be a major administrative burden.

Labor Union Fraud Issues

I’ll touch on one more issue, because it appears in the news every now and then – which is the theft of funds from unions. Unions have an inherently difficult control environment, because they receive funds from many employers, and then disburse it at multiple levels. You could lock down the theft opportunities with a large accounting staff, but most unions are understaffed, and so don’t have enough people to watch over this.

As an example, several officials of the United Auto Workers union, including two former presidents, were convicted of embezzling millions of dollars of union funds between 2017 and 2021. Another example is the American Federation of Government Employees – the treasurer of one of its locals embezzled more than $80,000 of union funds in 2021. And then there was the financial secretary of a United Steelworkers local that embezzled more than $150,000 back in 2016. In short, yes – controls are a very major concern for unions.