Wage and Welfare Bond
Unions require this type of bond when negotiating collective bargaining agreements with companies. If a union member company fails to uphold its obligations under the bond’s terms, the bond amount can be used to pay claims for salary, wages, fringe benefits and/or compensation for services rendered by employees represented by the union. Each wage and welfare bond is unique depending on the union that requires it.
As such, these bonds are known by many different names, such as:
No matter the specific title found at the top of the form, these bonds all work in the same basic way: as legally binding contracts that join three parties together to ensure a certain task is completed. The three parties involved in wage and welfare bonds are as follows.
- Principal: the member required to purchase the bond insurance
- Obligee: the union requiring the bond to protect employees’ interests
- Surety: the underwriter that issues the bond, thereby providing a financial guarantee of the principal’s ability to uphold its duties as a union member
These bonds are a type of financial guarantee bond, which means they’re very risky for underwriters to issue - especially since so many unions have made claims on them in the past. As such, underwriters typically require that applicants post collateral worth 100% of the bond amount. This means if a company needs $100,000 of bond insurance coverage, the company will have to post $100,000 of collateral with the underwriter before the bond will be written. As such, the application process for these bonds is lengthier than processes for commercial bond types that are far less risky.