Shutdowns and Layoffs: Watch
Out for the WARN ACT
© 2010 Cohn Whitesell & Goldberg
When does the WARN Act require a company to give advance notice before terminating an employee? What are the consequences of failing to give notice? What if the decision to shut down must be made on very short notice? Are there special rules for faltering companies? What if a shutdown or layoff is necessitated by unforeseen circumstances?
When considering whether to shut down or substantially scale back operations, directors and officers of corporate debtors with 100 or more employees must include consideration of the Worker Adjustment and Retraining Act (WARN Act). Subject to certain exceptions, the WARN Act requires employers with 100 or more employees to provide a 60-day notice to such employees of any plant closing or mass layoff. The WARN Act creates a right of action by an employee for wages and benefits for each day of violation of the notice provisions, up to a maximum of 60 days. So, if your company is subject to the WARN Act and files a Chapter 11 petitionand closes a plant without the required notice, it could give rise to a significant claim in bankruptcy - a claim that would most likely be a wage priority claim or, if the closing was postpetition, perhaps even an administrative claim.
Who should be concerned about the WARN Act?
The Act provides that: "An employer shall not order a plant closing or mass layoff until the end of a 60-day period after the employer serves written notice of such an order" to each employee or employee representative, as well as to the proper state and local officials. The key concepts are "employer," "plant closing" and "mass layoff."
An employer is defined as any business enterprise that employs 100 or more full-time employees, or 100 or more employees who work more than 4,000 hours per week in the aggregate. A parent company is often faced with the issue of whether it is a business enterprise subject to the WARN Act where the parent and each subsidiary, standing alone, do not have 100 employees, but combined have more than 100 employees. There is no absolute answer. Because the WARN Act does not define "business enterprise," courts have looked to comparable state and federal law, and the facts of each case, to determine whether a parent and subsidiaries are a single enterprise. Courts look to factors such as common ownership and management, interrelationship of operations, non-observance of corporate form, and centralized control of labor.
A plant closing under the WARN Act is the permanent or temporary shutdown of a single site of employment (or one or more facilities or operating units within a single site) if the shutdown results in an employment loss during any 30-day period for 50 or more employees. A single site of employment can refer to a single building or to a group of buildings such as a campus or industrial park, or to a group of warehouses in the same area where employees shift from one building to another. Facilities located on the opposite sides of town, with separate work forces, will most likely be separate sites even if they are managed by a single employer.
A mass layoff is a reduction in work force that is not a plant closing, but that results in employment loss at a single site during any 30-day period for either: (a) at least 50 full-time employees provided that they constitute and at least 33 percent of the full-time employees; or (b) at least 500 full-time employees. So, if you have 180 employees and lay off 60, you are required to give notice; if you have 120 employees and lay off 40, you are not. Note that a layoff on the first of the month and on the 15th of the month will be deemed a single layoff.
What if you are supposed to give notice but don't (or can't)?
If an employer fails to give notice, it becomes liable to each employee for back pay for each day of the violation. So, if an employer gives 15 days' notice, it is liable for 45 days of back pay. The rate of pay is measured as the higher of the average regular rate of such employee over the last three years, or the final regular pay received by such employee. Back pay also includes employee benefits that would otherwise have been provided, including any medical expenses that would otherwise have been covered by insurance. In addition, employers face a civil penalty of $500 per day and are responsible for the attorneys' fees incurred by aggrieved parties.
This liability becomes particularly important to a company that is considering filing a Chapter 11 petition. If a layoff or plant closing occurs prior to a Chapter 11 filing, the employees' claims for failure to provide WARN Act notice will be a prepetition claim, some or all of which will be entitled to priority treatment under the Bankruptcy Code. If the layoff or plant closing occurs after the Chapter 11 filing, the employees' claims may be postpetition administrative expense claims, which puts them at the very top of the collection ladder after secured creditors, and can have serious adverse effects on the company's ability to operate and successfully confirm a plan of reorganization.
Are there excuses for failure to provide notice?
The purpose behind the WARN Act is to afford a measure of protection to workers, their families and communities by prohibiting plant closings or mass layoffs without notice. But often the decision on whether to shut down operations or to lay off a large part of the workforce must be made on short notice. Indeed, sometimes the decision is taken out of the hands of directors and officers when, for example, a bank stops providing working capital and the company simply has no money to operate.
The WARN Act sets forth two primary exceptions to the notice requirements - the so-called "faltering company" and "unforeseen business circumstances" exceptions. Under either exception, the company must still give as much notice as is practicable, and in so doing must provide a brief statement of the reason for reducing the notice period.
The faltering company exception permits an employer to order a shutdown of a single site before the end of the 60-day period if as of the time the notice would have been required the employer "was actively seeking capital or business which, if obtained, would have enabled the employer to avoid or postpone the shutdown and the employer reasonably and in good faith believed that giving the notice required would have precluded the employer from obtaining the needed capital or business." Courts have construed this exception narrowly, and require objective proof that all of the elements are met.
The unforeseeable business circumstances exception permits an employer to order a plant closing or mass layoff before the conclusion of the 60-day period if the closing or mass layoff is caused by "business circumstances that were not reasonably foreseeable as of the time that notice would have been sent." Courts apply this exception where there has been some sudden, dramatic and unexpected action or condition outside the employer's control. Examples may include termination of a major contract or a sudden shutdown of a site by the government. An employer relying on this exception must show that it used commercially reasonable business judgment in predicting the demands of the market.
Who is responsible if the plant closing or layoff is part of a sale?
The seller is responsible for providing WARN Act notice for a plant closing or mass layoff that occurs up to and including the day of the sale. Thereafter the purchaser is responsible. Back to resource center
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