Caught Between WARN And A Hard Place

Thursday, January 1, 2009 - 01:00

As companies struggle to stay afloat in the current economic climate, they must cut expenses any way they can, including making reductions to employee headcount.

Often these reductions in force are done without advance notice and the result has been a significant number of lawsuits filed under the Worker Adjustment and Retraining Notification (WARN) Act, the federal law that requires employers to give employees 60 days advance notice of a mass layoff or plant closing.

Companies that do not give proper WARN notice often believe that they are exempt either because the company or the workforce reduction is not covered by WARN or because they believe they fall under one of WARN's exceptions.

In some cases, companies determine for business reasons that they cannot give the required WARN notice notwithstanding the legal risk. They presume it will all get sorted out in bankruptcy if necessary.

What companies do not know or understand about WARN, however, can hurt them. The following are five common misconceptions about WARN and the truth behind each:

Misconception #1: WARN applies only to employers with 100 or more full-time employees .

The WARN Act does apply to employers with at least 100 full-time employees. However, full-time employment as defined under WARN is not the same as most companies define it. Under WARN, an employee is full-time if the employee averages at least 20 hours of work per week and has been employed for at least six of the last 12 months. So an employer that has not done any hiring in the past six months and that has 80 full-time employees and 25 part-time employees who each work 30 hours per week is covered by WARN even though it has only 80 full-time employees by its own definition.

Moreover, just because an employer has fewer than 100 full-time employees does not mean it is exempt from coverage under WARN. An employer with 100 employees overall (including both full-time and part-time) is covered by WARN if those employees average in the aggregate at least 4,000 working hours per week not including overtime. This means that new hires as well as those exempt employees who regularly work 50 or 60 hours each week can create WARN coverage for an employer where such coverage otherwise might not exist.

Misconception #2: There is no obligation to give WARN notice if layoffs are staggered.

The obligation to give WARN notice is triggered when at least 50 full-time (as defined by WARN) employees suffer an employment loss at a single site of employment during any 30-day period. In the case of a mass layoff, the affected employees also must constitute at least 33 percent of the workforce at the site, unless there are at least 500 affected employees. It is important to note that the 30-day aggregation requirement is not only prospective but also retrospective, meaning that layoffs that take place less than 30 days after an earlier layoff can trigger after-the-fact WARN liability with respect to the first group of laid-off employees.

As if the 30-day aggregation requirement were not onerous enough, there is also a 90-day aggregation requirement where there are two or more rounds of layoffs, each round alone is insufficient to trigger WARN, the layoffs are not the result of separate and distinct events and the staggering of the layoffs is not an attempt by the employer to evade WARN's requirements.

While employers that have legitimate business reasons for staggering layoffs may find that the layoffs do not trigger WARN liability, just because layoffs are staggered does not mean WARN will not apply.

Even if WARN does not apply, many states and localities have "mini-WARN" statutes. In some cases, the thresholds for coverage and for triggering notice obligations under these laws are lower than under federal law.

Misconception #3: WARN liability can be avoided by paying employees the wages they would have earned during a 60-day notice period.

WARN requires that notice be given to the affected employees or to their union if applicable, to the state and to the locality, and the notice must contain certain information to be valid. Written notice that does not contain all of the required information is insufficient, and verbal notice is never sufficient. If proper notice is not given, employees are entitled to damages.

An employer that fails to give the required notice to the locality is subject to a civil penalty of $500 per day for each day of the violation for a maximum of 60 days (i.e., $30,000) unless the employer pays the affected employees what they are owed within three weeks from the date the layoffs are ordered.

Employees are owed not just the wages they would have received during the 60-day notice period. If an employee's average wages during the last three years of employment were more than what the employee was earning at termination, the employee is entitled to the greater amount. Moreover, if the employee works in Pennsylvania, New Jersey, Delaware or the Virgin Islands (i.e., the Third Circuit), he or she is entitled to 60 work days of wages rather than the wages the employee would have earned in 60 calendar days.

In addition to wages, an employer that violates WARN owes all aggrieved employees benefits under its welfare benefit and pension benefit plans (as defined under the Employee Retirement Income Security Act (ERISA)) for the period of violation, including the cost of medical expenses incurred during this period that otherwise would have been covered under the company's group health plan.

Thus, paying employees the wages they would have earned during a 60-day notice period does not negate all damages to which the employees are entitled under WARN. Such damages are negated only if the employer pays benefits as well as back wages and those back wages are paid at the highest rate and as interpreted by the courts.

Employers do not get credit for payments or benefits that are provided conditionally (for example, in exchange for a general release) nor do they get credit for payments or benefits provided due to an existing obligation (for example, pursuant to a severance plan).

With regard to the requirement that payment be voluntary and unconditional, employers should not despair. There are ways to make a general release and/or a severance plan work to an employer's advantage with respect to WARN. WARN claims can be waived and severance plans can be written so that amounts payable under the plan are automatically reduced if and to the extent that any amounts are paid pursuant to WARN. Employers should consult with counsel on these issues in advance of any layoffs that may trigger WARN.

Misconception #4: There is no obligation to give WARN notice if an employer is actively seeking capital.

There are three exceptions to the 60-day notice requirement under WARN, and none completely relieves an employer of the obligation to give WARN notice. Rather, the exceptions reduce the notice period from 60 days to the longest period that is practicable under the circumstances.

The three exceptions are: natural disaster, unforeseeable business circumstances and faltering business. The first two are available in the context of either a mass layoff or plant closing. The third exception, however, is available only where there is a plant closing.

It is the faltering business exception that applies where an employer is actively seeking capital (specifically, loans, issuance of stocks or bonds, money or credit) or business. The exception is available only where the employer can prove that: (1) it was actively seeking the capital or business at the time the 60 days notice should have been given; (2) there was a realistic opportunity of obtaining the capital or business, (3) if obtained, the capital or business sought would have been sufficient to postpone or avoid the plant closing, and (4) it reasonably and in good faith believed that giving WARN notice would have precluded it from obtaining the capital or business.

The faltering business exception is narrow. It probably would not apply, for example, where an employer is actively seeking to be bought by another company rather than seeking capital through the means specified above.

As the Third Circuit recently explained in In re APA Transport Corp. Consolidated Litigation , 541 F.3d 233 (3d Cir. 2008), the exception also does not apply when the employer cannot point to specific steps taken to obtain capital or business at or shortly before the time notice is required. In APA Transport , the court found that a single meeting between the employer and its lender approximately two months before WARN notice was to be given and during which the employer did not make a formal request for additional financing was insufficient to satisfy this requirement.

Because the exception applies only where there is actually a plant closing, it is inapplicable if the company is successful in its efforts but still must lay off some of its employees. It is also likely to be inapplicable if the company ultimately closes but goes through several rounds of layoffs outside the 90 days leading up to the closure since the employees laid off earlier technically lost their jobs as part of a mass layoff rather than a plant closing.

While an employer that cannot take advantage of the faltering business exception may still argue unforeseeable business circumstances, the two exceptions generally do not go hand in hand. An unforeseeable business circumstance is by definition a sudden, dramatic and unexpected action outside the employer's control. An employer that is actively seeking capital typically understands the risks inherent in failure, making it difficult to characterize such failure (if it occurs) as sudden, dramatic and unexpected.

Misconception #5: If a company anticipates it may ultimately file for bankruptcy, it does not have to be concerned about potential WARN claims.

Just because a company files for bankruptcy does not mean that it is no longer covered by WARN.

Rather, the only time a company in bankruptcy can avoid WARN coverage altogether is if the bankruptcy is under Chapter 11 and layoff decisions are made after the company has ceased to operate as a business enterprise and while it is engaged strictly in asset liquidation.

Most of the time, WARN Act claims involving a bankrupt company get resolved in the bankruptcy, either as second priority administrative claims or fourth and/or fifth priority claims, depending on when the claims accrued.

As per recent court decisions - In re First Magnus Financial Corp., 390 B.R. 667 (Bankr. D. Ariz. 2008) and In re Powermate Holding Corp. , 394 B.R. 765 (Bankr. D. Del. 2008) - WARN Act claims are deemed to accrue when employees are laid off as opposed to the date WARN notice should have been given or the date that is 60 days following the layoff date. Only those WARN Act claims that accrue after the bankruptcy filing date are afforded administrative expense status.

While this is good news for employers that ultimately do file for bankruptcy, a company on the edge financially may in fact be pushed into bankruptcy by class action litigation under the WARN Act following mass layoffs where proper notice was not given.

Moreover, since employees laid off prior to a bankruptcy filing are likely not to be paid in full, they will be looking for other ways to be made whole.

While there is no individual liability under WARN, there is potential liability for affiliated companies, management companies, investors and lenders.

Author's Note: This article should not be construed as legal advice or as pertaining to specific factual situations.

Jennifer Blum Feldman is a Partner in the Philadelphia office of WolfBlock LLP and focuses on employment law compliance, in particular with regard to EEO and wage and hour issues.She also provides training to in-house counsel and human resources professionals and has significant experience litigating employment cases.

Please email the author at jfeldman@wolfblock.com with questions about this article.