The WARN Act: A key exception to employer liability
It’s no surprise that employer reductions-in-force (RIFs) have dramatically increased over the past year. With that increase has come a corresponding increase in questions and employee claims under the federal Worker Adjustment Retraining and Notification (“WARN”) Act. A recent decision by Tenth Circuit sheds valuable light on WARN Act liability and provides a great opportunity to review the key provisions of the law.
Your obligations under the WARN Act
In general terms, the WARN Act requires covered employers (any organizations employing 100 or more persons) to provide a 60-days’ advance written notice to all affected employees before a “plant closing” or “mass layoff.” Any employer violating the Act may be liable for back pay to each aggrieved employee, attorneys’ fees, and in some cases, punitive damages.
For the purposes of the WARN Act, a “plant closing” is the temporary or permanent shutdown of a single employment site (or any discrete subpart of a site of employment) if the shutdown results in an employment loss of 50 or more employees. A “mass layoff” occurs when (1) there is a RIF at a single employment site and an employment loss to at least 33 percent of the workers (but not fewer than 50) lose their jobs or (2) a RIF occurs in which 500 or more workers become unemployed. Plant closings and mass layoffs are determined by examining the total number of employment losses occurring during any 30-day window.
‘Unforeseen business circumstance’ exception
The notification requirements mandated by the WARN Act are not absolute. In fact, Congress provided some key exceptions. In January, the Tenth Circuit examined one of those key exceptions – the so-called “unforeseen business circumstance exception” – and provided some key guidance to Oklahoma employers facing financial difficulties.
Under the WARN Act, you may execute a plant closing or mass layoff without providing the 60-day advance written notice if the plant closing or mass layoff was “caused by business circumstances that were not reasonably foreseeable as of the time that notice would have been required.” However, in those circumstances, you must still provide “as much notice as is practicable,” as well as “a brief statement of the basis for reducing the notification period.”
In one case, a group of former employees brought suit under the WARN Act, complaining that their employer, Hale-Halsell, had failed to provide the required 60-day notice before a large RIF. The employer, an Oklahoma grocery distributor, responded by arguing that the RIF was prompted by the loss of a major long-term customer and that such a loss amounted to an “unforeseen business circumstance” under the WARN Act, which excused it from giving 60 days’ notice. Additionally, it argued that it provided notice to affected employees within three days of the loss of the key customer, which was as soon as it was practicable to do so.
Beginning in 2003, Hale-Halsell began experiencing financial and operational difficulties which resulted in its inability to meet many of its clients’ orders. As time went by, the company was unable to resolve internal issues, and more and more client orders were left unfilled. The employer’s largest client grew increasingly dissatisfied and ultimately terminated its long-term business relationship with the grocery distributor.
The former employees argued that the loss of Hale-Halsell’s client wasn’t “unforeseen” because a series of communications over the year established the client’s increasing dissatisfaction. In short, the employer knew about the troubled relationship, and the employees argued the loss of that relationship should have been anticipated. The court rejected that argument, holding that knowledge of dissatisfaction, standing alone, does not make the termination of a client relationship foreseeable. Until the client provided express notice of its decision to terminate, Hale-Halsell was objectively justified in believing the relationship could be salvaged.
Specifically, the court noted the client relationship had endured for more than 31 years and that up to the time of the termination, the grocery distributor was in the midst of meaningful loan negotiations, which may have resolved the relationship difficulties. Ultimately, the court concluded:
We should not burden employers with the task of notifying employees of possible contract cancellation and concomitant lay-offs every time there is a cost overrun or similar difficulty. Such an indiscriminate practice could undermine morale, let alone exacerbate the problem. Such difficulties are invariable, and most often do not lead to contract cancellation.
Finally, the court rejected the employees’ argument that Hale-Halsell failed to give notice as soon as practicable, notwithstanding the unforeseen business circumstance of the lost customer. The court noted that after learning of the termination decision, the employer took only three business days to discuss the matter internally with its advisors and lawyers in hopes it might “survive the carnage.” Finding the employer’s entire course of action to be objectively reasonable under the circumstances, the court upheld the dismissal of the plaintiffs’ WARN Act claims. Gross v. Hale-Halsell Co.
The notice requirements under the WARN Act undoubtedly serve a valid purpose in attempting to minimize the disruption and financial hardship to displaced workers. However this decision reflects the fact that courts will recognize the equally valid yet competing principle that employers must be free to work through financial difficulties in an attempt to salvage a distressed business without fear of WARN Act liability.