This post commences CDF’s new monthly series from the Business Transactions and Restructurings Group, highlighting labor and employment issues that can arise in business deals.  

These are strange economic times. Although some businesses do continue to grow by acquisition, we are seeing an increasing number of other businesses contracting and undergoing reductions in force, while still others are preparing for acquisitions and also executing reductions in force. For businesses contemplating a reduction in force, here are some helpful issue-spotting tips regarding the federal Worker Adjustment and Retraining Notification (“fed WARN”) Act requirements.  

The fed WARN sets forth notice requirements for certain lay-offs and plant closings. Fed WARN applies to a business that has: (i) 100 or more employees, excluding part-time employees and those with fewer than 6 months of service in the last 12 months; or (ii) 100 or more employees, including part-time employees, who collectively work more than 4,000 hours per week, excluding overtime (“Covered Business”).  

A Covered Business must comply with fed WARN notice requirements where it undergoes: (i) a mass layoff - a reduction in force that (a) does not result from a plant closing, and (b) results in an employment loss at the single site of employment during any 30 day period for at least 50-499 covered employees if they represent at least 33% of the total active workforce, or 500 or more covered employees; or (ii) a plant closing – which is the permanent or temporary shut down of a single place of employment or one or more facilities/operating units resulting in an employment loss during a 30 day period for 50 or more covered employees. The Department of Labor has various definitions of a single site of employment, and it bears mention that a single site of employment can be comprised of multiple facilities in close proximity, and a single facility can actually contain multiple single sites of employment. This analysis is a highly fact-sensitive one that is subject to 90-day lookback periods and should be done hand in hand with a review of the most current evolution of case law on this topic. There are exceptions to the notice requirement for faltering businesses, unforeseeable business circumstances, and natural disasters. But note that fed WARN sets forth specific definitions for many terms that readers should review before drawing any conclusions about notice obligations.

If a Covered Business undergoes a triggering event, it must provide 60 calendar days advance notice to the employees or employee representative(s), the chief local elected official and the State Rapid Response Dislocated Worker Unit. This notice requirement should be evaluated as early as possible to avoid negatively impacting the flow of a business transaction or restructuring, and to avoid risks of exposure to damages and penalties. An employer that violates the fed WARN Act notice requirement is liable to each affected employee for an amount equal to back pay and benefits for the period of violation up to 60 days and is subject to civil penalties of up to $500/day for each day of violation.  

State Law Considerations

Many states, including California, have “mini-WARN” Acts that set forth higher standards and notice requirements. Each state has specific and different definitions and requirements, employers must satisfy fed WARN as well as the state WARN Act anywhere a covered facility undergoes a triggering event. The California WARN Act (“Cal WARN”) requires any industrial or commercial facility that employs or within the preceding 12 months has employed at least 75 persons (“Covered Establishment”) to give employees and the appropriate LWDA official notice 60 days prior to a qualifying layoff, relocation or termination. Cal WARN is triggered where a Covered Establishment layoff affects 50 employees (or one third of full-time employees at a single worksite) and lasts at least 6 months. Exemptions do apply.

Be sure to evaluate potential layoffs related to a pending transaction or restructuring as early as possible to avoid potential complications to the timeline of your transaction or risks of exposure to damages and penalties. WARN Act violations may pose risks of exposure to liability even for officers, directors, and secured creditors.