The federal Worker Adjustment Retraining Notification Act (the WARN Act), generally requires that employers give workers 60 days’ written notice of any plant closings or mass layoffs. If employers do not comply with this requirement, then workers can recover backpay.

A recent decision from the United States Bankruptcy Court for the District of Delaware addressed obligations under the WARN Act for an employer facing a potential bankruptcy. Yellow Corp., a national trucking business, found itself in challenging financial circumstances. In an attempt to stabilize its financial condition, the company hired bankers to identify new investors and possible modifications of its debt. The company had also asked its union pension fund for a deferral of contributions. The fund refused, and the company failed to make the contribution. The union then gave the company a 72-hour strike notice. Both the company and the union treated the notice as a bluff, but customers reacted negatively — and daily shipments dropped sharply in a matter of days, which ultimately led the company to terminate employees and file for bankruptcy.

In the company’s bankruptcy proceeding, employees pursued WARN Act claims and, after discovery, both sides filed motions for summary judgment. The court then considered the statutory exemptions to WARN Act liability.

Exception 1: The Faltering Company Exception

First the court considered the so-called “faltering company exception.” Under this exception, an employer does not have to comply with the WARN Act’s notice requirement if, “as of the time that notice would have been required,” it 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.”

The court concluded that Yellow Corp.’s efforts prior to filing bankruptcy clearly indicated that it was attempting to “explore options either to refinance existing indebtedness or to attract new capital,” and that such efforts were “sufficient to fall within the faltering company exception.” More specifically, the court noted that “[r]etaining an investment banker that is actively engaged in exploring the market for sources of new liquidity is precisely the kind of activity that qualifies under the faltering company exception.”

Exception 2: Unforeseeable Business Circumstance Exception

Next, the court considered the “unforeseeable business circumstances exception.” Under this exception, an employer does not have to comply with the 60-day notice requirement if a layoff is “caused by business circumstances that were not reasonably foreseeable” at the time that the notice would have normally been required.

In determining whether the present events had been “reasonably foreseeable,” the court recognized it must apply an objective standard to determine “whether a similarly situated employer,” using “commercially reasonable business judgment,” would have foreseen the events at the time that the notice would have otherwise been required. The court then determined that it was clear that the company’s shut down was caused by an unforeseeable business event, namely, the “history of brinksmanship” with the union.

Notice to Workers Is Still Necessary Even if Exceptions Apply

The court did not end its analysis at this point. Even if an exception applies, an employer must still give employees as much notice as is practicable and provide a brief statement of the basis for reducing the notification period.

The court held that when the company eventually gave notice to its workers, those notices did not contain enough adequate facts to justify the reduced notice period. Yellow Corp.’s first notice to workers was “devoid of actual facts,” while the second notice lacked “language specific to the company’s circumstances.” Therefore, the court held that the company could not successfully rely upon either of the exceptions to avoid WARN Act liability.

The Liquidating Fiduciary Exception

The company had another argument to avoid WARN Act liability, referred to as the “liquidating fiduciary exception.” Under Department of Labor regulations, certain employers “whose sole function in the bankruptcy process is to liquidate a failed business… does not succeed to the notice obligations.” Hence, the question before the court was whether, at the time of the layoffs, the company was still engaged in its usual business activity. The court determined that, as of the date on which nonunion employees had been fired, the company was still an employer because it was still making deliveries. However, it was less clear whether there was usual business activity at the time when union workers were fired a number of days later. Accordingly, the court was unable to grant summary judgment on this exception to liability.

Takeaways

Financially distressed companies have many responsibilities to creditors and other stakeholders:

• Management and professional advisors must consider compliance with the WARN Act employee notice requirements when there is a potential for mass layoffs.
• Even if you qualify for an exception, you may still need to give notice.
• Check for state law “mini-WARN Acts” that may have different requirements.

Although there are exceptions to the WARN Act notice requirements when a company is faltering or facing unforeseen circumstances, strict compliance is still necessary to avoid liability to employees.