An Obsolete "WARNing?"

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As the economy hemorrhages jobs (3.6 million and counting since the start of the recession), C-level suites everywhere are abuzz with executives hashing out the details of impending rightsizings, streamlining, redundancies, or whatever obfuscation of choice.

Among the many considerations that those charged with the unenviable task of cutting jobs must take into account is the federal Worker Adjustment and Retraining Notification (WARN) Act.

WARN, one of those fortunate acronyms which hint at its underlying meaning (like MADD, or CREEP), requires businesses that have at least 100 employees to give 60 days’ advance notice of any “mass layoff” (defined as at least 50 employees losing their jobs during a 30-day period). A number of states also have their own WARN Act laws that may be stricter than the federal law and may apply to smaller employers. (For example, New York State’s version requires 90 days’ notice to employees and covers employers with 50 employees.) Failure to provide the required notice can lead to liability for up to 60 days back pay and benefits.

There is no government watchdog agency on the lookout for WARN Act violations; only a civil action by the aggrieved employees (or their unions) can enforce the rights granted by the Act.

Although, as The New York Times recently reported, there are no comprehensive statistics on employment cases, there is broad agreement among the labor and employment bar that the number of WARN Act lawsuits has risen sharply as the economic crisis has deepened. This spike in WARN suits has an obvious logic: when it’s easy to land a new job, motivation to go through the hassle of filing a lawsuit is low. And vice versa. Since the onset of the recession, former employees of Lehman Brothers, Archway Cookies, EOS Airlines, and Fortunoff have all filed class actions under the WARN Act. Other prominent companies “under investigation” by plaintiffs’ law firms for violations include Caterpillar, Harley-Davidson, Home Depot,IBM,General Motors, and Microsoft.

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In this tumultuous economic context, it is even more urgent that employers contemplating layoffs know the answers to these questions: Is my company covered by the Act? What events trigger the notice requirements? What are the consequences of violating the Act? Conversely, employers must be cognizant of the circumstances, which exempt employers from the Act’s notice obligations and liabilities. Among these exemptions built into the federal version of the WARN Act is the “unforeseen business circumstances” exception where the employer must show that the business circumstances which led to the layoffs were not “reasonably foreseeable” at the time notice would have been required. (Not all state WARN laws contain this exemption.)

Historically, courts have been extremely reluctant to apply the “unforeseen circumstances” exemption. Some recent case law suggests this reluctance might be waning.

In a federal WARN case (Gross v. Hale-Halsell Co.) decision handed down last month by the Tenth Circuit Court of Appeals in Denver, an employer won a summary judgment based on the “unforeseen circumstances” exemption. The court observed, “Business downturns in a cyclical economy are not unusual and 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….” Keep in mind, the events at issue in the Gross case happened in the prelapsarian days of 2004.

As the current batch of WARN cases make their ways through the courts, what will judges make of “unforeseen circumstances” arguments based on the global meltdown of the financial system? It is difficult to imagine courts reexamining the “foreseeability” of the economic crisis on a case-by-case basis.

Is a “loophole” a “loophole” if everyone can slip through it? Has the WARN Act been rendered obsolete by the developments of the last year?

Defunct law firm Thelen LLP is among the growing ranks of employers facing a WARN class action by former employees. The firm, which informed employees in October that it would dissolve as of December 1, 2008, contends that it ought to be excused from its WARN obligations because, basically, no one could have seen the economic collapse (and the end of the firm’s credit line) coming. “Thelen's performance was made impracticable without fault of Thelen by the occurrence of an event the nonoccurrence of which was a basic assumption on which the contract was made,” read the firm’s answer to the class action complaint.

This statement is not only a near-parody of convoluted legalese, it also might be a winning argument.

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Brian Dalton is Vault's senior law editor. He has J.D. from Fordham, and a B.A. in History from Middlebury.

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