WARN Act Exceptions for a Faltering Company

The notice period can be reduced for a “faltering company” that is trying to stay in business by seeking additional capital or business. This provision applies only to plant closings and not to mass layoffs. To avoid giving the full 60-day notice under this exception, you must meet four strict requirements:1

• You must have been actively seeking capital or business at the time that the 60-day notice would have been required.
• There must have been a realistic opportunity to obtain the financing or business sought.
• You must show that the financing or business sought, if obtained, would have enabled you to avoid or postpone the shutdown for a reasonable period of time.
• You must demonstrate that you reasonably and in good faith believed that giving the required notice would have precluded you from obtaining the necessary capital or business.

Court cases have determined that the “faltering company” exception does not apply to attempted sales of a facility2 or attempted merger negotiations with another employer.3 California law requires you to produce documentation of your efforts to seek capital or business and declare the accuracy of documentation under penalty of perjury.4

The exception to the WARN notice required by California law does not apply if the employer is merely seeking a buyer for its business, as opposed to seeking capital or business to stay afloat. The employer must prove that it was seeking the capital or business at the time it would have had to give the 60 days’ prior notice.5

The Department of Industrial Relations (DIR) issued an opinion letter in response to Insync Marketing Solutions, LLC’s written request for a determination that it was not required to give 60 days’ notice under the WARN Act when it closed its Los Angeles facility on February 20, 2009. Insync believed it qualified for an exemption because it was actively seeking a buyer for its business. It felt that providing notice would cause it to lose customers, employees and potential business investors or purchasers. The DIR explained that because Insync closed its doors on February 20, 2009, it must have been actively seeking capital or business on or about December 22, 2008, to qualify for the exception.

Example of Valid WARN Exception

In another case claiming an exception to the requirement for a WARN notice, Telescape Communications, Inc., provided documentation of its attempt to acquire investors. The company ceased operations on December 12, 2008. Notice would have been required on October 13, 2008.

At that time, Telescape was in communication with another company about a capital investment that would have allowed it to continue in business for at least another year. Telescape had also retained the services of an advisor to assist in finding investors, purchasers, partners, joint ventures and any other business combinations that might save the company.

The DIR agreed that, had Telescape sent the required WARN notice, Telescape’s ability to get the additional capital would have been jeopardized. Investors would be unwilling to invest if they thought the company might be closing.6

WARN Act Exceptions for Unforeseeable Circumstances

The WARN Act notice period can be reduced if the trigger event is caused by business circumstances that were not reasonably foreseeable 60 days before the mass layoff or plant closing. This is a narrow exception. The WARN Act notice period can be reduced when the closing or layoff was a direct result of a natural disaster, including flood, drought, earthquake, storm, tidal wave or other similar disaster.7 California exempts closings that result from a physical calamity or act of war.8

Federal law contains a narrow exception where the closing constitutes a strike or lockout not intended to evade the law’s requirements.9

Under these exceptions, you must give as much notice as possible under the circumstances.

The Ninth Circuit Court of Appeals clarified that a mass layoff that occurs for reasons outside the employer’s control does not trigger the WARN Act notice requirements. In Deveraturda et. al. v. Globe Aviation Security Services, the court found that WARN Act notification was not required because the layoffs did not happen as a result of the employer’s own initiative but, instead, at the direction of the federal government. The WARN Act applies only when the employer orders a mass layoff.10

WARN Act Exceptions for Contract Termination

In Loehrer v. McDonnell Douglas Corporation, the Eighth Circuit Court of Appeals ruled that a sudden, dramatic and unexpected termination of a defense contract by the U.S. Navy excused a company from providing employees the required 60 days’ notice of a mass layoff. Under the WARN Act, you are excused from providing the full period of notice if unforeseeable business circumstances exist. In Loehrer, Congress expressed its support for the project and contract renegotiations were proceeding well. These facts, combined with the government’s history of rarely canceling contracts for programs for which Congress stated a need, convinced the court that the contract’s loss constituted an unforeseeable business circumstance.11

WARN Act Exceptions for Good-Faith Omission

The federal WARN Act provides that a court has the discretion to reduce the amount of any liability or penalty if an employer can prove that:12

• An act or omission was committed in good faith.
• The employer reasonably believed that the act or omission did not violate the law.

WARN Act Exception Denied

In a case before the Ninth Circuit Court of Appeals and brought under the federal WARN Act, the court awarded the employees more than $60,000 for lost wages and benefits, plus more than $123,000 in attorneys’ fees. The employer laid off about 90 percent of its workers with only one day’s notice. Several weeks later, it shut down completely. Employees sued, alleging violation of the WARN Act. They sought pay and benefits that should have been provided during the notice period.

The company argued that it was qualified for three exceptions. Invoking the good-faith exception, the company claimed ignorance of the WARN Act requirements. The court said that ignorance of the law did not meet the good-faith exception.

The company pointed to the refusal of its bank to renegotiate its credit as evidence of a business circumstances exception. The court rejected this exception as well, pointing to evidence that it was not the loss of credit but rather depressed market conditions, increased raw material costs and certain operational problems that were responsible for the closing.

For the “faltering company” exception, the company argued that it was seeking new capital from its bank. The court rejected this defense because no evidence was presented to show that the bank would have denied necessary funding because employees were given a WARN notice.13

1. 29 CFR sec. 639.9(a); Lab. Code sec. 1402.5