Sequestration: Are You Prepared to Provide WARN Act Notice?

March 1, 2013

Many federal contractors are increasingly apprehensive as the impending sequestration deadline of midnight draws near. Sequestration is now inevitable and federal Government budget cuts are going to occur in the near future that will significantly impact the availability of funding for future and current government contracts.

As contract terminations and reductions occur, contractors will be confronted with a thicket of legal obligations arising under the federal Worker Adjustment and Retraining Notice (WARN) Act and numerous state mini-WARN statutes. Contractors are therefore well advised to thoughtfully consider various alternatives to laying employees off in a manner that can eliminate the need to provide WARN notice and avoid the "brain drain" associated with mass layoffs.

The Federal WARN Act

The federal WARN Act requires employers to provide employees 60 days' notice before implementing a plant closing or mass layoff. 29 U.S.C. §§ 2101-2109. A "mass layoff" is defined as a reduction in force that does not result from a plant closing and "results in an employment loss at the single site of employment during any 30-day period," excluding part-time employees, for either: (1) 33% of the employees and at least 50 employees, or (2) at least 500 employees. The WARN Act has three exceptions to its 60 day notice requirement. The "unforeseen business circumstances" exception is most applicable to a situation where contracts are terminated or curtailed by government agencies unexpectedly. This exception allows an employer to order a mass layoff or a plant closing without giving the full 60 days' notice if the layoff or closing is caused by business circumstances not reasonably foreseeable at the time that notice would have been required.

In relying in part on the unforeseen business circumstances exception, the Department of Labor (DOL) and the White House Office of Management and Budget (OMB) issued guidance in the summer and fall of 2012 adopting the position that WARN notice is not required to be issued to workers employed under government contracts in advance of any sequestration announcements because of the uncertainty of whether sequestration will actually occur and if so, which contracts would be affected. Per this guidance, WARN notices are not required right when the sequestration deadline hits because contractors still cannot foresee which contracts will be affected. Once federal agencies announce which contracts will be terminated or curtailed, WARN notices would be required at that time to the extent there is any portion of the 60 days of WARN notification left.

In addition, it is likely that contract cuts will occur intermittently instead of all at once. When trying to determine whether there has been or will be a sufficient number of employees suffering an employment loss, contractors facing contract losses must be aware of the federal WARN Act "aggregation rule." Under this rule, during any 90 day period, if two or more groups of employees at a single site of employment suffer employment losses and the aggregate number of layoffs or terminations exceeds the minimum number required for a mass layoff or plant closing, a "mass layoff" or "plant closing" will be deemed to have occurred unless the employer can demonstrate that the employment losses are the result of "separate and distinct" actions. Given that employers bear the burden of showing that layoffs were the result of separate and distinct causes in the event they failed to provide WARN notice, employers should carefully monitor the number of layoffs that occur due to contract reductions.

State Mini-WARN Acts

The ambiguity and complexity of the federal WARN Act requirements are compounded by the numerous and often more stringent state law provisions addressing the same notice issues. Several states, territories and localities have enacted WARN-like statutes and regulations that require advance notice or severance payments to employees facing job loss from a mass layoff or plant closing.

For example, some states, such as New York, Illinois and New Hampshire set a lower trigger for mass layoffs than federal law, defining a mass layoff as: (1) at least 25 full-time employees if they constitute at least 33% of full-time employees or (2) at least 250 full-time employees regardless of the percentage during any 30-day period. California defines a "mass layoff" as a separation from a position during any 30-day period of 50 or more employees. In addition, although many states follow the federal WARN 60 day notice requirement, New York requires 90 days' notice, while Maine requires only seven days. Minnesota's statute incorporates the federal WARN notice requirements but is entirely voluntary. Moreover, some state laws, unlike the federal WARN Act, do not include or severely limit the "unforeseen business circumstances" exception to the notice requirement, including California and New Jersey.

Workable Layoff Alternatives

Given the uncertainty of whether and when contract terminations or cuts will occur, and contractors' desire not to unduly alarm employees in anticipation of such cuts, many contractors are considering a variety of alternatives to laying off employees, such as implementing furloughs and reducing hours and salaries of affected employees.

The advantages of issuing furloughs are that if the contractor is able to find other employment for the affected employees, WARN notice is not required. The negative side of furloughs is if the contractor cannot find other employment for the affected employees who are furloughed, the full 60 days' WARN notice would then be required at the end of the furlough period. Contractors who choose to furlough employees cannot then rely on the "unforeseen business circumstances" exception of the WARN Act after a contract reduction occurred given that they should have foreseen such layoffs were necessary at the time the contract was cut.

Other alternatives include reducing employees' salaries or converting employees' status from full-time to part-time. Contractors considering these options may have to provide notice of a change in employment status or reduction in salary under applicable state or local law. Contractors should also examine their benefit plans to determine whether a reduction in hours will trigger a loss of coverage.

Now that sequestration is inevitable, contractors should carefully monitor Government announcements and information to determine when contract terminations or cutbacks to their specific contracts are sufficiently foreseeable to trigger their WARN Act notice obligations. Contractors should also be mindful of the federal WARN Act requirements and the applicable WARN-like state law requirements that often have varied triggering events, notice requirements and exceptions to the notice requirements. Given the significant potential employer liability for failure to comply with WARN, the importance of fully understanding the various complexities of the WARN and other employment statutes that can come into play cannot be overstated.

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