As the novel Coronavirus, COVID-19, continues to impact employees and employers alike, employers must make difficult decisions to protect their businesses. The United States is facing what some predict to be the worst economic downturn since the Great Depression. Many employers are finding it necessary to reduce their workforce to stay afloat.
The federal Worker Adjustment and Retraining Notification Act (“WARN” or “Act”) imposes notice obligations on employers when making reductions in force that affect a significant number of employees. The Act generally applies to employers with at least 100 employees (excluding part-time employees) that implement plant closings or mass layoffs. The Act also applies to employers with at least 100 employees who, taken together, work at least 4,000 hours per week, excluding overtime.
Understanding the Basic WARN Obligations
A plant closing is the shutdown of a single site of employment (or facility or operating unit therein) that results in an employment loss at that site during any 30-day period affecting at least 50 full-time employees. A mass layoff is a permanent or temporary reduction in force that results in an employment loss at a single site of employment during any 30-day period affecting: 1) at least 500 full-time employees; or 2) at least 50 full-time employees, who equal at least 33 percent of the full-time employees. Employment losses include:
• an employment termination, other than a discharge for cause, voluntary departure, or retirement,
• a layoff exceeding 6 months, or
• a reduction in hours of work of more than 50 percent during each month of any 6-month period.
The Act requires employers that plan to institute a plant closing or mass layoff to provide affected employees, along with certain union and government officials, with at least 60 days’ advance notice.
In certain circumstances, though, an employer may provide less than 60 days’ notice without facing the $500 per day fine for noncompliance and without facing civil liability to employees for noncompliance. The circumstances in which an employer can reduce the notice period include a faltering company that is actively seeking capital, unforeseeable business circumstances, and a natural disaster. Of these defenses to the Act’s notice requirement, the unforeseeable business circumstances defense is the broadest and therefore is most frequently used; yet, determining whether circumstances are truly unforeseeable can be a complex analysis for employers.
Unforeseeable Business Circumstances Defense
WARN allows employers to give “as much notice as is practicable” when a plant closing or mass layoff is triggered by an unforeseeable business circumstance. Successfully applying this defense requires that an employer be able to prove that it applies by a preponderance of the evidence. Unforeseeable business circumstances are characterized by a “sudden, dramatic, and unexpected action or condition outside the employer’s control.”
Circumstances that may be unforeseeable include a government-ordered closing of a work site that occurs without prior notice, a “principal client’s sudden and unexpected termination of a major contract with the employer, a strike at a major supplier of the employer, and an unanticipated and dramatic major economic downturn.” In response to COVID-19, employers are most likely affected by clients’ terminating major contracts, the current economic downturn, and government-ordered closings. I briefly explore each of these concepts below.
• Client Termination of Major Contracts. Courts have held that in considering whether termination of a contract or loss of a business relationship constitutes an unforeseeable business circumstance, employers should consider their history with and reliance on a customer when evaluating whether a customer’s termination of a major contract is foreseeable. In determining liability for shortened notice, courts may consider how long an employer has been in business with a customer, the percentage of the employer’s business that the customer contributes, whether and when the customer indicated an intent to terminate the contract, and the employer’s historic means and methods of communication with the customer. For example, when a customer that has provided 40% of an employer’s business for over 30 years suddenly terminates the relationship, an unforeseeable business circumstance may exist.
• Economic Downturn. An unanticipated and dramatic major economic downtown can include a recession or other market shift that causes a sudden reduction in demand. An employer must use “commercially reasonable business judgment as would a similarly situated employer” in predicting the demands of its market. However, the employer is not expected to predict accurately general economic conditions that may affect demand for its services. This means that a business circumstance is reasonably foreseeable when it becomes probable, not merely possible. An employer should consider its performance as compared to the industry’s performance in evaluating whether the current economic conditions are an unforeseeable business circumstance. For example, in the 2008 recession, the steel industry as a whole faced a reduction in sales that reached lows unseen in at least 25 years. Although the recession of 2008 was well-known by fall of 2008, the Eighth Circuit Court of Appeals recognized that an employer’s unprecedented high demand for steel in the first three quarters of 2008 as compared to the sudden drop in the fourth quarter of 2008 created an unforeseeable business circumstance. Had the employer faced a steady economic decline throughout the year, it may not have been able to successfully assert the defense. However, the employer’s steady performance during the first three quarters made the sudden decrease in business in the last quarter unforeseeable. Therefore, employers cannot solely rely on the performance of the industry as a whole but must also evaluate their own performance.
• Government-Ordered Closings. A government-ordered closing of an employer’s facility may be an unforeseeable business circumstance if it is mandated without any prior notice. But where there has been a history of correspondence and warnings from the government, the closure is likely foreseeable. For instance, the Sixth Circuit Court of Appeals found that the Food and Drug Administration’s (“FDA”) arrest and seizure of a pharmaceutical company’s product that caused a mass layoff and closure was foreseeable because the company had failed to remediate issues the FDA raised six-months prior to the seizure. As of April 16, 2020, all but seven states (Arkansas, Iowa, Nebraska, North Dakota, South Dakota, Utah, and Wyoming) had issued some form of a stay-at-home or shelter-in-place order as a response to COVID-19. Because this global pandemic is the first of its kind in modern history, these orders may be persuasive as unforeseeable business circumstances. However, employers that are awaiting stay-at-home orders in the remaining seven states should carefully consider whether those stay-at-home orders are now foreseeable in light of the overwhelming number of states that have issued such orders.
Timing of Notice
While employers claiming the unforeseeable business circumstances defense are required to give “as much notice as practicable,” courts generally do not measure this standard by the amount of notice given. Instead, this standard is measured by the amount of time that lapses between the unforeseeable business event and the date that the employer gives notice. Therefore, employers should not idle in making a determination as to how to respond to the unforeseeable business circumstance. Employers should be able to show that they are actively working to come to a decision on their response to the unforeseeable business circumstance to succeed in the unforeseeable business circumstance defense.
The Bottom Line for Employers
COVID-19 has presented a novel circumstance for employers who are downsizing. During and in the aftermath of the virus, we can expect to see courts flesh out the scope of the Act’s defenses, including most significantly the unforeseeable business circumstances defense, based on the framework established in previous recessions. As a practical matter, employers will need to consider their performance prior to COVID-19 as compared to their performance after COVID-19 and the performance of their competitors in the industry. In completing this analysis, employers should ensure that they are taking active steps each day to come to a determination to defend against allegations of stall tactics or insufficient notice.