By Jude Biggs
The Worker Adjustment and Retraining Notification Act (WARN) requires large employers to provide 60 days’ advance notice of a plant closing or mass layoff. Sometimes circumstances are such that an employer needs to act quickly to lay off employees and can’t provide the 60 days’ notice required by WARN. A recent Tenth Circuit decision describes when covered employers may skip the notice requirements under WARN’s “unforeseeable business circumstances” exception.
Large Employers With Large Layoffs Must Generally Give Notice
WARN requires employers with 100 or more employees to give at least 60 days’ advance notice to employees of a plant closing or a mass layoff. A “plant closing”' means a permanent or temporary shutdown of a single site of employment if the shutdown results in 50 or more employees (excluding any part-time employees) being laid off. A “mass layoff” means a reduction in force that results in at least 33 percent of the active employees and at least 50 employees (excluding part-time employees) losing their jobs, or the termination of at least 500 employees. Companies covered by WARN who fail to give the required notice are liable for back pay and benefits for each day they fail to give notice, up to a maximum of 60 days.
Sometimes a company’s business problems develop so quickly that advance notice is not practical or possible. Recognizing this, Congress created an exception to the 60-day advance notice requirement called the “unforeseeable business circumstances” exception. Under this exception, when a reduction in force is caused by some sudden, dramatic, and unexpected action or condition outside the employer's control, the employer is excused from the 60-day notice requirement under WARN. Examples of “unforeseeable business circumstances” include a major client's sudden and unexpected termination of its contract with the employer, a strike at a major supplier of the employer, an unanticipated and dramatic economic downturn, or a government-ordered shutdown of the employer’s business operations that occurs without prior notice.
The test for determining when the unforeseeable business circumstances exception will apply turns largely on whether the employer, exercising commercially reasonable business judgment, could not have reasonably predicted at the time WARN notice is required that adverse circumstances would lead to a plant closing or mass layoff. To satisfy the unforeseeable business circumstances exception, the employer must also show that it gave notice as soon as practicable when it knew a plant closing or mass layoff was inevitable.
The Hale-Halsell Case
In January 2004, the Hale-Halsell Co. (HHC), a wholesale grocery warehouse and distribution company in Tulsa, Oklahoma, was forced to lay off about 200 workers three days after learning it had lost its largest customer, United Supermarkets (United). Up until that time, the two companies had been doing business with each other for more than 30 years, with United providing 40 percent of HHC’s orders.
At various times, HHC was unable to fill United’s submitted orders, a situation the industry calls “stockouts.” For example, in December 2002, HHC’s stockouts to United were 6 percent. In November of 2003, HHC’s stockouts reached 18.9 percent, and by early January 2004 they hit 53.8 percent. To address these problems, HHC sought a $15 million dollar working capital loan from a local bank, which the bank told HHC it felt “positive” would be approved. While HHC and United had several discussions during this time about HHC’s stockouts, United never indicated to HHC that it intended to terminate their relationship.
On January 8, 2004, United told HHC that while it wanted to keep doing business with HHC, it had to switch several of its orders to other suppliers. HHC understood this to mean that United was not cutting off orders, but that orders from United would be declining. However, on January 15, 2004, United wrote a letter to HHC informing the company that United was going to use another company as its primary supplier and that HHC would be United’s secondary supplier. HHC received this letter on January 16, 2004, and promptly replied that while United’s decision would place HHC in a “bad situation,” HHC hoped to turn things around with United once its loan with the bank was approved.
On January 20, 2004, HHC met with its financial advisers, and after the meeting concluded it “was not going to be able to survive.” The next day, HHC told staff and warehouse employees of their impending layoff. That same day, the Associated Press issued a news release announcing the layoff of approximately 200 HHC employees due to the company’s loss of a key customer. On January 22, the 200 or so employees received written notice of the layoffs along with their final paychecks.
Employees Claim They Were Not “WARNed”
The laid-off employees sued under WARN, claiming that HHC should have given them 60 days’ notice before letting them go. HHC asked the trial court to dismiss their claims, as the unforeseeable business circumstances exception excused the layoff without notice. The trial court agreed with HHC and dismissed the employees’ claims, saying that HHC had provided notice “as soon as practicable” under the circumstances. The laid-off workers appealed to the Tenth Circuit, which makes law for a number of states in the Rocky Mountains, including Colorado.
HHC Not Liable for Layoff Without “WARNing”
On appeal, the employees argued that the unforeseeable business circumstances exception did not apply in this case because (1) HHC’s financial problems were well known to the company at the time the 60 days’ advance notice under WARN should have been given; (2) HHC’s other financial problems, not United’s decision to drop HHC as its primary supplier, caused the layoff of its 200 employees; and (3) even if the problems with United were not foreseeable, HHC did not give employees WARN notice of layoff as soon as practicable.
In rejecting the employees’ first argument, the Tenth Circuit reasoned that WARN does not require employers to predict the future perfectly, nor does it force financially fragile, yet economically viable, employers to provide WARN notices when there is only a possibility that the business may fail at some point in the future. Indeed, such a reading of WARN would force employers to lay off their employees prematurely. Despite HHC’s financial and operational difficulties in late 2003, United did not tell HHC that HHC would no longer be its primary supplier until United sent HHC its January 15 letter, which HHC did not receive until January 16. Up to that point, United had confirmed its interest in doing business with HHC despite record high stockouts. While HHC’s financial problems would “undoubtedly raise the eyebrows of any prudent business person,” the Tenth Circuit held that the facts in this case do not suggest that United’s sudden decision to switch primary suppliers was reasonably foreseeable before HHC received United’s January 15 letter. Therefore, the court of appeals held that United’s decision to replace HHC as its primary supplier, and that layoffs would be necessary, was not reasonably foreseeable until January 16, when HHC received United’s letter announcing it had been replaced as United’s primary supplier.
As for the employees’ second argument that HHC’s other financial problems, not United’s decision to replace HHC with another company as its primary supplier, was the cause of the layoffs, the Tenth Circuit once again disagreed with the employees. The court of appeals stated that United’s January 16 letter informing HHC of its decision to drop HHC as its primary supplier was the “straw that broke the camel’s back,” resulting in HHC’s decision to lay off its 200 or so employees Up until the very end, HHC had a reasonable hope that business would improve with its bank financing and that United would maintain the relationship. Based on the evidence presented, it was clear to the Tenth Circuit that layoffs were not contemplated until HHC received word from United that it was being replaced by another supplier.
Finally, the laid off employees argued that HHC did not give as much notice as practicable in this case. However, the Tenth Circuit said there was no evidence that HHC unduly delayed telling employees they were laid off. In this case, HHC learned of United’s decision to replace HHC with another supplier on January 16; took three days to discuss the matter with its financial advisers, and then acted quickly to inform its employees of the layoff in light of the devastating news. The court of appeals stated that in light of this chronology, HHC did not act unreasonably in taking a few days to determine if “it could survive the carnage” before announcing the layoff to its employees. Gross v. Hale-Halsell Co., No. 08-5028 (10th Cir., Jan. 20, 2009).
Consider Yourself “WARNed”
In our current economic climate, more and more businesses must lay off employees. Remember that if you are an employer with at least 100 employees and you are laying off the number of employees described above, you are required under WARN to give at least 60 days’ notice to affected employees. However, exceptional circumstances that cause a sudden layoff may excuse this advance notice requirement. Regardless of the circumstances, employers should be prepared in all cases to give employees (both those to be let go and those to be retained) as much advance notice of the layoff as possible to reduce the risk of litigation.
For more information on this case, the WARN Act or layoffs, contact Jude Biggs at (303) 473-2707 or jbiggs@hollandhart.com.
This article is posted with permission from Colorado Employment Law Letter, which is published by M. Lee Smith Publishers LLC. For more information, go to www.hrhero.com.
