A new ruling from the Ninth Circuit Court of Appeal, which covers California, focuses on when small employers may have to comply with the WARN Act—which requires advance notice to employees of plant closings or mass layoffs. We’ll take a look at what happened.
Big Layoff
Darby Lumber Inc. (DLI) operated a lumber mill and manufactured, marketed, and sold finished lumber. DLI acquired 100 percent of the shares of Bob Russell Construction Corp. (BRC), which operated a construction company and managed DLI’s lumber yard. Also, BRC’s owner, Robert Russell, held 49 percent of DLI’s stock and 51 percent of DLI Employees’ Stock Ownership Plan stock.
On September 24, 1998, DLI told DLI employees there would be a major layoff because of financial difficulties. The next day, DLI shut down its mill, and all 88 mill employees were laid off over the next few weeks. All 18 BRC employees were laid off within several months.
WARN Lawsuit Filed
The former DLI employees sued, charging the companies didn’t provide 60 days’ advance notice of the layoff as the Worker Adjustment and Retraining Notification (WARN) Act requires. DLI and BRC, both located in Montana, countered the law only applies to companies with at least 100 full-time employees, which neither had. The companies also argued that even if WARN did apply, they would be exempt from giving notice because the layoffs were caused by unforeseen business circumstances.
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A trial court ruled that WARN did cover the companies because DLI and BRC qualified as a single employer and, combined, had the requisite 100 employees. The court awarded the workers $60,345 in damages (60 days of lost wages and benefits) plus $123,000 in attorney’s fees.
Companies Were Single Employer
The Ninth Circuit upheld the lower court’s ruling and damages award. The court explained WARN bars employers with 100 or more full-time employees from ordering a plant closing (displacing 50 or more employees in a 30-day period) until the employer provides affected employees or their representative with 60 days’ advance notice.
The court based its finding that DLI and BRC qualified under WARN as a single employer on the following: 1) the companies had common ownership in that they owned each other’s stock; 2) the companies shared directors and officers; 3) DLI management exercised significant control over BRC operations; and 4) BRC’s operations were very dependent on DLI, as more than 90 percent of BRC’s activities and revenues came from DLI.
Notice Exception Didn’t Apply
The court also rejected the companies’ argument that they were exempt from having to give notice under WARN because the financial events necessitating the layoffs were sudden and couldn’t be predicted. The court said the plant closure was indeed foreseeable, as it was caused by a variety of factors—including a depressed lumber market, increased cost of raw materials, and getting rejected for a line of credit—that accumulated over time. Thus, there was sufficient warning of the impending financial crisis to provide employees with 60 days’ notice.
Impact of Case
This case demonstrates that two or more companies that wouldn’t independently meet the threshold number of employees for WARN coverage may still have to comply if they qualify as a single employer.
What’s more, keep in mind that as of last year, California has its own, stricter version of WARN. Cal/WARN’s layoff notice rules apply if you have just 75 employees. Plus, Cal/WARN does not include an exception for unforeseen business circumstances. Covered employers are exempt from giving 60 days’ layoff notice only under narrow circumstances, such as when there’s been an act of war or physical calamity or when the employer was actively seeking capital or business that would have enabled them to avoid or postpone relocations or terminations.