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Unforeseeable Circumstances Justify Layoff Without WARN Notice

The Worker Adjustment and Retraining Notification Act (WARN Act) requires employers with 100 or more workers to provide 60 days’ advance notice of a plant closing or mass layoff. Sometimes employers need to act quickly to lay off employees and can’t provide the 60 days’ notice required by the WARN Act. A recent decision from the Tenth U.S. Circuit Court of Appeals explains when businesses can skip the notice requirements under the WARN Act’s “unforeseeable business circumstances” exception.

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Large employers must generally give notice of layoffs
The WARN Act requires employers with 100 or more employees to provide at least 60 days’ notice of a plant closing or a mass layoff. A “plant closing”‘ is a permanent or temporary shutdown of a single site of employment resulting in 50 or more employees (excluding part-time employees) being laid off. A “mass layoff” is (1) a reduction in force (RIF) that results in at least 33 percent of active employees and at least 50 employees (excluding part-time workers) losing their jobs or (2) the termination of at least 500 employees. Companies covered by the WARN Act that fail to give the required notice are liable for back pay and benefits for each day they fail to give notice, up to 60 days.

Sometimes a company’s business problems develop so quickly that advance notice is not practical or possible. Recognizing that, Congress created an exception to the 60-day notice requirement called the “unforeseeable business circumstances” exception. Under the exception, when a layoff is caused by a sudden, dramatic, and unexpected action or condition outside an employer’s control, it is excused from the 60-day notice requirement under the WARN Act. Examples 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 notice.

The test for determining when the unforeseeable business circumstances exception applies turns largely on whether the employer, exercising commercially reasonable business judgment, could not have reasonably predicted at the time notice was required that adverse circumstances would lead to a plant closing or mass layoff. Businesses must also be able to show that they gave notice as soon as practicable when they knew that a plant closing or mass layoff was inevitable.

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Hale-Halsell case
The Hale-Halsell Co. (HHC) is a wholesale grocery warehouse and distribution company in Tulsa, Oklahoma. In January 2004, it was forced to lay off about 200 workers just three days after learning it had lost its largest customer, United Supermarkets. The two companies had done 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 six percent. In November 2003, HHC’s stockouts reached 18.9 percent, and by early January 2004, they hit 53.8 percent. To address the problem, HHC sought a $15 million 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 about HHC’s stockouts, United never indicated that it intended to terminate its relationship with the distributor.

On January 8, 2004, United told HHC that it wanted to keep doing business with HHC but that it had to switch several of its orders to other suppliers. HHC understood that to mean that United wasn’t cutting off its orders but that its orders would be declining. However, on January 15, United wrote a letter informing HHC that it was going to use another company as its primary supplier and that HHC would be its secondary supplier. HHC received the letter on January 16 and promptly replied that while United’s decision would place HHC in a “bad situation,” it hoped to turn things around with United once its loan with the bank was approved.

On January 20, HHC met with its financial advisers. After the meeting, the company concluded it “was not going to be able to survive.” The next day, HHC told staff and warehouse employees of its impending layoff. That same day, the Associated Press issued a news release announcing the layoff of approximately 200 HHC employees resulting from the company’s loss of a key customer. On January 22, roughly 200 employees received written notice of the layoff, along with their final paychecks.

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Employees claim they weren’t ‘WARNed’
The laid-off employees sued under the WARN Act, claiming that HHC should have given them 60 days’ notice before letting them go. HHC asked the trial court to dismiss their claims because the unforeseeable business circumstances exception excused it from providing notice. The trial court agreed with HHC and dismissed the employees’ claims, saying that HHC had given notice “as soon as practicable” under the circumstances. The laid-off workers appealed to the Tenth Circuit.

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’ notice should have been given;
  2. HHC’s other financial problems, not United’s decision to drop HHC as its primary supplier, caused the layoff; and
  3. even if the problems with United were not foreseeable, HHC did not give employees notice of the layoff as soon as practicable.

In rejecting the employees’ first argument, the Tenth Circuit reasoned that the WARN Act doesn’t require you to predict the future perfectly. Additionally, it doesn’t force a financially fragile yet economically viable employer to provide notice when there is only a possibility that the business may fail at some point in the future. Such a reading of the WARN Act would force employers to lay off workers prematurely. Despite HHC’s financial and operational difficulties in late 2003, United didn’t tell HHC that it would no longer be its primary supplier until it sent the January 15 letter, which HHC didn’t 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 the case didn’t suggest that United’s sudden decision to switch primary suppliers was reasonably foreseeable before HHC received the January 15 letter. Thus, the court of appeals held that United’s decision to replace HHC as its primary supplier was not reasonably foreseeable until January 16, when HHC received the 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 it with another company as its primary supplier, were the cause of the layoffs, the Tenth Circuit once again disagreed with the employees. The court of appeals stated that United’s January 15 letter informing HHC of its decision to drop HHC as its primary supplier was the “straw that broke the camel’s back.” It was the letter that ultimately resulted in HHC’s decision to make layoffs.

Up until the very end, HHC had a reasonable hope that business would improve, the bank loan would come through, and United would maintain its 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 didn’t give as much notice as practicable. However, the Tenth Circuit said there was no evidence that HHC unduly delayed telling employees they were laid off. HHC learned of United’s decision to replace it with another supplier on January 16. It took three days to discuss the matter with its financial advisers, and then the company acted quickly to inform its employees of the layoff in light of the devastating news. The court of appeals stated that the chronology of events led it to believe that HHC acted reasonably 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).

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Consider yourself ‘WARNed’
In our current economic climate, more and more businesses must lay off employees. Remember, if you are an employer with at least 100 employees and you are laying off a large number of employees, the WARN Act requires you to give at least 60 days’ notice to affected workers. However, exceptional circumstances leading to a sudden layoff may excuse employers’ notice requirement. Employers also should check their states’ WARN acts to determine the requirement and any exceptions. Regardless of the circumstances, businesses should always be prepared to give employees (both those being laid off and those being retained) as much advance notice of the layoff as possible to reduce the risk of litigation.

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