• Plant Closing, Job Loss Triggered WARN Act: Asset Sale No Defense, Seventh Circuit Says
  • June 1, 2007 | Author: Todd D. Steenson
  • Law Firm: Holland & Knight LLP - Chicago Office
  • The federal WARN Act requires employers with more than 100 employees to give employees 60 days notice of certain plant closings or mass layoffs. Such a warning is not required, however, if the business is sold and employees continue employment with the buyer. But, as Meridian Rail Corp. learned the hard way, to avoid WARN liability under this exception, employees must remain employed by the seller until the sale is fully completed and become employed by the buyer immediately thereafter. Because the formal closing of an asset sale to NAE Nortrak Inc. did not occur until more than a week after Meridian’s employees were terminated, Nortrak’s promise to hire and eventual hiring of most of the Meridian employees was irrelevant, the Seventh Circuit ruled. Meridian was still obligated to give its employees the 60-day WARN Act notice, and had to pay them 60 days’ pay for failing to do so. Phason v. Meridian Rail Corp., No. 06-2942 (7th Cir. 2007).


    A Brief WARN Act Primer

    Under the WARN Act, employers with 100 or more full-time workers must provide 60 days advance notice of “plant closings” or “mass layoffs” that will cause 50 or more workers to lose their jobs. A plant closing is the permanent or temporary shutdown of a single site of employment that results in job losses for 50 or more employees in a 30-day period. A mass layoff is a reduction in force (RIF) of 500 or more full-time employees in a 30-day period, or at least 50 to 499 employees during a 30-day period if the RIF reduces the employer’s workforce by 33 percent. A mass layoff cannot result from a plant closing. These are only definitions of the events that trigger an employer’s WARN obligations.

    Employers are responsible for determining whether a plant closing or RIF creates WARN Act obligations. When the Act applies, employers must provide 60-day written notice of impending job losses to affected employees or their union, the state’s dislocated worker unit and the chief elected official of the local government where the closing or mass layoff will occur. The Act specifies what must be included in the notice for each of the required recipients.


    Business Sale, Employment Terminations

    In mid-December 2003, Meridian Rail, a railroad equipment manufacturer, reached a handshake deal for Nortrak to purchase all of the assets of its Chicago Heights, Illinois operation. Nortrak intended to continue the Chicago Heights operation and employ most of Meridian’s employees. Meridian notified its employees on December 31, 2003, that it was closing its Chicago Heights operation, effective that day, and terminated their employment that day. Meridian invited its employees to apply for jobs with Nortrak, which had already issued a similar invitation when it and Meridian shook hands on the sale deal.

    However, the sale of Meridian’s assets to Nortrak did not close until January 8, 2004, and the former Meridian employees were not hired by Nortrak until that date. Employees sued, claiming that Meridian had terminated their employment without giving them proper WARN Act notices and owed them 60 days’ pay in lieu of notice.

    The U.S. District Court for the Northern District of Illinois dismissed the WARN Act suit. The Court reasoned that because Nortrak eventually hired all but 40 to 45 of the former Meridian workers, and fewer than 50 employees experienced a job loss, the WARN Act’s advance notification requirements did not apply to the Meridian-Nortrak transaction.


    WARN Applied to Sale, Seventh Circuit Rules

    The Seventh Circuit disagreed. It noted that under the WARN Act, a “plant closing” triggering employer notice obligations occurs in the event of a permanent or temporary shutdown that results in an employment loss at a single site for 50 or more employees. An “employment loss” is in turn defined by the WARN Act to include “an employment termination,S which occurred here.”

    Meridian argued that it was protected by another provision of the WARN Act which provides that any worker employed by a business seller “as of the effective date of the sale shall be considered an employee of the purchaser immediately after the effective date of the sale,” and thus would not suffer an employment loss requiring WARN Act notice. Because Nortrak had agreed to buy Meridian’s assets and promised to hire its workers before December 31, and then it did hire all but a few of the former Meridian workers, no “employment loss” large enough to trigger the WARN Act’s notice requirements ever occurred, Meridian argued.

    Not so fast, the Court said. The “effective date” of the sale did not occur until the closing on January 8. “The sale of a business can’t be said to be ‘done’ until everyone has signed on the dotted line and all required payments have been made.” But the employees had been terminated from their jobs at Meridian on December 31, clearly causing an employment loss even despite the employees’ strong likelihood of employment with Nortrak. “‘You’re fired, but you have prospects of catching on with someone else real soon now,’ is a ‘termination’” under the WARN Act, the Court stated. Because the employees did not remain employed with Meridian until the effective date of the sale, Meridian could not rely on the sale of business exception and owed its employees 60 days’ pay in lieu of notice.

    The Court recognized that liability under the WARN Act would have been avoided if Meridian had scheduled the formal closing of the sale earlier, and that the outcome appeared arbitrary. But the law’s distinctions are often arbitrary, the Court said. “Bright lines must be enforced consistently or they won’t work.” Employees can lose a WARN Act claim if they fall even one worker short of the statute’s numerical thresholds, and “employers likewise must lose when what seems an inconsequential difference (the closing date) comes out the employees’ way. Otherwise courts have put a thumb on the scale,” the Court reasoned.


    What Does This Mean for You?

    This decision seems unfair. Meridian may have intended and expected the sale to close on December 31 and believed its employees would immediately become employed by Nortrak – with no employment gap. It may have believed in perfect good faith that it had no obligation to provide the WARN Act notice. Delays in the closing may have occurred because of factors beyond Meridian’s control. Most Meridian employees knew they were going to get hired, and they were out a week’s pay, at most, not 60 days’ worth. Granting them 60 days’ pay under these circumstances looks like a windfall.

    The Phason case shows that when the WARN Act is involved, fairness does not really matter. The WARN Act is a statute of bright-line rules. The only way to avoid liability is to ensure that you comply with those rules. If you are considering a plant closing, large reduction in force or sale of a business that could possibly trigger WARN Act obligations, be sure to seek legal advice to make sure you comply.