• Sale of Part or All of an Employer’s Business: Potential Pitfalls for Buyers and Sellers under the Federal WARN Act
  • November 7, 2011 | Authors: Michael D. Kaufman; James "Jim" M. McCabe
  • Law Firm: Troutman Sanders LLP - Atlanta Office
  • Under the Worker Adjustment and Retraining Notification Act (WARN Act), employers must provide advance warning of mass layoffs and plant closings to every affected employee. This article explores the general requirements of the WARN Act, and some potential pitfalls employers should avoid when buying or selling part or all of a business.

    General Requirements Under The WARN Act

    • Employers Subject to the Act

    An employer is covered by the WARN Act if, among other things, it has (1) 100 or more employees (excluding certain part-time employees) or (2) 100 or more employees who in the aggregate work at least 4,000 hour per week (excluding overtime hours). If such an employer fails to provide the notice as provided by the WARN Act, the employer can be liable for back pay to each affected employee for each day of the violation.

    • WARN Notice

    Under the WARN Act, at least 60 days before a “plant closing” or “mass layoff” (as defined below), an employer must provide written notice to every affected employee (or to the union representative of the affected employee) and to certain government officials. For government officials, the written notice must be given to the entity designated in the state where the closing or layoff is to occur and to “the chief elected official of the unit of local government within which such closing or layoff is to occur.”

    • Definitions of Plant Closing, Mass Layoff, and Employment Loss

    In determining whether the WARN notice must be provided, an employer must analyze whether there has been a “plant closing” or “mass layoff.” A plant closing is defined as “the permanent or temporary shutdown of a single site of employment, or one or more facilities or operating units within a single site of employment, if the shutdown results in an employment loss at the single site of employment during any 30-day period for 50 or more” full-time employees. A mass layoff is defined as a reduction in force at a single site of employment that results in an employment loss, during any 30-day period, of:

    (1) 33% or more of the workforce and 50 or more full-time employees; or
    (2) more than 500 full-time employees.

    The definitions of “plant closing” and “mass layoff” can be confusing. However, one helpful rule of thumb is: if fewer than 50 employees incur an “employment loss” (as defined below) at a single site of employment, it is not a mass layoff or a plant closing.

    Employment loss is defined as (A) an employment termination, other than a discharge for cause, voluntary departure, or retirement, (B) a layoff exceeding 6 months, or (C) a reduction in hours of work of more than 50 percent during each month of any 6-month period.

    However, in some situations, different rules apply to an employment loss in the context of a sale of part or all of a business. These different rules present potential pitfalls for both buyers and sellers of businesses.

    Pitfalls For Sellers

    Any plant closing or mass layoff occurring as part of, or contemporaneously with, a business sale must be preceded by WARN notice. The question is: does the seller or the buyer have the responsibility to provide this notice? Under the WARN Act, the seller is responsible for providing such notice for a plant closing or mass layoff that occurs before or on the “effective date” of the sale. This means that if the plant closing or mass layoff occurs before the effective date of the sale and the seller fails to provide WARN notice, the seller may be liable for this failure even after the sale of the business.

    This general rule, however, is complicated by the fact that the WARN Act does not define what a “sale of part or all of an employer’s business” means. In general, a sale of a business can be accomplished through the sale of its stock or through the sale of all or substantially all of its assets. In a stock purchase, the seller’s employees automatically become the buyer’s employees on the effective date of the sale. However, in an asset purchase, the seller usually terminates the employment of its employees as part of the sale itself, and then the buyer usually rehires some or all of those employees. In the asset purchase situation, the seller’s termination of employees usually occurs on or before the effective date of the sale. The question then becomes: does the seller or the buyer have the responsibility to provide notice in that situation? The short answer (discussed more fully below) is: if the business is sold as a going concern and the seller has no reason to believe that buyer intends not to hire the seller’s employees, then the buyer, not the seller, is responsible for providing the WARN notice to the seller’s employees. Often, the buyer and the seller will have a provision in their asset purchase agreement dealing with hiring the seller’s employees.

    Under the WARN Act, the seller is responsible for providing notice for terminations that occur up to and including the effective date of the sale. So, it would seem that if the employees’ employment with the seller were terminated on the effective date of the sale, then the seller would be responsible for notice, even if immediately after the effective date of the sale, the buyer rehires all of the seller’s employees. However, the Act also provides that “any person who is an employee of the seller (other than a part-time employee) as of the effective date of the sale shall be considered an employee of the purchaser immediately after the effective date of the sale.”

    Several lower courts have interpreted these provisions to mean that a seller is not responsible for WARN notice, even if the seller technically terminates its employees on the effective date of the sale, if (1) the business is sold as a “going concern” and (2) the seller’s employees are still employed by the seller on the effective date of the sale. These courts have recognized that, while the sale of the business technically results in a termination of all employees of that business by the seller, the WARN Act was not intended to impose liability on the seller for this technical termination, and therefore no liability will be imposed on the seller provided the seller reasonably believes that its employees would be rehired by the buyer. In coming to this conclusion, these courts have noted that “it is presumed that a sale of a business as a going concern involves the hiring of the seller’s employees unless something indicates otherwise.” Indeed, as one court has noted, if the seller had the responsibility to provide notice in such a situation, “one could imagine a situation in which no employee would remain by the time the closing date arrived.” This result, courts have concluded, is not what was intended by WARN.

    However, in circumstances where a business is not being sold as a “going concern,” or where the seller is otherwise aware that the sale of the business will result in a plant closing or mass layoff because the buyer does not intend to rehire the seller’s employees, then the seller will still have the responsibility to provide WARN notice to the seller’s employees. Accordingly, to avoid these obligations, sellers should not terminate their employees before the effective date of the sale and should require the buyer to indicate in writing that the buyer intends to hire all of the seller’s employees (or at least that the buyer will not fail to hire the seller’s employees due to a plant closing or massive layoff).

    Pitfalls For Buyers

    After the effective date of the sale, the buyer is responsible for providing the required WARN notice to the seller’s employees of a plant closing or mass layoff. Further, and as noted above, any employee of the seller on the effective date of the sale will be considered an employee of the buyer immediately after the effective date of the sale. This means that, even if the buyer never actually hires those employees, it may still be responsible for providing the WARN notice to the seller’s employees if the buyer decides not to hire the seller’s employees due to a plant closing or layoff. Accordingly, if the buyer does not intend to hire the seller’s employees, the buyer should ensure that the seller terminates the employees before the effective date of the sale (and not as a part of the sale) or that the buyer hires the seller’s employees and then provides the required WARN notice before terminating their employment.

    Concluding Thoughts

    To avoid the pitfalls that sellers and buyers face under the WARN Act, the parties should carefully examine any terminations of the seller’s employees that may trigger notice requirements. In particular, the timing of any terminations as part of the sale should be carefully considered in light of the responsibilities of the parties, and the parties should determine when and who will provide that notice. In this regard, buyers and sellers can avoid some of the pitfalls of determining WARN notice responsibilities by stating in their contract for the sale of the business what will happen to the seller’s employees as a result of the transaction.

    One final point that employers should keep in mind is that many states have their own versions of the WARN Act that sometimes impose different requirements and, therefore, the applicable state law should be consulted as well before the sale of the business.