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The 'Faltering Company' and 'Unforeseen Business Circumstances' Exceptions Under The WARN Act

Traps for the Unwary or Lifesavers for the Unlucky?

The WARN Act contains several affirmative defenses that provide employers with a complete defense to liability under the statute when a company's exigent condition forces an immediate cessation of operations. This article identifies the key features (including the benefits and drawbacks) of each.

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As most informed employers and their counsel know, the federal WARN Act requires companies that maintain a facility of 100 or more full-time employees to provide no less than 60 days’ written notice to employees affected by a mass layoff or facility closure. Failure to provide such notice creates significant exposure — back pay and benefits for each employee for each day that the notice is not provided, in addition to possible civil penalties. Moreover, because the statutes necessarily involve a large number of similarly situated employees, judges often find WARN claims suitable for class certification.

The predictable response of many employers faced with the issue of whether, and when, to issue WARN notices to employees is that they simply do not know 60 days before a shutdown of operations that it will be necessary — in many cases, employers have only a few days’ notice (or less) before a decision to shutter a facility is made. Indeed, employers correctly conclude that providing WARN notice to employees as soon as a shutdown appears reasonably likely will prompt the type of response from employees that would harm the company’s efforts to rescue the business — including loss of workforce morale, employee defections, and adverse publicity. The alternative, of course, is to refrain from providing notice as long as possible, and risk significant liability.

The WARN Act contains several affirmative defenses that are designed to address this conundrum, and provide employers with a complete defense to liability under the statute when a company’s exigent condition forces an immediate cessation of operations. These exceptions to the WARN notice obligations are identified as the “Faltering Company” and “Unforeseen Business Circumstances” exceptions. Codified together (at 29 U.S.C. sec. 2102(b)(1) — (2)), the two exceptions are often analyzed together and confused. They are distinct, however, and employers faced with possible pending layoffs or facility closures should consider both of them independently. This article identifies the key features (including the benefits and drawbacks) of each.

Faltering Company Exception

Despite the name normally applied to it, the Faltering Company exception is not tied directly to a company’s financial condition. Instead, the exception requires efforts by the struggling company to secure financing that would enable it to avoid (or at least postpone) the shutdown of operations. The federal regulations that set forth the parameters of the defense make clear that an employer asserting the defense “must be able to identify specific actions taken to obtain capital or business,” which may include “financing or refinancing through the arrangement of loans, the issuance of stocks, bonds, or other methods of internally generated financing; or the employer must have been seeking additional money, credit, or business through any other commercially reasonable method.” 20 C.F.R 639.9(a)(a).

Moreover, the employer must be able to demonstrate that if the financing had been obtained, it would have proved “sufficient … to avoid or postpone the shutdown.” One of the chief limitations of the Faltering Company Exception is suggested by this phrase: The exception is not available in the case of mass layoffs; it only can be used in the case of facility closures.

In addition to demonstrating that the company was actively seeking financing or business that would have enabled it to remain in business, and that the financing sought would have enabled it to avoid the closure, a company relying on the Faltering Company Exception must also show that providing the required notice to employees would have “precluded the employer from obtaining the needed capital or business.” While providing notice to employees of a possible shutdown would likely complicate an employer’s efforts to retain employees, to show that investors would be unwilling to proceed with financing in the event of WARN notice often proves challenging, to say the least.

Several other key limitations apply to the Faltering Company exception. First, courts have held that it is not available in the event of a proposed sale of the company in question. Although efforts to sell a troubled company would seem to face the same issues as seeking “capital or business,” an aborted sale is not referenced in the statute or regulations, and the exception does not appear to be available in such instances. This despite the fact that in the event of a successful sale of a company, in which employees of one company become employed by the purchaser with no loss in employment, the notification requirement under WARN is not triggered.

Another significant caveat in asserting the Faltering Company exception is spelled out in the federal regulations, which specify that the exception “should be narrowly construed.” 20 C.F.R. sec. 639.9(a). Thus, not only does the employer bear the burden of establishing that the exception has been satisfied, but courts are instructed to interpret the exception narrowly, and view it skeptically. Employers who are aware that a possible shutdown of operations may be necessary, and believe that issuing WARN notice may jeopardize efforts to save it, would do well to build a case to support the Faltering Company exception carefully and deliberately, realizing that establishing this defense is an uphill battle.

Unforeseen Business Circumstances Exception

For companies that see a drastic reversal of fortune, and face closure or a significant downsizing, the Unforeseen Business Circumstances exception is likely to prove a more promising defense to WARN notice requirements. For starters, this exception applies to mass layoffs, not only facility closures. For another, the exception is not designed to be “narrowly construed” against employers. Without a presumption against the use of this exception (as exists for the Faltering Company exception), companies have a better chance of establishing the defense at the outset.

The Unforeseen Business Circumstances exception allows companies to be excused from providing timely WARN notice if the plant closing or mass layoff is “caused by business circumstances that were not reasonably foreseeable at the time that 60-day notice would have been required.” 29 C.F.R. sec. 639.9(b). The exception must be caused by “some sudden, dramatic, and unexpected action or condition outside the employer’s control.” Examples include “[a] principal client’s sudden and unexpected termination of a major contract with the employer, a strike at a major supplier of the employer, and an unanticipated and dramatic major economic downturn.” 29 C.F.R. 639(b)(1). Moreover, credence is given to an employer’s “commercially reasonable business judgment” in assessing whether an adverse business development is truly unforeseen.

It is worth noting that under the state-law “baby” WARN statute of one state — California — the Unforeseen Business Circumstance is not available. In other jurisdictions, however, the Unforeseen Business Circumstances exception has been successfully used by employers to excuse their failure to issue timely WARN notice.

In fact, several recent judicial decisions illustrate that the Unforeseen Business Circumstances exception can be utilized even when a company has long-standing financial challenges that culminate in the need for a facility closure or mass layoff. In one case, an aircraft manufacturer defaulted on financial obligations before agreeing to sell the business in an approved sale in bankruptcy. Months later, after the sale did not close due to the failure of promised financing, the company abruptly announced to employees that the business was closing and that their employment would be terminated. Despite the fact that the company faced financial travails for a significant period of time before the shutdown became necessary, the federal district court affirmed the bankruptcy court’s ruling that the employer had established the Unforeseen Business Circumstances exception. The court noted that even if a facility closure had been possible for a lengthy period, the employer showed that it had not been likely until the promised financing failed to materialize.

In language that is significant for employers, the court concluded that the company’s failure “did not need to be ‘out of the blue’ for it to be considered ‘sudden, dramatic, or unexpected.” In re AE Liquidation, 556 B.R. 609, 621 (D. Del. 2016) (also noteworthy is the fact that the bankruptcy court had previously rejected the Faltering Company exception, noting that the proposed sale of the business did not qualify).

In another case, the U.S. Court of Appeals for the Fifth Circuit affirmed that the trial court had correctly applied the Unforeseen Business Circumstances to a company’s failure to provide WARN notice until the day it filed for bankruptcy, despite years of financial losses and threats from its principal source of financing to discontinue support if the company failed to turn a profit. Despite these problems, the court held that the shutdown only became “inevitable” when its funding sources evaporated with no notice.

In holding that the Unforeseen Business Circumstances exception applied, the court held that “[t]he WARN Act allows good faith, well-grounded hope, and reasonable expectations,” and that the Unforeseen Business Circumstances exception is “intended to encourage employers to take all reasonable actions to preserve the company and the jobs.” Angles v. Flexible Flyer Liquidating Trust, 511 Fed. Appx 369, 372 (5th Cir. 2013). Based on a review of the applicable regulations, it appears that the Unforeseen Business Circumstances exception to WARN, rather than the Faltering Company exception, provides the best grounds for an employer to make the case that it has exercised these qualities.

A final point is worth emphasizing in relation to both the Faltering Company and Unforeseen Business Circumstances exceptions to WARN. Under both exceptions, employers are still required to provide “as much notice as is practicable” to employees of the employment terminations, in addition to “a brief statement of the reason for reducing the notice period.” While this notice may be as soon as a day before termination of employment, it still must be provided in order for the exceptions to apply. Therefore, these exceptions cannot be considered as an excuse for not providing WARN notice, but only as a defense for employee notice that fails to comply with the statutory requirement. Prudent employers will begin to think about establishing these defenses to WARN Act liability well before this notice is issued, however, and hope that their business judgment is vindicated by a court looking at the situation months, or even years, later.

***** David Van Pelt is special counsel in the Labor and Employment practice group at Kelley Drye & Warren’s Los Angeles office. He represents clients in all aspects of labor and employment matters, including counseling with respect to wage and hour issues, employment termination, employee leave, accommodation of disabilities and employee relations. He can be reached at DVanPelt@KelleyDrye.com or 310-712-6199.

The views expressed in the article are those of the authors and not necessarily the views of their clients or other attorneys in their firm.

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