In an August 2017 decision, the Third Circuit ruled that an employer’s obligation to provide its employees with pre-termination notice under the Worker Adjustment and Retraining Notification Act, 29 U.S.C. §§ 2101 et seq. (the “WARN Act”), is not triggered by “unforeseeable” events but instead springs into effect at the time that terminations become “probable.” Varela v. AE Liquidation, 866 F.3d 515 (3d Cir. 2017). Since the Third Circuit’s ruling, Varela’s foreseeability standard has been a popular topic in bankruptcy forums, but foreseeability issues are just the tip of the iceberg when it comes to the interplay between bankruptcy proceedings and the WARN Act. This article addresses the various ways in which bankruptcy and the WARN Act intersect in the Third Circuit and provides advice on how debtors’ counsel can minimize the impact the WARN Act has on their clients’ Chapter 11 restructuring efforts.
The WARN Act
The WARN Act was enacted in 1988 with the goal of protecting and supporting workers by providing notice of impending terminations to: (i) affected employees so that they have an opportunity to find new employment and obtain necessary job training in advance of being terminated, and (ii) governmental entities so that they can assist to-be-terminated employees in seeking and adjusting to new employment. Specifically, the WARN Act requires “business enterprises” that employ “100 or more employees, excluding part-time employees” or “100 or more employees who in the aggregate work at least 4,000 hours per week (exclusive of hours of overtime)” to provide at least 60 days’ notice of plant closings or mass layoffs, as defined by statute. 29 U.S.C. §§2101-2102. Employers that abrogate their WARN Act obligations are required to pay “aggrieved employees” salary and benefits pro rata for the portion of the 60 days’ notice they failed to provide prior to a layoff. 29 U.S.C. §2104.
Implications of the WARN Act on Bankruptcy Cases
In a perfect world, all employers subject to the WARN Act would provide at least 60 days’ notice of plant closings or mass layoffs and would thereby avoid the imposition of any WARN Act liability. As restructuring attorneys know, however, 60 days’ notice is often not feasible. When presented with a distressed client that needs to immediately downsize or shutter its doors, attorneys must determine when and how to effectuate layoffs so as to minimize the effect the WARN Act has on their client’s restructuring or liquidation efforts.
- Classification of WARN Act Claims
To the extent a Chapter 11 bankruptcy filing is determined to be a debtor’s best restructuring option, counsel must devise a plan to allow its client to emerge from bankruptcy, whether through a restructuring of liabilities or liquidation of assets. In both instances, emergence from bankruptcy likely entails the confirmation of a Chapter 11 plan that dictates, among other things, that administrative and priority claims will be paid in full. In a case involving WARN Act liabilities, the timing of an employer’s notice under the WARN Act can significantly impact a Chapter 11 debtor’s ability to confirm a plan.
Where a debtor cannot provide full WARN Act notice, it may opt to provide pre-petition notice of layoffs in the hope of benefitting from fourth priority unsecured treatment of WARN Act claims up to a statutory cap of $12,850 per claimant, 11 U.S.C. §507(a)(4), with all amounts in excess of $12,850 treated as general unsecured claims. In contrast, if notice is provided post-petition, the resulting WARN Act liabilities will be treated as second priority administrative expense claims in bankruptcy. 11 U.S.C. §503(b); 11 U.S.C. §507(a)(2); see, e.g., In re Powermate Holding Corp., 394 B.R. 765, 778 (Bankr. D. Del. 2008) (“Therefore, whether a WARN Act claim is an administrative expense depends on whether the termination without notice occurred pre[-] or post-petition.”); Oil, Chemical & Atomic Workers v. Hanlin Group, Inc., 176 B.R. 329 (Bankr. D.N.J. 1995).
The issue of whether a WARN Act liability gives rise to an administrative or priority claim is, of course, unique to bankruptcy cases (outside of bankruptcy, WARN Act liabilities are treated pari passu with general unsecured claims). Classification of WARN Act claims is further complicated by the fact that some courts have held that WARN Act claims can be bifurcated and accorded both administrative and priority unsecured status depending on when an employee’s back pay actually vests. Regardless, employers can mitigate their WARN Act liability by providing WARN Act notice as early as possible because WARN Act claims are calculated pro rata such that early notice followed by even a brief period of employment diminishes an employer’s WARN Act liability.
- Exceptions to WARN Act Liabilities
Again assuming bankruptcy is a debtor’s best path, counsel should consider whether its client can eliminate WARN Act liability entirely via a statutory exception to the WARN Act, keeping in mind that a debtor’s entitlement to such an exception might arise post-petition (and, moreover, might arise after significant effort has been expended in reducing WARN Act liabilities to enable confirmation of a Chapter 11 plan).
For example, a debtor might qualify for a “faltering company” exception under 29 U.S.C. §2102(b)(1) where it can prove:
(1) it was actively seeking capital at the time the 60-day notice would have been required; (2) it had a realistic opportunity to obtain the financing sought; (3) the financing would have been sufficient, if obtained, to enable the employer to avoid or postpone the shutdown; and (4) the employer reasonably and in good faith believed that sending the 60-day notice would have precluded it from obtaining the financing.
In re APA Transp. Corp. Consol. Litig., 541 F.3d 233, 246-47 (3d Cir. 2008), as amended (Oct. 27, 2008) (citing 20 C.F.R. § 639.9(a)).
Counsel should also consider whether a “natural disaster” exception can be employed to eliminate WARN Act liability. 29 U.S.C. §2102(b)(2)(B) (“No notice under this chapter shall be required if the plant closing or mass layoff is due to any form of natural disaster, such as a flood, earthquake, or the drought currently ravaging the farmlands of the United States.”). Lastly, a debtor may be statutorily exempt from complying with the WARN Act where an “unforeseeable business circumstance” leads to layoffs. 29 U.S.C. §2102(b)(2)(A) (“An employer may order a plant closing or mass layoff before the conclusion of the 60-day period if the closing or mass layoff is caused by business circumstances that were not reasonably foreseeable as of the time that notice would have been required.”).
In Varela, the court ruled that the unforeseeable business circumstance exception exempted an employer from its obligation to provide 60 days’ WARN Act notice (and therefore from WARN Act liability) where WARN Act notice was given retroactively but the mass layoffs in question did not become “probable” until the decision to terminate the employees was made. Varela, 866 F.3d at 530. The Varela court explained:
If reasonable foreseeability meant something less than a probability, nearly every company in bankruptcy, or even considering bankruptcy, would be well advised to send a WARN notice, in view of the potential for liquidation of any insolvent entity …. [T]here are significant costs and consequences to requiring these struggling companies to send notice to their employees informing them of every possible “what if” scenario and raising the specter that one such scenario is a doomsday …. When the possibility of a layoff—while present—is not the more likely outcome, such premature warning has the potential to accelerate a company’s demise and necessitate layoffs that otherwise may have been avoided.
Id., 866 F.3d at 530. In the wake of Varela, attorneys should carefully monitor the business operations of debtors walking the narrow tightrope of solvency, paying particular attention to the foreseeability of layoffs throughout the pendency of such debtors’ bankruptcy cases. Debtors that fail to provide WARN Act notice upon identifying that a plant closing or mass layoff has become “probable” will likely incur significant post-petition WARN Act liabilities.
Moreover, debtors in the Third Circuit can benefit from the common law “liquidating fiduciary” exception, see 54 Fed. Reg. 16,042, 16,065 (1989), which provides that a debtor “operating not as a … going concern, but rather as a business liquidating its affairs” and which has “clearly demonstrate[d] its intent to liquidate” is not subject to the WARN Act. In re Official Comm. of Unsecured Creditors of United Healthcare Sys. v. United Healthcare Sys, 200 F.3d 170, 178-79 (3d Cir. 1999) (internal marks omitted). Attorneys considering this exception must, however, carefully analyze the facts and circumstances before them, because “[a]n employer as fiduciary will succeed to its WARN Act obligations if an examination of the debtor’s economic activities leading up to and during the bankruptcy proceedings reveals that the fiduciary has continued in an employer capacity, operating the business as an ongoing concern.” Id. at 179.
In sum, the WARN Act can create substantial liabilities and roadblocks at all stages of a bankruptcy proceeding. When restructuring an entity with significant potential WARN Act liabilities, attorneys should keep their clients’ WARN Act obligations front of mind to effectuate the best possible outcome for their clients and all other bankruptcy constituents.
Yudkin is a member in the Bankruptcy & Corporate Restructuring Department of Cole Schotz in Hackensack. Hollander is an associate in that department as well as the firm’s Real Estate Special Opportunities Group.