Pitfalls to Avoid in Furloughs, Layoffs and Shutdowns

Employers Considering Workforce Changes Must Consider the WARN Act's Notice Requirements

As employers try to navigate the impact of COVID-19 on their businesses, many are faced with the prospect of layoffs, reductions in compensation or hours and even permanent business shutdowns. Such employers should be aware of the federal Worker Adjustment and Retraining Notification (“WARN”) Act and the duty it imposes on employers to notify employees or their representatives and certain state and local government officials at least 60 days in advance of mass layoffs or plant shutdowns.  Failure to abide by these WARN notice requirements can create liability for employers in the form of back pay, the value of any lost benefits, attorney’s fees and civil penalties for each affected employee for each day of defective notice up to 60 days. 

Nearly half of the states have enacted a federal WARN Act counterpart (often referred to as “mini-WARN”) including Alabama, California, Connecticut, Delaware, Georgia, Hawaii, Illinois, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New York, Ohio, Oregon, Pennsylvania, Tennessee, Washington and Wisconsin.  It is important to note that state mini-WARN statutes vary in terms of notice period (e.g., New York and Maine require 90 days) and coverage factors (as described below).

With respect to Illinois’ WARN Act, it covers more employers, has a lower threshold for triggering notice obligations and expands the recipients to whom notice must be provided as compared to the Federal WARN Act.

Size of the Employer

The Federal WARN Act applies to employers that employ (a) 100 or more full-time employees (defined as an employee who works more than 20 hours per week and has been employed for six of the last twelve months) or (b) 100 or more employees, including part-time employees, who, in the aggregate, work a minimum of 4,000 hours per week.

The Illinois WARN Act applies to employers who employ at least 75 or more full-time employees who collectively work a minimum of 4,000 hours per week.  Therefore, upon the occurrence of a triggering event, employers in Illinois employing between 75 and 99 full-time employees will be required to comply with the Illinois WARN Act although they would be exempt from complying with the Federal WARN Act.

Affected Employee Threshold

Under the Federal WARN Act, a "mass layoff" is defined as a reduction in force (which is not a plant closing) which results in an employment loss within a 30-day period at a single site of employment of at least: (1) 500 or more full-time employees; or (2) 50 or more full-time employees who comprise at least one-third (33%) of all full-time employees at the site.

Under the Illinois WARN Act, a "mass layoff" is defined as a reduction in force (which is not a plant closing) which results in employment loss within a 30-day period at a single site of employment of at least: (1) 250 or more full-time employees; or (2) 25 or more full-time employees which comprise at least one third (33%) of all full-time employees at the site.

Under both Acts, the term "employment loss" is defined as: (1) an employment termination, other than a discharge for cause, voluntary departure or retirement; (2) a layoff exceeding six (6) months; or (3) a reduction in hours of work of more than 50% during each month of any six (6) month period.

Both Acts similarly define a "plant closing" as a 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.

Scope of the Notice Required

Under the Federal WARN Act, employers are required to provide notice to: (1) the representative of each affected employee; (2) if no such representative exists, then to the affected employee; (3) the State; and (4) the chief elected official of the unit of local government within which the closing or layoff has occurred.

Under the Illinois WARN Act, employers are required to provide notice to: (1) affected employees or representatives of affected employees; (2) the Illinois Department of Commerce and Economic Opportunity; and (3) the chief elected official of each municipal and county government within which the employment loss, relocation, or mass layoff occurred.  Additionally under the Illinois WARN Act, if the employer receives state or local economic support pursuant to the Business Economic Support Act ("BESA"), then it must also provide notice to the Governor, Speaker and Minority Leader of the House of Representatives, the President, Minority Leader of the Senate and the mayor of each municipality where the entity has locations in the State.

Exceptions to WARN

• Unforeseeable Business Circumstances (UBC) Exception

Under the Federal and Illinois WARN Acts, there exists an exception which permits employers to provide less than 60 days’ notice to employees for plant closings and mass layoffs caused by business circumstances that were not reasonably foreseeable at the time full notice would have been due so long as an explanation is provided for the reduced notice.  The UBC exception does not excuse notice altogether, but instead allows an employer to give notice as soon as is practicable.  The WARN Act’s regulations expressly recognize that “an unanticipated and dramatic major economic downturn might be considered a business circumstance that is not reasonably foreseeable.” 

Whether effects felt from COVID-19 fall within such exception is undetermined at this time.  But because this is a heavily litigated exception, employers are advised to proceed with caution before determining whether the exception applies to them.  For example, there is an argument to be made by potential plaintiffs that the UBC exception should not be available to employers at the end of the eight-week period under the CARES Act's Paycheck Protection Program ("PPP") because the employers should know at the time of receipt that they will not be able to retain most, if not all, of the employees they placed back on payroll once the funds have been fully utilized.  The same foreseeability argument could be made against employers who already furloughed employees back in March 2020, for instance, and but for the PPP loan amount, would have been unable to recall such employees.  In other words, employees may be able to successfully argue that circumstances underlying a future second layoff or furlough of employees after PPP funding runs out is currently foreseeable.

• Faltering Company Exception

Under both the Federal and Illinois WARN Acts, an employer may order the shutdown of a single site of employment before the conclusion of the 60 day period, if as of the time that notice would have been required, the employer was actively seeking capital or business which, if obtained, would have enabled the employer to avoid or postpone the shutdown and the employer reasonably and in good faith believed that giving WARN Act notices would have prevented the employer from obtaining the needed capital or business.  Like the UBC exception, this exception does not excuse notice altogether, but relaxes the 60-day requirement so an employer may provide as much notice as is practicable.  This exception applies only to plant closings and is applied on a company-wide basis, not on a facility or office basis.  Finally and most importantly, there must be a causal connection between the employer’s failure to obtain business or capital and the shutdown.  It is likely that many employers will rely on this exception in the face of COVID-19’s aftermath.  Before determining that your workplace is covered under any WARN exception, it is recommended that you first seek the advice of counsel. 

• Natural Disaster Exception

Under the Federal WARN Act, when a plant closing or mass layoff is the direct result of a natural disaster such as a flood, earthquake, drought, storm, tidal wave, or similar effects of nature, notice requirements are relaxed.  While notice must still be given, it can be given as late as after the triggering event.  However, where a plant closing or mass layoff occurs as an indirect result of a natural disaster, this exception will not apply.  Currently, there is no authority on whether a pandemic such as COVID-19 would constitute a “natural disaster” under WARN; however, even if it were defined as such, showing a “direct” nexus between COVID-19 and a company's plant closing or mass layoff may be difficult to prove.

If you have questions related to WARN coverage or notice requirements, please contact Naureen Amjad, a Partner and the Leader of Pedersen & Houpt's Employment Law Practice Group, at 312.261.2273 or at namjad@pedersenhoupt.com.