Whether Buyer or Seller: Heed This WARNing

09/06/2024|4 minute read

Key Takeaways:

• WARN (and corresponding local requirements) must at least be considered and discussed in any transaction in which not all employees will be retained post-sale.
• WARN's 60-day notice requirement often triggers obligations prior to the transaction's closing date, so early consideration of any potential mass layoff is crucial.
• Over 20 states (and municipalities) have their own mass layoff statute or regulation, so buyers and sellers must consider local requirements based on where impacted employees work.

One often forgotten consideration in many mergers and acquisitions is the Worker Adjustment and Retraining Notification Act of 1988 (WARN Act). Whether you are a buyer or a seller, you should consider whether the WARN Act and/or a parallel state/local notice requirement is implicated by your deal.

WARN: An Overview

The WARN Act requires covered employers to provide 60 days' advance notice in writing to employees and certain officials, including union representatives, local government officials and state dislocated worker units, in the event of a plant closing or mass layoff, unless certain exceptions apply.

• Covered employers include those with 100 or more employees (excluding part-time employees who work less than an average of 20 hours per week or who have been employed for less than six of the 12 months preceding the notice date) and those with 100 or more employees who work a combined total average of 4,000 or more hours per week.
• A plant closing is the permanent or temporary closing of a facility or operating unit that results in employment loss for 50 or more full-time employees at a single-site location.
• A mass layoff occurs when at a single-site location there is a loss of employment for either (1) 500 or more full-time workers or (2) 50 or more full-time workers who constitute at least 33 percent of the employer's workforce.
• The WARN Act also requires employers to provide notice if, during any 90-day period, the aggregate number of layoffs during that period would result in a covered WARN event as defined above.

Failure to comply with WARN obligations can be costly. The consequences for violating the WARN Act include the obligation to pay wages and benefits for up to 60 days to each affected employee and civil penalties of up to $500 per day for not complying with the required reporting to the appropriate local government.

WARN in the Sale of a Business

When all or part of a business is sold, the acquisition of a business or workforce alone does not trigger the WARN Act. If the seller's workforce will have continued employment following the acquisition, notice is not required even though the employees' employment with the seller is technically "terminated" under the acquisition. This is because employment continues with the buyer. However, if the acquisition will result in a plant closing or mass layoff, the WARN Act is triggered. The question becomes: Who is required to provide the notice?

If the plant closing or mass layoff occurs before or upon the acquisition closing, the seller must provide the required notice. If the plant closing or mass layoff occurs after the acquisition becomes effective, the buyer must satisfy the WARN Act's obligations. This is a notable distinction because the buyer may be obligated to provide the WARN notice prior to the acquisition closing - that is, prior to becoming the employing entity. For example, consider an acquisition where the buyer anticipates a plant closing 45 days after the acquisition's close. In this instance, the buyer is obligated to provide the WARN notice 15 days prior to the acquisition's closing to satisfy its 60-day notice requirement. While the seller may provide the notice if agreed to by the buyer, any potential liability under the WARN Act will be placed on the buyer (the employing entity at termination of employment). In this situation, it is important for the parties to cooperate in the early exchange of employee data, such as compiling a list of the affected employees, names, addresses and potential union representation, to provide timely notice. For this reason, buyer and seller should include employment counsel early in acquisition discussions to assess potential triggering events, strategies to consider to avoid triggering the WARN Act, and how to avoid potential penalties and liability.

Employment counsel can also help in assessing necessary employment-related provisions for an asset sale. While many asset sales result in the continuation of employment, this is not always the case. If the buyer intends to hire the seller's workforce, the parties should ensure the asset purchase agreement contemplates their terms and conditions of employment. The U.S. Department of Labor takes the position within its guidance that if the buyer offers continued employment but significantly changes the employee's wages, benefits, working conditions or job description and the employee resigns as a result, such changes could result in a finding of "constructive discharge" in which the buyer could be liable under WARN. While this is a high bar, it is important for buyers in an asset sale to consider early on the terms offered to the seller's workforce.

Mini-WARN

In addition to providing notice under the WARN Act, buyers and sellers should consider whether any applicable state or local jurisdiction has similar notice requirements. To date, over 20 states (and municipal jurisdictions) have some type of mass layoff statute or regulation in effect. These range from regulations encouraging employers to provide notice to local entities or affected employees for aiding workforce displacement assistance to statutes requiring employers to provide severance pay and even to statutes requiring employers to obtain authority before ceasing or limiting operations. State requirements also often apply to layoffs affecting fewer employees than WARN requires, and thus, it is necessary to also evaluate potential exposure from state or local laws in any acquisition-related employment termination.

BakerHostetler's Employment Deal team is available to assist in identifying potential WARN, mini-WARN and other local jurisdiction triggers; preparing effective notices; and mitigating against potential WARN and other violations.

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