M&A Bargain Hunters Should Heed The WARN Act

By Amelia Henderson and Kayla Haines
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Law360 (September 16, 2020, 3:13 PM EDT) --
Amelia Henderson
Amelia Henderson
Kayla Haines
Kayla Haines
As of early August, more than 170 U.S. companies had filed for Chapter 11 protection, citing losses from COVID-19 as a major factor. While this is a tough financial time for these businesses, it may provide opportunities for others with more liquidity to pick up some bargains. Any company looking to buy, however, should keep the federal Worker Adjustment and Retraining Notification Act[1] in mind — or face the consequences.

WARN Act Requirements and Applicability

The WARN Act, codified at Title 29 of the U.S. Code, Section 2101, requires covered employers to give a minimum of 60 days' notice to employees prior to any plant closing or mass layoff. Thus, covered employers are barred from implementing a plant closing or mass layoff until the end of the 60-day period after such written notice is given.

In situations where two or more groups of employees at a single worksite are laid off or affected by a plant closing — even if each group, standing alone, amounts to fewer than the minimum number of employees that trigger the notice requirement in the law — the aggregate number of employees affected over a 90-day period is considered for WARN Act applicability.

Plant closing means "the permanent or temporary shutdown of 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 employees."[2]

Mass layoff means

a reduction in force which (a) is not the result of a plant closing; and (b) results in an employment loss at the single site of employment during any 30-day period for (1)(i) at least 33% of the employees; and (2)(ii) at least 50 employees (excluding part-time employees); or (2) at least 500 employees (excluding part-time employees).[3]

Fortunately for smaller businesses and those laying off only a small number of employees, there are employment thresholds that must be met in order to be a covered employer under the WARN Act, regardless of whether the plant closing or mass layoff thresholds are met.

The WARN Act applies only to a business that: (1) employs 100 or more employees, not counting those who work part-time; or (2) employs 100 or more full-time and part-time employees, who, together, work at least 4,000 hours per week, not counting overtime.

Who Provides Notice in the Case of a Sale?

Various transactions may result in a plant closing or mass layoff as a business is transferred to a new owner. WARN Act liability is possible not only for the seller in such a transaction, but also for the purchaser. According to the WARN Act, "in the case of a sale of part or all of an employer's business," the seller is responsible to provide notice for any plant closing or mass layoff up to and including the effective date of the sale.[4]

The purchaser in such a sale is responsible for providing notice for any plant closing or mass layoff that occurs after the effective date of the sale.[5]

For example, in Day v. Celadon Trucking Services, the asset purchase agreement in the transaction at issue stated that the seller's employees were to remain employed for 14 days after the date of the sale.[6]

In Day, the U.S. Court of Appeals for the Eighth Circuit found that the purchaser was responsible for providing the notice required under the WARN Act, and would have had to provide that notice at least 60 days prior to the mass layoff occurring 14 days after the effective date of the sale to comply with the WARN Act.[7]

Further, the WARN Act regulations treat a purchaser's decision not to hire the seller's employees after a sale — and the seller's technical termination of the employees at the time of a sale — as though it were a termination decision by the purchaser, obligating the purchaser to provide the required WARN Act notice.[8]

The regulations provide that, if the seller is aware of a purchaser's plans to carry out a mass lay off or plant closing, it may provide notice to affected employees as the purchaser's agent, suggesting that compliance with the WARN Act on the part of the purchaser may be triggered far in advance of the closing of the transaction.

The regulations further suggest that a notice of intent not to rehire employees after the sale must be given at least 60 days in advance of the closing date even though the purchaser is not yet the employer of the seller's employees at that time.[9]

Sale of Assets Versus Sale of Business as a Going Concern

The WARN Act does not define the "sale of part or all of an employer's business," and the courts have had to interpret this language a number of times. Courts have distinguished between sales of assets and sales of a business as a going concern.

When a case involves simply a sale of assets, as opposed to the sale of a business as a going concern, the seller retains the WARN Act notice responsibility because the seller is the party actually closing the plant that results in the employment loss. On the other hand, when a sale of a business as a going concern is involved, the sale-of-a-business exclusion creates the presumption that the buyer is the employer for WARN Act purposes if the seller employs its employees on the day of the sale.[10]

Although a transaction can be styled as a sale of assets by entering into an "asset purchase agreement," courts have said that, if the transaction is an asset sale in which the purchaser intends to continue the seller's business after the closing indefinitely, the sale is likely of a business as a going concern and subject to WARN Act scrutiny.

In contrast, courts have found that a sale of a business in which the purchaser would not take over operations at closing, and would simply purchase and remove certain tools and equipment, is not a sale of a business as a going concern and meets the exception to the WARN Act.

One court has gone so far as to conclude that a "sale of part or all of an employer's business" includes both (1) a sale of a company's total business, and (2) a sale of part of an employer's business that entails the transfer of at least some employees.[11]

How This Works in Practice

As an example, say the purchaser in a Section 363 sale out of a bankruptcy case wants to acquire all a bankrupt debtor's assets but does not plan to permanently hire all of its employees.

This would likely be a "sale of a business as a going concern" because all the debtor's assets would be used to continue operations of the company after the acquisition. The potential dismissal of the debtor's employees on closing would therefore trigger the WARN Act, assuming the employment thresholds were also met.

In this case, the deal could be structured so that the purchaser kept some of the debtor's employees on for a period of time after the closing. This would give enough time for the purchaser to provide proper WARN Act notice to the employees who were not hired permanently, and could also facilitate the transition of the debtor's assets to the purchaser.

Conclusion

The repercussions of the pandemic are far from over, and it remains unclear just how many companies will be left bankrupt. While some may be on the lookout for an opportune acquisition in the current environment, buyers must exercise caution and take the federal WARN Act into consideration.



Amelia Henderson is a shareholder and Kayla Haines is an associate at Smith Hulsey & Busey.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Some states have similar laws, which in some cases are more stringent than the federal WARN Act. This article only focuses on the federal WARN Act, but practitioners should also be aware of their own state's laws.

[2] 29 U.S.C. § 2101(a)(2).

[3] 29 U.S.C. § 2101(a)(3).

[4] 29 U.S.C. § 2101(1).

[5] Id.

[6] See Day v. Celadon Trucking Servs., Inc. , 827 F.3d 817 (8th Cir. 2016).

[7] Id. at 830.

[8] 20 C.F.R. § 639.4.

[9] Id.

[10] Day, 827 F.3d at 827.

[11] Oil, Chemical, and Atomic Workers Intern. Union v. CIT Group/Capital Equipment Financing, Inc. , 898 F. Supp. 451, 457 (S.D. Tex. 1995).

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