Last week the U.S. District Court in Cleveland issued a decision that, once again reminds us in two ways how devilishly tricky the Worker Adjustment and Retraining Notification (WARN) Act can be when determining what is a covered employer and who is liable for a violation of the Act. Blough v. Voisard Manufacturing, 2015 U.S. Dist. LEXIS 9267, 1:14 CV 263 (N.D. Ohio, Jan. 27, 2015).

Background

Voisard Manufacturing was a manufacturing company owned by a parent limited liability company, LGP. LGP was managed by another entity, LGI. The owners of LGP and LGI also were the officers and directors of all three companies and controlled the employment and financial decisions at Voisard. During that time, LGP collected nearly $3 million in management fees from Voisard.

While once a successful company, Voisard’s financial fortunes changed near the end of 2012. It lost much of its work from its largest customer and operations and revenues declined throughout 2013.

The Layoffs

In the spring 2013, Voisard began reducing its workforce and, in September 2013, laid off 28 employees. In conjunction with these l layoffs: (1) Voisard sent notices stating, “We hope that this will be a temporary situation and we can get everyone back to work as quickly as possible”; (2) Voisard’s HR manager testified that in the past, Voisard had nearly always recalled employees who had been laid off; and (3) Voisard, a non-union shop, maintained a written seniority policy that gave laid off employees recall rights for up to one year from the date of layoff. These findings proved crucial as we shall see.

Throughout the remainder of 2013, Voisard worked to keep its financing in place to remain open. On January 31, 2014, however, Voisard laid off 72 more employees without notice. The workers then sued, contending that Voisard violated the WARN Act by failing to give them 60 days’ notice before the mass layoff on January 31, 2014.

This case raises two questions relating to “fine print” issues for employers contemplating layoffs: (1) who is covered by the Act, and (2) who may be liable for violations?

(1) Was Voisard an “Employer” Covered by the WARN Act?

The Law

The WARN Act requires employers that close any single site of employment or have a “mass layoff” at a single site of employment (with either causing at least 50 “losses of employment” during a 30-day period) to provide at least 60 days’ advance notice of the job losses to the employees (or their representative, if any) and to the local state dislocated worker division. 29 U.S.C. §§2101(a), 2102(a).

Snapshot Date

But, only “employers” are subject to the advance notice rule. The term “employer” is defined as a business enterprise that employs 100 or more employees, excluding part-time employees. 29 U.S.C. § 2101(a)(1). The date for measuring the number of employees—the “snapshot” date— is the date when the first notice is required to be given: 60 days prior to the layoffs. 20 C.F.R. § 639.5(a)(2). For Voisard, the snapshot date was December 2, 2013—60 days before the January 31, 2014, mass layoff.

The Court’s Analysis

According to the trial court, when the layoffs occurred on January 31, 2014, Voisard employed only 87 employees. On the December 2 snapshot date, Voisard employed only 97 employees. This should mean that Voisard was not an “employer” covered under the WARN Act, right? Not so fast . . .

The WARN Act does not exactly define the term, “employee.” However, several courts and WARN Act regulations instruct that “employee” includes temporarily laid-off employees who have a “reasonable expectation of recall.”

Whether an employee has a “reasonable expectation of recall” depends upon “whether a ‘reasonable employee,’ in the same or similar circumstances . . . would be expected to be recalled.” To analyze this expectation, courts consider a number of factors:

  1. the employer’s past experience;
  2. the employer’s future plans;
  3. circumstances of the layoff;
  4. the expected duration of the layoff; and
  5. industry practice.

While Voisard had only 97 employees on the snapshot date, 28 employees were laid off within six months of January 31, 2014; adding them to the 97 employees on the payroll would have pushed Voisard over the 100-employee threshold.

The plaintiffs argued that the 28 laid-off workers should be included as “employees” because (a) Voisard had a written seniority policy providing a full year’s recall rights; (b) Voisard’s HR manager had testified that Voisard nearly always recalled employees on layoff, and that layoffs were “never permanent”; (c) Voisard’s layoff letters expressed a desire to recall and stated that the layoffs were temporary; and (d) the chief operating officers did not expect the layoff.

Ruling

The trial court ruled that those laid off by Voisard starting in September 6, 2013 made a sufficient showing to the jury on the issue of whether they could have reasonably expected to be recalled and therefore should have been counted in the total number of employees for purposes of determining WARN Act applicability.

(2) Who May Be Liable for WARN Act Violations?

Plaintiffs’ lawyers learn early that a case is only as good as the ability of the defendant to pay a judgment. WARN litigation, by its nature, involves claims that arise because many people lost their jobs. And, if that occurred, chances are that the employer is struggling and may not be able to satisfy a judgment. So, the plaintiffs went looking for a pocket to satisfy a judgment and sued not only Voisard (which was financially on the rocks) but also LGP and LGI (who you will recall took nearly $3 million out of Voisard as management fees).

Now, you might ask, “How could LGP and LGI be sued? Wasn’t Voisard an LLC and aren’t the owners of an LLC shielded from any liability incurred by Voisard under general common law and LLC law?” The answer is “not necessarily”!

U.S. Department of Labor (DOL) regulations provide that “subsidiaries which are wholly or partially owned by a parent company are treated as separate employers or as a part of the parent or contracting company depending upon the degree of their independence from the parent” (emphasis added). 20 C.F.R. § 639.3(a)(2). So, the general rule of “corporate separateness” does not necessarily apply in WARN litigation.

To determine if an operation involving a parent and subsidiary, like the one involving Voisard, LGP, and LGI, is a “single employer” and therefore “jointly liable” for WARN Act violations, the courts typically use a five-factor test that examines the integration, if any, of the separate entities.

  1. Is there common ownership?
  2. Are there common directors and/or officers?
  3. Does one entity exercise de facto control of the other?
  4. Is there a unity of personnel policies emanating from a common source?
  5. Are the operations of the various entities dependent upon each other?

20 C.F.R. § 639.3(a)(2). The salient issue in the five-factor analysis is whether two nominally separate entities are actually operated separately, at arm’s length, or whether the amount of control exercised by one over another supports the conclusion that they are one integrated entity. Clearly, this erosion of the “separateness” typically accorded subsidiaries is a trap for the unwary.

The last three factors of the analysis are usually the determinative factors. Among these, de facto exercise of control is the most important factor, and it involves an analysis of whether one company “was the decision-maker responsible for the employment practice giving rise to the litigation.”

The trial court found that the operations of the firms were very much intertwined—particularly since Voisard paid millions to LGP to manage its business, and the principal officers of LGP and LGI made the decision to carry out the mass layoff on January 31, 2014. Therefore, LGP and LGI could be held liable for the failure to give a WARN notice to Voisard’s employees.

Hard Lessons Learned

Several lessons can be drawn from this case.

  1. First, while seniority policies may have some utility (e.g. defining service for benefit accrual and eligibility purposes, service awards, and determining who is entitled to the best parking space), beware of promising recall rights.
  2. Second, whenever the number of employees laid off begins to approach 50, it may be prudent to contact counsel to work through the “fine print” of WARN Act application.
  3. Third, beware of reliance upon the “corporate shield” to protect parent organizations from subsidiary WARN Act liabilities. Entities routinely use subsidiary corporate structures to shield valuable parent assets from risky subsidiary ventures. Be advised, however, that the greater the entanglement of the parent in the subsidiary’s affairs, the greater the likelihood that violations will be visited upon the parent.