In Phason v. Meridian Rail Corp. (March 15, 2007), the United States Court of Appeals for the Seventh Circuit held that terminations resulting from the sale of a business triggered the federal Worker Adjustment and Retraining Notification ("WARN") Act where there was an eight-day delay between (i) the seller's closing of its plant and termination of its employees and (ii) the closing of the sale transaction and the buyer's hiring of all but 40 to 45 of the seller's employees. Notably, in order for the WARN Act to apply to a "plant closing," the WARN Act requires, among other things, that 50 or more employees at the single site of employment suffer "employment losses."

In mid-December 2003, NAE Nortak, Inc. ("Nortak") and Meridian Rail Corp. ("Meridian") "shook hands on [a] deal" by which Nortak would buy the assets of Meridian's operations in Chicago Heights, Illinois — at least 100 employees were employed by Meridian at the Chicago Heights facility. At or about the same time, Nortak invited Meridian's employees at this facility to apply for jobs with Nortak. On December 31, 2003, Meridian notified its employees that it was closing the Chicago Heights facility effective immediately and invited them to apply for jobs with Nortak. "For reasons that [the court] record does not illuminate," the transaction between Meridian and Nortak did not close until January 8, 2004 — eight days after "Meridian had severed all ties to the former workers."

Four former employees of Meridian who were not hired by Nortak commenced a lawsuit alleging that Meridian failed to comply with the WARN Act's requirement to provide 60 days' notice prior to implementing a "plant closing." Under the WARN Act, a "plant closing" is defined as "any 'permanent or temporary' shutdown that 'results in an employment loss at the single site of employment during any 30-day period for 50 or more employees.'" The WARN Act defines an "employment loss" as an employment termination, other than a termination for cause, resignation or retirement, a layoff of more than six months or a reduction in hours of work of more than 50 percent during each month of any six-month period.

The United States District Court for the Northern District of Illinois held that the WARN Act did not apply because Nortak eventually hired all but 40 to 45 of Meridian's employees — therefore, less than 50 employees had suffered an "employment loss" under the WARN Act. The employees appealed the decision to the Seventh Circuit, arguing that "the right question is how many people lost their jobs on December 31, 2003, rather than the difference between that number and how many found work later. And if December 31 is the right time, then the number unambiguously exceeds 50."

Meridian argued that the WARN Act does not apply because there had been no "employment losses" within the meaning of the statute. Specifically, Meridian relied on the following provision of the WARN Act: "Notwithstanding any other provision of this Act, any person who is an employee of the seller...as of the effective date of the sale shall be considered an employee of the purchaser immediately after the effective date of the sale." Based on this provision, Meridian argued that "[i]t sold the plant to Nortak, and as Nortak soon hired many of the workers (leaving fewer than 50 disappointed applicants), no 'employment loss occurred.'"1

The Seventh Circuit concluded that "a handshake is not a 'sale' of a business." The Court noted again that "[t]he sale closed on January 8, 2004, more than a week after Meridian let almost all of its employees go." Meridian and the employees had disputed whether all of the employees had been terminated on December 31, 2003 or whether Meridian retained a handful of workers during the first week of January 2004 to take inventory. The Court held that, notwithstanding this factual issue, "as more than 50 workers lost their jobs [on December 31] a statutory 'plant closing' likewise took place." Dismissing Meridian's arguments that an "employment loss" did not occur because of the number of employees hired by Nortak, the Court stated that, "'[y]ou're fired, but you have prospects of catching on with someone else real soon now'" is a termination of employment and therefore an "employment loss" under the WARN Act.

Although the WARN Act provision quoted above (on which Meridian relies) states that employees of the seller will be considered employees of the purchaser as of the effective date of the sale, the Court noted that the "effective date" of the sale was January 8, 2004. On that day, the Court explained that Meridian employed zero employees at the Chicago Heights facility because it had already terminated all of its employees. The Court concluded that this provision of the WARN Act therefore does not excuse the lack of notice to the employees prior to the plant closing.

The Court next addressed the following question: "If the sale was a done deal as of December 2003, why should it matter that the transaction did not close until January 8, 2004?" The Court stated that "[o]ne potential answer is that many a 'done deal' turns out not to be 'done' after all...The WARN Act does not require employees to take business risks; employees' entitlements depend on events as they are, rather than as employers hope they will turn out." The Court also stated that another answer is that the WARN Act "draws a lot of bright lines" that "make[] the Act easier to administer." The Court held that the "[d]elayed closing put Meridian on the wrong side of one [of these bright lines]." Interpreting other court decisions that have applied a "practical, effects-driven analysis" under the WARN Act, the Court noted that "instead of looking at employers' intent, the statute examines consequences, such as whether 50 employees lost their jobs."

The Seventh Circuit therefore reversed the decision of the District Court and remanded the case with instructions to award the employees a remedy appropriate under the WARN Act. The Court also stated that the District Court would need to reconsider whether to permit the lawsuit to proceed as a class action.