A cautionary tale
Avoiding liability


Private equity firms and other investors that become directly involved in the day-to-day business activities of portfolio companies run the risk of being held directly liable for the Worker Adjustment Retraining Notification (WARN) Act violations of those entities. The US Court of Appeals for the Second Circuit recently clarified the standards that apply to such liability, and other courts have further defined the contours of acceptable and riskier behaviour.


In Giuppone v BH S&B Holdings LLC(1) York Capital, Bay Harbour Management and certain of their affiliates faced possible liability for alleged violations by the successor entity to Steve and Barry's Industries, Inc. In analysing the plaintiff's claims, the Second Circuit formally adopted a five-factor test created by the Department of Labour to determine whether related entities should be considered to be a single employer for purposes of the WARN Act. Under the five-factor test, a court considers:

  • common ownership;
  • common directors or officers;
  • de facto exercise of control;
  • unity of personnel policies emanating from a common source; and
  • dependency of operations.

In adopting this standard, the court specifically rejected York Capital's suggestion that the test the court had applied in Coppola v Bear, Stearns & Co,(2) which by its terms applied to lenders to distressed companies, should also apply to private equity investors. While only a handful of cases relied on the Department of Labour's test before 2011, it has now become the prevalent analysis applied by courts analysing the potential liability of related entities for violations of the WARN Act.

In analysing the nature of the relationships between the private equity firms and the employing entity, the following factors were most significant:

  • Common ownership – because the employing entity was owned by two unrelated private equity funds, it had different ownership from those funds. A private equity sponsor that owns all of the equity of a portfolio company would be at risk with respect to this factor.(3)
  • Common directors or officers – because four of seven board members were appointed by the private equity firms, the court found that this factor favoured the plaintiff. Nonetheless, it noted that this factor was of limited value as courts assume that directors are wearing their "subsidiary hats" when acting on behalf of a downstream entity.
  • De facto control – courts repeatedly emphasise that this is the most important factor in the test. Here, the court found that the plaintiff had failed to allege that the investors had controlled the decision-making process, ruling that the alleged conduct occurred at the level of the holding company, as the parent to the employing entity.

A cautionary tale

The fate of the investor in Young v Fortis Plastics, LLC demonstrates how an investor may find itself subject to potential liability. There, the plaintiff alleged that Monomoy Capital Partners LP was the sole owner of Fortis and the court thus found that this factor favoured the plaintiff, but the plaintiff failed to make any allegations regarding overlapping directors and officers, unity of personnel policies or dependency of operations. As to the de facto exercise of control factor, the plaintiff:

  • alleged the closing of the Fortis facility was "ordered by Defendants", which was defined to include both Fortis and Monomoy;
  • named specific Monomoy employees who he alleged were involved in the exercise of control over Fortis through weekly calls; and
  • alleged that Monomoy received $500,000 in management fees from Fortis.

These relatively thinly pleaded allegations were found to be sufficient to withstand a motion to dismiss. Of course, on a full factual record, Monomoy may well be able to establish facts that preclude liability and justify summary judgment dismissing the plaintiff's claims. In the meantime, it will be forced to incur the costs and distraction of defending the litigation.

Avoiding liability

To reduce the risk of liability, investors should strive to ensure separation from the employer's decision to lay off employees or close facilities. Certainly, this does not require that the third party abstain from all involvement in the employer's financial matters, but specific decisions and determinations should be left to the management and board of directors of the employer. Direct orders or instructions to conduct lay-offs or plant closures should be avoided; establishing expense reduction requirements or requiring financial covenant compliance is far less likely to lead to liability. Greater care is called for when a single private equity firm or other investor is the sole or primary owner of the equity of the employing entity.

Critically, the corporate formalities must be observed. Appropriate documentation should reflect that the relevant decisions were made by the employer's officers or board of directors, not the investor, including through board resolutions, minutes of meetings and internal memoranda. Demonstrating a lack of control over the determination will go a long way towards insulating the third party from liability for any WARN violations by the employer.

For further information on this topic please contact Kevin B Leblang or Robert N Holtzman at Kramer Levin Naftalis & Frankel LLP by telephone (+1 212 715 9100), fax (+1 212 715 8000) or email ( or The Kramer Levin Naftalis & Frankel LLP website can be accessed at


(1) 737 F 3d 221 (2d Cir 2013).

(2) 499 F 3d 144 (2d Cir 2007).

(3) See, for example, Young v Fortis Plastic, LLC, 294 FRD 128 (ND Ind 2013) (Monomoy Capital Partners' motion to dismiss WARN Act claims denied; Monomoy owned all of the equity of the employer).