The United States District Court in Delaware recently issued a welcome decision for private equity firms whose portfolio companies run afoul of the Worker Adjustment and Retraining Notification Act (the “WARN Act”).  In In re Jevic Holding Corp. (PDF), the Court affirmed a bankruptcy court decision holding that Sun Capital Partners (“Sun”) was not liable for the WARN Act violations of Jevic Transportation Inc. (“Jevic”) (which was owned by one of Sun’s wholly-owned subsidiaries).  Jevic’s WARN Act obligations were triggered after Sun chose not to invest more money in Jevic, leading Jevic to default on a financing arrangement and ultimately declare bankruptcy.  The Jevic decision illustrates the difficulty faced by employees seeking to hold corporate parents accountable under the WARN Act, particularly when contrasted with the Second Circuit’s decision last year in Guippone v. BH S&B Holdings LLC (PDF).

In both cases, the courts applied a five-factor test, developed by the Department of Labor (“DOL”), for determining whether affiliated companies may be liable under the WARN Act as a “single employer.”  Likewise, in each case, the courts placed considerable emphasis on one of these five factors, “de facto exercise of control,” which both courts stated is present where the “parent has specifically directed the allegedly illegal employment practice that forms the basis for the litigation.”  But the courts ultimately diverged in applying this factor to the different facts in the two cases.

In Guippone, there was no obvious distinction between BH S&B Holdings LLC (“Holdings”), the asset owner and employer of the employees at issue, and BHY S&B HoldCo, LLC (“HoldCo”), the holding company that served as the sole managing member of Holdings.  Thus, the Court reversed the grant of summary judgment to HoldCo, finding that a jury could conclude that:

Holdings was so controlled by HoldCo that it lacked the ability to make any decisions independently, and that the resolution passed by HoldCo’s board “authoriz[ing] Holdings to effectuate the Reduction in Force” was, in fact, direction from HoldCo to Holdings to undertake the layoffs.

In contrast, in Jevic, it was Jevic that made the decision to shut down the company and thereby terminate the employees, without any apparent specific direction from Sun.  While these actions may have been the “natural and probable consequences” of Sun’s decision to withhold further funding, Jevic ultimately made the decision to shut down – not Sun – and only after a failed attempt to locate a potential buyer.

These decisions indicate that private equity firms, corporate parents, and the like will be held liable for their subsidiaries’ WARN obligations only where they exercise such significant control that they could be found to have directly participated in the decision to effect the employee terminations that trigger such obligations.  Mere control over the purse-strings – as in Jevic – is not enough.