In connection with asset transactions, purchasers sometimes seek to make job offers to employees of sellers on terms less favorable than they have enjoyed prior to the sale. In Service Employees International Union v. Prime Healthcare Services, Inc., 2010 WL 2843942 (E.D. Cal. July 19, 2010), a federal district court in California ruled that such an action does not result in an employment loss under the federal WARN Act.

In this case, the management company for a hospital suffered financial difficulties and the lessor of the hospital (i) terminated its agreement with that manager and (ii) entered into a lease agreement with another management company to operate the hospital. In connection with this transaction, all of the approximately 768 employees of the former manager were technically terminated and approximately 609 of these individuals were given offers of employment by the new management company. The offers included wage reductions for some employees, health and fringe benefit reductions, loss of seniority, loss of union representation and loss of vacation. The plaintiff union brought claims under the federal WARN Act and the California WARN Act.

With respect to the federal WARN Act claim, the defendants argued that an insufficient number of employees were terminated to create liability under the Act; the court agreed. In reaching this result, the court relied on the statutory definition of an “employment loss” as “(A) an employment termination, other than a discharge for cause, voluntary departure, or retirement, (B) a layoff exceeding 6 months, or (C) a reduction in hours of work of more than fifty percent during each month of any 6-month period.” The court held that technical termination of the employees, immediately followed by an offer of employment by the new management company, did not qualify as an “employment loss” under the federal WARN Act even if the offers were on less favorable terms and conditions than those provided by their former employer. Accordingly, there was no “mass layoff” under the federal WARN Act — the number of employees who had suffered an employment loss was significantly less than 500 employees and fell far short of thirty-three percent of the total number of employees — and the plaintiff’s federal WARN Act claim was dismissed. The court declined to exercise supplemental jurisdiction over the plaintiff’s California WARN Act claim.

There are important lessons to be discerned from this decision by purchasers and sellers involved in asset transactions. The case confirms that a technical termination of employment by a seller immediately followed by an offer of employment from a purchaser will not constitute an “employment loss” under the federal WARN Act. The case further lends support to the argument that no “employment loss” has occurred even if the seller’s offer of employment is on terms and conditions less favorable than those enjoyed by the employees during their employment with the seller. It is critical, however, for employers to consider potentially less favorable state WARN Acts when determining whether they might have potential liability in connection with a sale or purchase of assets.

The court held that technical termination of the employees, immediately followed by an offer of employment by the new management company, did not qualify as an “employment loss” under the federal WARN Act even if the offers were on less favorable terms and conditions than those provided by their former employer.

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