On July 30, 2012, the Employment and Training Administration of the US Department of Labor (DOL) issued a guidance letter on the applicability of the Worker Adjustment and Retraining Notification Act (WARN) to layoffs that may occur among federal contractors, including in the defense industry, as a result of sequestration. Training & Employment Guidance Letter No. 3-12 (July 30, 2012).

Background

Questions have recently been raised as to whether the WARN Act requires federal contractors—including, in particular, contractors of the US Department of Defense (DOD)—whose contracts may be terminated or reduced in the event of sequestration on January 2, 2013, to provide WARN Act notices 60 days before that date to their workers employed under government contracts funded from sequestrable accounts. According to the DOL, the answer to this question is "no."

The Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA), as amended by the Budget Control Act of 2011 (BCA), requires that the president of the United States issue a sequestration order on January 2, 2013, that reduces non-exempt defense and non-exempt non-defense accounts by a uniform percentage. The Congressional Budget Office has estimated that base defense discretionary spending would be cut by approximately 10 percent while non-defense discretionary spending would be cut by almost 8 percent. Members of both Congress and the Obama Administration have stated that their goal is to avoid the sequester, and the Office of Management and Budget has not directed federal agencies to begin planning for the specific manner in which they will operate were sequestration to occur.

The WARN Act

Generally, the WARN Act requires employers with at least 100 employees to provide written notice at least 60 days before ordering a plant closing or mass layoff to "affected employees." A "plant closing" or a "mass layoff" is defined in terms of numbers of workers at a single site of employment who suffer an "employment loss." "Affected employees" are employees "who may reasonably be expected to experience an employment loss as a consequence of a proposed plant closing or mass layoff by their employer." An "employment loss" is defined as a termination from employment other than a termination for cause, voluntary departure, or retirement; a layoff for more than 6 months; or a reduction in hours of more than 50 percent in each month of a 6-month period.

According to the DOL, “these statutory provisions demonstrate that the WARN Act is designed to require employers to provide notice to those workers who are reasonably likely to lose their jobs or suffer other serious employment consequences, but not to those workers who will suffer no such consequences or who have only a speculative chance of suffering them.”

The WARN regulations recognize that an employer may not always know exactly which workers will suffer an employment loss 60 days before it orders a plant closing or mass layoff. This could occur, for example, because employee bumping rights make it difficult to predict exactly which workers will lose their jobs or because circumstances make accurate prediction 60 days in advance difficult.

The WARN Act and regulations also recognize that there may be situations in which an employer cannot give 60 days’ advance notice. The Act lists three situations in which notice may be given fewer than 60 days before a plant closing or mass layoff will occur. These exceptions are referred to as the faltering company, unforeseeable business circumstances, and natural disaster exceptions.

According to the DOL, of these three exceptions, the unforeseeable business circumstances exception is the one that would apply to plant closings or mass layoffs occurring before or in the wake of the potential sequestration on January 2, 2013. The unforeseeable business circumstances exception occurs when "the closing or mass layoff is caused by business circumstances that were not reasonably foreseeable as of the time that notice would have been required."

The WARN regulations expand on the definition of unforeseeable business circumstances and state that an important indicator of whether a circumstance was reasonably foreseeable is if it was "caused by some sudden, dramatic, and unexpected action or condition outside the employer's control."

Application of WARN Act to Potential Sequestration

The DOL reasoned that “although it is currently known that sequestration may occur, it is also known that efforts are being made to avoid sequestration. Thus, even the occurrence of sequestration is not necessarily foreseeable.”

The DOL also noted that the sequester’s impact on particular accounts will depend at least in part on Fiscal Year (FY) 2013 funding that Congress has not yet enacted. Federal agencies also have some discretion in how to implement the required reductions if sequestration were to occur. The DOL concluded as follows:

Given that Federal agencies, including DOD, have not announced which contracts will be affected by sequestration were it to occur, and that many contracts may be completely unaffected, the actual contract terminations or cutbacks that will occur in the event of sequestration are unknown. Thus, in the absence of any additional information, potential plant closings or layoffs resulting from such contract terminations or cutbacks are speculative and unforeseeable.

Thus, according to the DOL, if federal agencies announce before January 2, or in the wake of sequestration, specific contract terminations or cutbacks that will require contractors to lay off or separate their employees in less than 60 days, “such announcements would be sudden and dramatic, and in such cases, consistent with the WARN Act, employers will not have to provide the full period of notice.”

However, many such federal agency decisions may also occur later than January 2, as these agencies, including DOD, will need time to determine how to operate ongoing programs, projects, and activities for the remainder of FY 2013 within the constraints of any sequestration order. BBEDCA itself recognizes that agencies will need substantial time to implement a sequester and determine its effects on specific programs, providing that "administrative regulations or similar actions implementing a sequestration shall be made within 120 days of the sequestration order." The DOL concluded that “in such instances, contractors' obligation to provide notices under the WARN Act would not be triggered until the specific closings or mass layoffs are reasonably foreseeable, pursuant to the statutory and regulatory standards discussed above.”

The DOL also reasoned that while the nature of the cause of the business circumstance is an important indicator, the test for unforeseeability is whether an employer exercised "commercially reasonable business judgment as would a similarly situated employer in predicting the demands of its particular market." According to the DOL,

It is unlikely that employers will have enough information to predict which contracts will be affected and therefore which plants could close and which groups of employees could experience employment losses at least without additional information about FY 2013 funding (which has not yet been enacted) and how agencies will operate within the constraints of a January 2 sequestration order (should one have to be issued) for the remainder of FY 2013. Where, as here, employers now have virtually no information from which to determine whether their contracts will be affected, there is no basis on which to form a business judgment.

Finally, the DOL noted that relevant case law indicates that under the current circumstances federal contractors, including defense contractors, are not obligated to provide WARN Act notifications 60 days before the date of the BCA sequestration order.

Conclusion

It is unclear whether all the federal courts would agree with the DOL’s guidance, but they generally defer to such agency pronouncements. It also remains to be seen whether state WARN laws will be interpreted in the same manner as the DOL interprets WARN.