If you provide goods or services to the Department of Defense as a prime contractor or subcontractor, you may be concerned about the sequestration of funds beginning January 2, 2013 and its impact on your business. Worrying about your level of contract funding (current or new) and having sufficient work for your employees is a headache. Your headache may have become a migraine. Now, however, you also may have concerns about compliance with the Worker Adjustment and Retraining Notification Act (or “WARN Act”).

Here’s a high-level summary of why:

WARN Act Requirements. As a general rule, the WARN Act requires companies with more than 100 employees to give written notice of a facility closing or mass layoff to the affected employees (and certain governmental offices) at least 60 days prior to the facility closing or layoff. Employees who have worked less than 6 months in the past 12 months and employees who work an average of less than 20 hours a week are excluded from the “more than 100 employees” calculation.

The WARN Act notice regarding a facility closing or layoff focuses on “loss of employment” which is, among other things, termination that is not voluntary, is not retirement, or is not based on “cause.” Determining whether a WARN Act notice is appropriate includes identifying the number of employees to be terminated and their employment or job site location.

Generally, an employer who does not give the required 60-day advance notice is liable to each affected employee for an amount including up to 60 days of back-pay and benefits, as well as civil penalties of up to $500 per day. Not unexpectedly, the statutory and regulatory requirements are more technical, but this is the basic outline.

Long story, short: If your company is subject to the WARN Act, you may be required to give written notice of lay-offs on or before November 1, 2012.

January 2, 2013 Department of Defense Sequestration—Does the WARN Act Apply? The WARN Act and its regulations do not contain clear, unambiguous exceptions to the Act’s notice requirements based on changes in available funding for Department of Defense procurement contracts for good or services. Various interpretations of possibly relevant judicial decisions also may not provide the comfort a contractor seeks.

However, earlier this year the US Department of Labor announced in its Training and Employment Guidance Letter No. 03-12, that “contractors of the DOD whose contracts may be terminated or reduced in the event of sequestration on January 2, 2013,” are not required to give the 60-day WARN Act notice to employees working under such contracts. As announced by the Department of Labor, the basis of this direction to DOD contractors is that “efforts are being made to avoid sequestration” and that potential closing and layoffs resulting from DOD contract terminations or cutback “are speculative or unforeseeable.”

This Department of Labor “guidance” was reinforced by a June 30, 2012 guidance letter from an Assistant Secretary at the Department of Labor. Additionally, a September 28, 2012 Executive Memorandum from the White House confirms the Department of Labor’s guidance that “it is neither necessary nor appropriate for federal contractors to provide WARN Act notice to employees 60 days in advance of the potential sequestration.”

The September 28 Executive Memorandum also states that if a DOD contractor follows the Guidance Letter, then “any resulting compensation costs for WARN Act liability as determined by a court, as well as attorneys’ fees and other litigation costs (irrespective of litigation outcome),” which the contractor incurs “would qualify as allowable costs and be covered by the contracting agency, if otherwise reasonable and allocable.”

Simple, easy, right?—Don’t give the WARN Act notice and the US Government will pay any employee claims for compensation and your legal fees and related costs. Not so fast, the devil, as always, is in the details, and there is more to this saga.

First, the March, 2012 Guidance Letter from the Department of Labor is generally a “best practices” statement, not a binding legal decision, not an amendment to the WARN Act adopted by Congress, and not a new regulation. Second, the September 28 Executive Memorandum contains a disclaimer and may not answer all of a contractor’s business and legal questions.

Long story, short: You may want to dig a little deeper before making your decision about whether or not you follow the Executive Memorandum and Guidance Letter or take the more conservative approach of complying with the WARN Act.

There’s uncertainty and unexplored ground in this arena. Move forward carefully, but don’t overlook the November 1, 2012 notice deadline (and setting your calendar for the last week in October is probably safer).