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In connection with asset transactions, purchasers sometimes seek to make job offers to employees of sellers on terms less favourable than those they enjoyed before the sale. In Service Employees International Union v Prime Healthcare Services, Inc(1) a federal district court in California ruled that such an action does not result in an employment loss under the federal Worker Adjustment and Retraining Notification (WARN) Act.

In Service Employees International Union, the management company for a hospital suffered financial difficulties. As a result, the lessor of the hospital:

  • terminated its agreement with that manager; and
  • 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 holiday allowance. 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 favourable 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 33% of the total number of employees. The plaintiff's federal WARN Act claim was therefore 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 favourable than those enjoyed by the employees during their employment with the seller. It is critical, however, for employers to consider potentially less favourable state WARN Acts when determining whether they might have potential liability in connection with a sale or purchase of assets.

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 (kleblang@kramerlevin.com or rholtzman@kramerlevin.com).

Endnotes

(1) 2010 WL 2843942 (ED Cal, July 19 2010).