Fair Warning

When San Francisco-based law firm Thelen abruptly shut its doors in December 2008, the legal world was shocked. The firm was more than 80 years old and employed about 400 lawyers in offices in Washington, D.C., Shanghai, New York and other cities around the world.

But no one was more shocked than the newly out-of-work associates at the firm, who allege they had little notice before Thelen shut down. A group of lawyers and staff sued, alleging that the firm violated the Worker Adjustment and Retraining Notification Act, commonly known as WARN.

Bergman v. Thelen was certified as a class action in April and is currently pending in the Federal District Court for the Northern District of California.

Thelen is not alone. In these troubled economic times, employers are increasingly turning to layoffs and location closings to stay alive. There has been a corresponding uptick in lawsuits alleging that employers are violating WARN, which requires employers to give affected workers 60 days of notice before a major layoff.

"A cottage industry of WARN litigation is springing up," says Stephen Woods, a shareholder at Ogletree Deakins. "There are boutique firms doing nothing but WARN class actions."

And the problem may get worse: Congress is considering legislation that would greatly increase employers' burdens under WARN.

Legislative Fix

Both houses of Congress are looking at versions of a statute called the Federal Oversight Reform and Enforcement of the WARN Act, or the Forewarn Act. If enacted, the bill would greatly expand the number of employers exposed to WARN lawsuits and would make noncompliance much riskier. Experts expect significant movement on the bill by the end of the year.

Most significantly, the Forewarn Act would encompass smaller employers and would be triggered by smaller layoffs. Currently, WARN applies only to companies with at least 100 employees. Forewarn would take that down to 75. Under current law, WARN's notice obligations are only triggered by a facility closing affecting at least 50 full-time employees, or a "mass layoff" impacting 33 percent of the work force or more than 500 employees. Forewarn's trigger is 25 terminations within a three-month period.

"It will be very difficult for employers to anticipate when they will trigger WARN notice requirements," says Philip Miscimarra, a partner at Morgan Lewis who represented the Business Roundtable during the development of the original WARN regulations. "A 'mass layoff' is defined such that the statute is triggered even if a plant stays open and only a few people are terminated at a time."

Forewarn would also require employers to give affected workers 90 days of notice before a layoff, as opposed to 60 under current law. Employment lawyers say this change is fraught with problems.

"Ninety days will put some companies that could have otherwise stayed open out of business," says Robert Ashmore, a partner at Fisher & Phillips. "For a white collar operation, such as a law firm or a bank, continuing to pay salaries for 90 days could be a crippling burden."

The statute also would greatly increase the penalties assessed on violators. WARN provides back pay--Forewarn contemplates double back pay plus interest for every day the employee was entitled to notice, but did not receive it.

The number of employers exposed to these liabilities is potentially huge. By some measures, noncompliance with WARN is rampant. For instance, according to a Government Accountability Office study conducted five years after WARN was implemented in 1988, only half of WARN-triggering layoffs led to WARN notices actually being given, and 29 percent of those notices did not provide the required 60 days.

Meanwhile, some of the harsher conditions contemplated by Forewarn are already a reality in some states, which have adopted "mini-WARN" statutes, with increased notice periods and higher penalties. New York and New Jersey, for example, already require 90 days notice.

The Enforcers

Forewarn would also change the enforcement scheme for violations of the statute. WARN is currently enforced only through private rights of action in federal court. Forewarn would authorize the Department of Labor to investigate alleged violations of WARN and bring lawsuits on aggrieved workers' behalf, similar to the manner in which the EEOC currently enforces anti-discrimination laws. By the same token, the Forewarn statute would require employers to notify the DOL when it undertakes a RIF that triggers WARN.

"When you task a federal agency with enforcement, you know there will be greater scrutiny and increased costs of compliance," Woods says.

That increased scrutiny will require employers to greatly step up their compliance efforts. The first order of business is taking an inventory of what the applicable state and federal laws require in a RIF scenario, and knowing what it will take to meet those requirements should the need for a RIF arise.

"The onus is on the in-house attorneys to educate management about the processes needed in a layoff," Ashmore says. "Managers are focused on the bottom line business implications and want to be decisive, but you can't decide on a Wednesday to do a RIF on a Friday. By then it's too late."

Employment experts also advise that companies do everything possible to avoid triggering WARN requirements.

"Consider every option before a RIF," Ashmore says. "You have to balance the savings against the risk of taking drastic action. An early-retirement incentive program, voluntary employee buyouts, temporary layoffs or wage freezes could all help avoid the risk of a lawsuit."

However, even voluntary separations would become riskier under Forewarn.

"[Under Forewarn] an employee cannot waive his rights under WARN unless the Secretary of Labor negotiates the release," says Garen Dodge, a partner at Jackson Lewis. "The practical implication is that you probably cannot have your employees release and waive WARN claims."

Unintended Consequences

Employment lawyers characterize these proposed drastic changes as the result of pressure on politicians to do something decisive to protect workers. Unfortunately, the changes may actually make matters worse for cash-strapped employers, necessitating more layoffs.

"Productivity plummets after an employer provides notice of a planned layoff," Woods says. "Suddenly there are more workers comp and discrimination claims. Frustration is high and there's the potential for sabotage."

Ashmore also points out that disclosing an intended RIF 90 days ahead of time could negatively impact a company's relationships with customers and creditors. And the increased risk and cost of litigation will be a significant burden.

"When WARN was originally debated in 1988, Sen. Orrin Hatch predicted that it would make even second-rate lawyers rich," Miscimarra says. "The changes being contemplated come closer to realizing these fears."

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