Labor: Why private equity firms need to be concerned about the WARN Act

Firms must walk the line between overseeing portfolio companies and exposing themselves to liability

Under the federal Worker Adjustment and Retraining Notification Act (WARN), employers with 100 or more employees are required to provide workers with 60 calendar days’ notice in advance of a plant closing or mass layoff. Employers who fail to provide such notice are liable to each affected employee for back pay and benefits for the period of violation, and may also be subject to civil penalties and attorneys’ fees.

This directive is relatively straightforward when only one entity falls within the definition of an “employer” under the statute. However, a much thornier issue presents itself when two or more entities may be considered the “employer” of the affected employees for purposes of WARN. Under the “single employer” theory of liability, employees who do not receive proper WARN notice may seek recovery from affiliated or parent entities if they can demonstrate that the affiliate or parent entity acted in concert with the subsidiary as a “single employer” in failing to heed WARN’s mandates. If the employees can make such a showing, the affiliated entity may be on the hook for substantial back pay damages, attorneys’ fees and penalties, despite never having directly employed the employees in question.

The Woolery court found that the plaintiffs had made a “strong showing” as to the third factor—the existence of de facto exercise of control—and effectively gave this factor dispositive weight in allowing the case to proceed against MatlinPatterson. The court explained that “a particularly striking showing of de facto control” may warrant liability even in the absence of other factors. The court went on to state that “de facto control” exists when the parent entity acts as “the decision-maker responsible for the employment practice giving rise to the litigation” and found that in deciding to close Premium’s facilities, lay off employees without the statutorily-mandated 60 days’ notice and declare bankruptcy, MatlinPatterson was responsible for the very business decisions governed by the WARN Act. Accordingly, the court found that MatlinPatterson had exceeded the degree of control normally exercised over a subsidiary under a stock ownership arrangement.

Conversely, in Czyzewski v. Jevic Transportation, Inc., the Delaware Bankruptcy Court held that Sun Capital Partners, Inc., a private equity firm, was not liable for the alleged WARN Act violations of its portfolio company Jevic Transportation, Inc.. Although Jevic was a wholly-owned subsidiary of Sun Capital and its affiliate companies, and the two entities shared common directors and/or officers, the court found that the level of oversight Sun Capital maintained over Jevic did not amount to a “de facto exercise of control” under the DOL’s “single employer” test because Sun Capital had little to no involvement in Jevic’s day-to-day operations and had not “specifically directed the allegedly illegal employment practice that forms the basis for the litigation” —namely, the decision to terminate Jevic’s employees without issuing the proper WARN notices. The court also noted that Sun Capital’s refusal to continue investing in Jevic was not actionable under WARN, as Jevic was ultimately responsible for keeping the company afloat; indeed, Jevic’s senior management made the final decision to shut down the company and sign off on the defective WARN notices, without any input from Sun Capital personnel.

Contributing Author

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Eugene A. Boyle

Eugene A. Boyle is a partner at Neal Gerber & Eisenberg. He has extensive experience counseling and defending companies nationally in all facets of labor...

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Contributing Author

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Judith Kong

Judith Kong practices in Neal, Gerber & Eisenberg’s Labor & Employment Practice Group. She focuses her practice on unemployment insurance,...

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