United States: Sequestration Arrives With Federal Contractors Still Facing WARN Act Uncertainties

Executive Summary: March 1 has arrived without a budget compromise in Washington, DC. Barring a last minute deal before midnight tonight, across-the-board federal budget cuts are expected to go into effect. For employers, this will bring with it a variety of direct and indirect consequences, including automatic cuts to the budgets of various federal agencies with workplace oversight and enforcement responsibilities. The most significant impact is expected to be on employers doing business with the federal government, particularly contractors with sizeable workforces servicing federal contracts. In the coming weeks a host of employment law issues may be implicated for contractors, some of which do not have the clearest answers.

Many federal contractors, in anticipation of the cuts (commonly referred to as "sequestration"), began contingency planning for the possible impact of sequestration several months ago, including analyzing and identifying ways to cut employment-related costs, such as reducing employee hours and possibly implementing furloughs and reductions in force.

Such planning has, of course, been hindered and complicated by the various uncertainties surrounding sequestration and whether it would even occur.

Now that sequestration has arrived, many contractors will be anxiously waiting to find out whether cuts will specifically impact them and, if so, how much advance notice they will receive. This latter issue is potentially very significant from an employment law standpoint, given an employer's notice obligations under the Workers Adjustment and Retraining Notification Act (the "WARN Act"). Pursuant to the WARN Act, employers with 100 or more employees are generally required to give at least 60 days advance notice prior to instituting mass layoffs or plant closings (as those terms are defined in the statute). In the sequestration context, the WARN Act could be implicated if a contractor suddenly finds it necessary to cut its workforce drastically in response to its federal project(s) being terminated or the funding reduced. A number of contractors have expressed concern that they might be forced to take immediate action in response to sequestration and find themselves in a position where it is not possible or practicable to provide the full 60-days of notice contemplated by the WARN Act. In such circumstances a contractor might qualify for one of the limited exceptions under the WARN Act when employers are permitted to provide less than 60-days notice, but it is the employer's burden to establish that the exception applies. Employers who fail to provide the required period of notice can find themselves subject to fines and lawsuits by employees seeking back pay and benefits.

In a number of states this issue is further complicated by existence of "mini-WARN Acts" that have been adopted by state legislatures, including California, Connecticut, Hawaii, Illinois, Iowa, Maine, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Tennessee, Wisconsin, and the U.S. Virgin Islands. Many of these laws impose obligations similar to those under the federal WARN Act, but some state statutes require even more advance notice, apply to smaller employers and/or are triggered when even fewer employees are let go. (For example, New York State's WARN Act requires that 90 days advance notice be given, applies to employers with 50 or more employees, and can be triggered when as few as 25 full-time workers are being let go.)

As a result of all this uncertainty and the risk of potential liability, some federal contractors have elected to issue "contingent" WARN Act notices, notifying employees that mass layoffs and/or plant closings may become necessary as a result of sequestration. The validity and effect of such notices is, however, the subject of some debate. For example, the U.S. Department of Labor, through the Employment and Training Administration ("ETA"), has taken the position that such "blanket" notices to all employees are inappropriate and contrary to the purposes of the WARN Act, as the actual terminations themselves are still too speculative to constitute the kind of meaningful notice required by the statute.

Limited and somewhat controversial guidance has been offered by the ETA to contractors struggling with this issue. On July 30, 2012, the ETA issued Training and Employment Guidance Letter No. 3-12 ( the "Guidance Letter"), which was directed to state dislocated workers units, but urged contractors to hold off issuing WARN Act notices before the sequestration deadline, noting that specific cuts were still speculative and unforeseeable, and that in its view blanket notices are contrary to intent of the WARN Act.  The Guidance Letter goes on to suggest that because the specific cuts are not yet known (and in turn what contracts and employees will specifically be impacted), if such cuts do come about and require less than 60-days notice, they would likely come within the "unforeseeable business circumstances" exception to the WARN Act, which allows employers to provide less than 60-days notice.

During a hearing before the House Subcommittee on Workforce Protections last month, Jane Oates, ETA's Assistant Secretary who issued the Guidance Letter, continued to stand by the Guidance Letter and its application to facts evolving around sequestration, while responding to some stern questioning from Republican lawmakers.

Although the Guidance Letter would appear to offer some measure of comfort to contractors, it is not clear what legal effect the Guidance Letter would have in a court case or how much deference it would receive if a contractor later finds itself being sued by employees for providing less than 60-days notice. (For example, if the affected employees assert that layoffs were reasonably foreseeable and that the contractor should have provided the full 60-days of notice.) The WARN Act's implementing regulations make clear that enforcement of the Act is to be done through the courts and that the Department of Labor and ETA have "no legal standing in any enforcement action and, therefore, will not be in a position to issue advisory opinions of specific cases." 20 C.F.R. § 639.1(d).

In an apparent effort to provide further comfort to contractors, last fall the White House, through the Office of Management and Budget (OMB), issued a memorandum on September 28, 2012, which suggested that any WARN Act liability costs incurred by contractors who followed the Guidance Letter, including litigation costs, would be reimbursable and covered as allowable costs by the contracting agency. The authority of the OMB to offer such broad assurances has, however, been questioned.

In the weeks after the OMB memorandum, a number of contractors nevertheless chose to issue contingent WARN Act notices in anticipation of the initial January 2, 2013 "fiscal cliff" deadline. No further guidance or assurances have been provided by the federal government or lawmakers since the OMB memorandum, leaving federal contractors still in the difficult position of judging for themselves how best to prepare for and address the day that appears to have finally arrived.

In assessing how to respond to sequestration in the coming days, contractors should be working closely with legal counsel to identify possible solutions and potential issues. For example, as an alternative to permanent reductions in force that might trigger the WARN Act, contractors may want to consider reducing employee hours and/or putting employees on temporary furloughs or short-term layoffs. (Under the WARN Act, an employee is not considered to have experienced a qualifying "employment loss" that counts towards the WARN Act being triggered if the employee's hours are reduced by 50 percent or less during each month of any six-month period, nor do layoffs of six months or less constitute an "employment loss" for WARN Act purposes.) In implementing such alternatives, however, other legal issues can arise. For example, putting employees on reduced schedules or temporary furloughs can have both state and federal wage and hour law implications, particularly when implementing such measures with respect to exempt employees. The U.S. Department of Labor addressed some of these issues in a Fact Sheet in 2009. Such actions can also trigger a loss of coverage under benefit plans and/or possibly qualify employees for unemployment benefits depending upon the state's applicable law and qualifying period.

Employers' Bottom Line: Now that sequestration is upon us, employers at risk of being directly impacted should be reviewing all of their options and working closely with their legal advisors. Some employers may opt to issue or "refresh" contingent WARN Act notices to provide maximum notice to their employees and bolster their potential defenses should litigation ever arise, but they should recognize that the legal effect of such notices may be open to question and that such notices carry with them the risk of creating anxiety and disruption among their workforce.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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