United States: Third Circuit Rules That Private Equity Fund And Portfolio Company Are Not A "Single Employer" For Purpose Of WARN Act Liability

Last Updated: September 28 2016
Article by Timothy Hoffmann and Mark G. Douglas

As private equity funds increasingly decide to participate actively in the affairs and management of their portfolio companies, recent court rulings suggest that funds may face greater exposure to liability for a portfolio company's obligations. For example, in 2013, the First Circuit Court of Appeals  fired a shot across the bow of private equity funds with portfolio companies that are participants in multi-employer pension plans. It ruled in Sun Capital Partners III, LP v. New England Teamsters & Trucking Indus. Pension Fund, 724 F.3d 129 (1st Cir. 2013), that a private equity fund was a "trade or business" which could be held jointly and severally liable under the Employee Retirement Income Security Act of 1974 ("ERISA") for the pension plan withdrawal liability incurred by one of its portfolio companies.

That ruling was reinforced earlier this year on remand from the First Circuit's decision in an opinion handed down by the U.S. District Court for the District of Massachusetts. In Sun Capital Partners III, LP v. New England Teamsters & Trucking Indus. Pension Fund, 2016 BL 95418 (D. Mass. Mar. 28, 2016), the court held that a related private equity fund was also a trade or business under ERISA and that the second prong of the test for imposing joint and several liability under ERISA—i.e., "common control"—had been met with respect to the group of related portfolio companies. The remand ruling, which we discussed in the May/June 2016 edition of the Business Restructuring Review, is now before the First Circuit on appeal.

Another potential minefield for private equity sponsors was the subject of a ruling recently issued by the U.S. Court of Appeals for the Third Circuit, with a different result. In Czyzewski v. Jevic Transp., Inc. (In re Jevic Holding Corp.), 2016 BL 241827 (3d Cir. July 27, 2016), a three-judge panel ruled in a nonprecedential opinion that Sun Capital Partners, Inc., and a subsidiary were not a "single employer" for the purpose of assessing potential liability under the Worker Adjustment and Retraining Notification Act, 29 U.S.C. § 2101 et seq. (the "WARN Act"), and its New Jersey counterpart. The Third Circuit ruled, among other things, that the mere fact that a subsidiary is dependent on its parent's loans and ultimately fails without them is inadequate to demonstrate dependency of operations.

These rulings highlight the importance of maintaining structural formalities and avoiding overreaching as a way to minimize a private equity sponsor's potential exposure in connection with a portfolio company's liabilities.

The WARN Act

Enacted in 1988, the WARN Act protects workers, their families, and communities by requiring most employers with 100 or more employees to provide notification of plant closings and mass layoffs 60 calendar days prior to the event. Twenty-nine U.S.C. § 2102(a) provides in relevant part:

An employer shall not order a plant closing or mass layoff until the end of a 60-day period after the employer serves written notice of such an order—

(1) to each representative of the affected employees as of the time of the notice or, if there is no such representative at that time, to each affected employee[.]

Twenty-nine U.S.C. § 2101(a)(2) defines "plant closing" as:

the permanent or temporary shutdown of a single site of employment, or one or more facilities or operating units within a single site of employment, if the shutdown results in an employment loss at the single site of employment during any 30-day period for 50 or more employees excluding any part-time employees[.]

"Mass layoff" is defined in 29 U.S.C. § 2101(a)(3) as a reduction in the workforce that is not the result of a plant closing and results in an employment loss at a single site of employment during any 30-day period of a specified percentage or aggregate number of employees.

Twenty-nine U.S.C. § 2101(a)(1) defines "employer" as "any business enterprise that employs—(A) 100 or more employees, excluding part-time employees; or (B) 100 or more employees who in the aggregate work at least 4,000 hours per week (exclusive of hours of overtime)[.]"

Although the WARN Act does not define "business enterprise," regulations issued by the U.S. Department of Labor (the "DOL") state that "subsidiaries which are wholly or partially owned by a parent company are treated as separate employers or as a part of the parent or contracting company depending upon the degree of their independence from the parent." 20 C.F.R. § 639.3(a)(2). The five factors to be considered in making this "single employer" determination are: "(i) common ownership, (ii) common directors and/or officers, (iii) de facto exercise of control, (iv) unity of personnel policies emanating from a common source, and (v) the dependency of operations." Id.

The five factors in the DOL balancing test are not accorded equal weight. Thus, for example, in Pearson v. Component Tech. Corp., 247 F.3d 471 (3d Cir. 2001), the Third Circuit noted that satisfaction of the first and second factors alone is not sufficient to establish that two entities constituted a "single employer." It also explained that "if the de facto exercise of control [factor three] was particularly striking—for instance, were it effectuated by disregard[ing] the separate legal personality of its subsidiary—then liability might be warranted even in the absence of the other factors." Id. at 504.

A court-fashioned "liquidating fiduciary" exception provides that a liquidating fiduciary in a bankruptcy case (e.g., a trustee or other estate representative) does not fit the definition of an employer for purposes of the WARN Act. See Official Comm. of Unsecured Creditors of United Healthcare Sys., Inc. v. United Healthcare Sys., Inc. (In re United Healthcare Sys., Inc.), 200 F.3d 170 (3d Cir. 1999); Conn v. Dewey & LeBoeuf LLP (In re Dewey & LeBoeuf LLP), 487 B.R. 169 (Bankr. S.D.N.Y. 2013).

DOL regulations also prescribe when an employer must give WARN Act notice, whom the employer must notify, how the employer must give notice, and what information the notice must contain. See 20 C.F.R. §§ 639 et seq.

Twenty-nine U.S.C. § 2104(a) provides that an employer which fails to give WARN Act notice shall be liable to each aggrieved employee who suffers an employment loss as a result of such plant closing or mass layoff for, among other things, back pay for each day during the period of the violation. It also states that the employer's liability "shall be calculated for the period of the violation, up to a maximum of 60 days, but in no event for more than one half the number of days the employee was employed by the employer."

However, if an employer can prove that it shut down operations because either it was a "faltering company" or the shutdown was due to business circumstances "that were not reasonably foreseeable," it need not comply with the WARN Act's 60-day-notice provisions. See 29 U.S.C. §§ 2102(b)(1) and (b)(2)(A); 20 C.F.R. § 639.9. In addition, 29 U.S.C. § 2102(b)(2)(B) provides that "[n]o notice under [the WARN Act] shall be required if the plant closing or mass layoff is due to any form of natural disaster, such as a flood, earthquake, or the drought currently ravaging the farmlands of the United States."

Even if the exceptions in 29 U.S.C. § 2102(b)(1) and (b)(2)(A) apply, an employer is not relieved of its obligation to notify employees altogether. When an employer ceases operating due to "not reasonably foreseeable" business circumstances or because it is a "faltering company," the employer can give less than 60 days' WARN Act notice, provided that the notice contains certain "basic" information (see 20 C.F.R. § 639.7) and the reasons the employer could not provide the full 60 days' notice. See 29 U.S.C. § 2102(b)(3).

Twenty C.F.R. § 639.9(b)(1) states that closings and layoffs are not foreseeable when "caused by some sudden, dramatic, and unexpected action or condition outside the employer's control." The regulations also provide that, in assessing the foreseeability of business circumstances, the focus should be "on an employer's business judgment" and that an employer is required only to "exercise such commercially reasonable business judgment as would a similarly situated employer in predicting the demands of its particular market." 20 C.F.R. § 639.9(b)(2).

Some states have enacted laws similar to the WARN Act that impose enhanced employee-notification requirements. See, e.g., New York State Worker Adjustment and Retraining Notification Act, N.Y. Lab. L. §§ 860‒860-i; art. 25-A, pt. 921 (2009); N.J. Stat. Ann. §§ 34:21-1 to 34:21-7 (2007) (the "NJ WARN Act"); 820 Ill. Comp. Stat. §§ 65 et seq. (2005); Cal. Lab. Code §§ 1400‒1408 (2003).

The Third Circuit addressed whether a private equity fund and one of its portfolio companies constituted a "single employer" under the WARN Act and the NJ WARN Act in Jevic Holding.

Jevic Holding

Jevic Transportation, Inc. ("Jevic Transportation") was a New Jersey-based trucking company with 1,785 employees as of 2008. In 2006, Jevic Transportation and its nonoperating affiliate, Creek Road Properties, LLC ("Creek Road" and, collectively, "Jevic"), were acquired in a leveraged buyout by Sun Transportation LLC, a subsidiary of private equity firm Sun Capital Partners, Inc. ("Sun Capital"). As part of the transaction, Jevic Holding Corp. was created to be Jevic's holding company. The transaction was financed with $85 million provided by a group of lenders led by CIT Group Business Credit Inc. ("CIT"). Jevic and Sun Capital entered into a management services agreement whereby Sun Capital provided consulting services to Jevic for a fee.

Jevic struggled financially throughout 2007 due to the general economic downturn and the negative impact of fuel surcharges on its profitability. After Jevic defaulted on a financial covenant in its loan agreement with CIT, Jevic and CIT entered into a series of forbearance agreements beginning in January 2008 under which, among other things, Sun Capital provided a $2 million guarantee.

On March 27, 2008, CIT presented Sun Capital with two options: (i) an additional investment in Jevic in exchange for a long-term forbearance agreement; or (ii) a 45-day forbearance during which Jevic would begin looking for an acquiror. Sun Capital chose the latter.

Jevic met with two potential buyers, one of which was Pitt Ohio, but the sale process stalled after CIT refused to fund further borrowing unless Sun Capital agreed to invest more money to fund a bridge loan to complete the sale. Sun Capital refused, concluding that the necessary investment would exceed the expected sale proceeds.

On May 16, 2008, with no viable sale or funding available to Jevic and with the forbearance agreement with CIT expiring, Jevic's board formally authorized a bankruptcy filing. Jevic sent its employees WARN Act termination notices that were received on May 19, 2008. Jevic filed for chapter 11 protection in the District of Delaware the next day.

On March 23, 2008, Jevic's terminated employees had filed a class action adversary proceeding alleging that Jevic and Sun Capital had violated the WARN Act and its New Jersey counterpart—the NJ WARN Act—by failing to provide employees with the requisite 60-day notice of a plant closing or mass layoff. The plaintiffs also alleged that Jevic and Sun Capital constituted a "single employer" for purposes of WARN Act and NJ WARN Act liability. After the bankruptcy court certified the class, the parties filed cross-motions for summary judgment.

The bankruptcy court ruled that Jevic and Sun Capital were not a "single employer" for the purpose of WARN Act and NJ WARN Act liability according to the five-factor DOL test, which has also been applied by New Jersey courts in construing the NJ WARN Act. See DeRosa v. Accredited Home Lenders, Inc., 22 A.3d 27, 40 (N.J. Super. Ct. App. Div. 2011). The district court affirmed on appeal. See Czyzewski v. Sun Capital Partners, Inc. (In re Jevic Holding Corp.), 526 B.R. 547 (D. Del. 2014).

The Third Circuit's Ruling

A three-judge panel of the Third Circuit affirmed in a nonprecedential ruling. Writing for the panel, circuit judge Anthony J. Scirica noted that, like the lower courts, the panel would apply the five-factor DOL test adopted in Pearson to determine whether Jevic and Sun Capital were a "single employer" for the purpose of assessing potential liability under the WARN Act and the NJ WARN Act. Of those factors, Judge Scirica explained, only the final three were disputed—Sun Capital did not challenge the lower courts' findings that factors one and two had been satisfied.

Addressing these disputed factors, the Third Circuit panel concluded as follows: (i) the evidence did not support the employees' contention that Sun Capital exercised de facto control (factor three) over Jevic by taking actions which "overwhelmed" the company, but rather, Jevic's board independently made the decision to shut down the company and signed the WARN Act notice terminating employees; (ii) Sun Capital did not directly hire or fire Jevic employees, share a personnel or benefits recordkeeping system with Jevic, or otherwise have any "unity of personnel practices emanating from a common source" (factor four); and (iii) Sun Capital and Jevic did not share administrative or purchasing systems, interchange employees or equipment, commingle finances, or otherwise have a "dependency of operations" (factor five).

According to the Third Circuit panel, the mere fact that a subsidiary is dependent on its parent's loans and ultimately fails without them is inadequate to demonstrate dependency of operations. Similarly insufficient to establish operational dependency, Judge Scirica observed, were the employees' thinly supported claims that Jevic depended on the administrative arrangements it shared with Sun Capital; that Sun Capital was involved in the creation, details, and manner of implementation of Jevic's business plan; and that Sun Capital undercapitalized and extracted management fees from the company.


Even though the courts involved have reached opposite conclusions on the imposition of liability under the pertinent statutes, New England Teamsters and Jevic Holding have a common theme that private equity sponsors should not ignore: too much interference in the management and financial decision-making process of a portfolio company can have significant consequences in terms of liability. It remains to be seen at this juncture what the First Circuit will ultimately rule on appeal in New England Teamsters. Given its previous ruling in the case, however, an abrupt change of course on the imposition of multi-employer pension plan withdrawal liability may be unlikely.

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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Mark G. Douglas
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