We regularly caution financial sponsors of failing companies about “responsible person” exposure that their entities, their designated directors and the operating management of the failing company may face. The list of exposure topics includes wage-related obligations, withheld benefit items, withheld and collected taxes, and fiduciary liability under ERISA. A recent decision by the influential U.S. Bankruptcy Court for the District of Delaware adds liability under the Worker Adjustment and Retraining Notification Act of 1988 (the “WARN Act”) to the list of sponsor concerns
The opinion in D’Amico v. Tweeter Opco, LLC (In re Tweeter Opco, LLC), 453 B.R. 534 (Bankr. D. Del. 2011) extends WARN Act liability to investors who actively manage or otherwise exercise significant financial control over a failing company by treating the controlling parent entities and the actual employer as a single employer for purposes of the WARN Act.
The WARN Act
The WARN Act requires covered employers (“any business enterprise that employs 100 or more full-time individuals”)1 to give their employees a 60-day advance notice of a plant closing or mass layoff. A plant closing is a permanent or temporary shutdown of a single site of employment that results in the loss of 50 or more employees during any 30-day period.2 A mass layoff is one which involves employment loss at a single site of employment of at least 50 employees and at least 33% of the employees at the single site.3
A qualified employer that fails to give the required 60-day notice may have liability for (i) back pay for each day of the violation, up to a maximum of 60 days and (ii) any losses an employee may have incurred for prematurely terminated benefits, including the cost of medical expenses incurred during an employment loss which would have been covered under an employee benefit plan if the employment loss had not occurred.4
While there are several defenses to WARN Act liability, they are narrowly construed.5
The Tweeter Decision
Tweeter Opco, LLC (the “Debtor”) filed a voluntary petition for Chapter 11 protection on November 5, 2008. It terminated employees by same-day notice on October 31, 2008 and November 7, 2008. The employees filed a class action for failure to provide 60-days’ notice of layoffs at two of its facilities. The employees sued both the Debtor and a distant indirect parent (four steps up the ownership chain), Schultze Asset Management, LLC (“SAM”), alleging the two were a single employer and therefore should be jointly liable for any WARN Act violations.
SAM was both the ultimate parent entity and the primary lender to Tweeter. George Schultze and his family owned and controlled SAM. The employees alleged that SAM had instructed a number of entities under its control to lend $30 million dollars to the Debtor.
The court found a WARN Act violation: (i) the Debtor was a covered employer, (ii) the Debtor’s two buildings constituted a single site of employment, (iii) a requisite number of layoffs were made at both the Massachusetts site and a separate Pennsylvania facility, and (iv) notice was given to employees the same day as their termination.
That led to the critical question of whether SAM was liable, along with the Debtor, as a single employer. The court used a five-factor Department of Labor test which considered whether the following factors were present: (i) common ownership, (ii) common directors and/or officers, (iii) the de facto exercise of control, (iv) unity of personnel policies emanating from a common source and (v) the dependence of operations between the entities.
First, SAM argued that it was too far removed from the Debtor in the chain of equity ownership to be considered a common entity. The court found that SAM’s indirect ownership combined with the financial control SAM exerted, which it noted was alone sufficient to establish common ownership, was sufficient to meet the first prong. SAM’s lender relationship alone gave George Schultze influence in decision-making, including cash collateral usage and the mass terminations.
Second, the court found that by George Schultze being simultaneously a director of the Debtor and CEO of SAM, the common directors and officers factor was satisfied. SAM also controlled three of the other directors of the Debtor.
Third, the Court defined the test for de facto exercise of control as “whether the parent [or lender] has specifically directed the allegedly illegal employment practice that forms the basis for the litigation.” There was evidence that SAM’s employees influenced the Debtor’s management by conveying George Schultze’s desire to significantly reduce payroll and by working directly with the Debtor’s management to lay off employees. The Court characterized that exercise of control as “particularly egregious.”6
The court found that the fourth and fifth factors – unity of personnel policies and dependence on one another for continuation of their day-to-day operations – were not satisfied. Nonetheless, the court concluded that the evidence of common ownership and management and de facto exercise of control by SAM over the Debtor was sufficient to grant summary judgment on SAM’s single employer liability to the Debtor’s employees. The court noted that SAM’s exercise of control over the Debtor’s hiring and firing decisions was significant given the WARN Act context.
The court rejected SAM’s assertion of the “faltering company defense” -- that it had insufficient capital to continue and was therefore in a faltering state. By citing only vague “adverse business conditions” in its notification to employees of the layoffs, the Debtor failed to provide sufficient facts to explain the reduction in the notification time as required by the WARN Act.
While the Tweeter facts are extreme, they are not unique. Parties with an ownership or management role -- even an ostensibly indirect one – of a troubled company must be mindful of the direct employer’s WARN Act responsibilities especially when that owner or manager is also providing the operating financing for the troubled company. Decisions regarding layoffs or plant closings must carefully consider the possibility that the owner or manager might have liability for WARN Act violations in addition to the liability of the direct employer. Compliance by the direct employer with the WARN Act’s notice provisions avoids owner/manager exposure. Avoiding exercise of de facto control and the other elements for “single employer” determination is the next best preventative step. Being aware of the exposure risk is a good first step.
1 29 U.S.C. § 2101(a)(1)
2 29 U.S.C. § 2101(a)(2)
3 29 U.S.C. § 2101(a)(3)
4 29 U.S.C. § 2104(a)(1)
5 Unforeseen Business Circumstances - Employers are free from the 60-day advance notice requirements under the Act if they can establish that certain business circumstances (i) were not reasonably foreseeable at the time the 60-day notice would have been required, and (ii) caused the closing or mass layoff. 29 U.S.C. § 2102(b)(2)(A).
Faltering Company - Employers also have a defense from WARN Act liability as a faltering company if (i) the employer was actively seeking capital at the time the 60-day notice would have been required; (ii) the employer had a realistic opportunity to obtain the financing sought; (iii) the financing would have been sufficient, if obtained, to enable the employer to avoid or postpone the shutdown; and (iv) the employer reasonably and in good faith believed the 60-day notice would have precluded it from obtaining the financing it needed. 29 U.S.C. § 2102(b)(1).
To invoke the benefits of either defense, however, an employer must give as much notice as is practicable and at that time shall give a brief statement of the basis for reducing the notification period. 29 U.S.C. § 2102(c).
6 A decision by the same judge issued several months prior to the Tweeter Opco decision demonstrates that actual exercise of control to influence the employment terminations is the strongest element in finding “single employer” liability. The court found no single employer liability in a case where the common ownership and common directors and officers elements were satisfied but where an unrelated secured lender, senior management and a chief restructuring officer made the decision to terminate the employees. In re DHP Holdings II Corp., et al, 2011 WL 3924798 (Bankr. D. Del. 2011).