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Applicability of WARN to Sale of Business

July 1, 1995

The Worker Adjustment and Retraining Notification Act ("WARN") generally requires that an employer provide 60 days' advance notice of a plant closing or mass layoff. 29 U.S.C. § 2101 et seq. (1988). The statute also contains exceptions to the notice requirement. An employer may give less than 60 days' notice where the closing is due to an "unforeseeable business circumstance." In addition, in a "faltering company" situation, where the company is actively seeking capital or business that (if obtained) would avert the closing, the employer may give less than 60 days' notice where providing earlier notice would jeopardize the company's efforts to secure such capital or business. However, under both exceptions to WARN, the statute requires that the employer provide a written notice "as soon as practicable" and requires that the notice contain "a brief statement of the reason for reducing the notice period." In the first ruling on the issue, the U.S. Court of Appeals for the Ninth Circuit in San Francisco has held that such an explanation must provide sufficiently specific information to assist employees in determining whether the notice period was lawfully shortened. Alarcon v. Keller Industries, Inc., 27 F.3d 386 (9th Cir. 1994). The court ruled that even where an exception to WARN clearly applies, an employer may be liable for violations of the statute if its notice to employees does not contain the required explanation justifying a shortened notice period.

Keller Industries, which manufactures outdoor furniture, had experienced a severe business downturn in 1990 and 1991. The company had been unsuccessful over several months in its attempts to increase its sales and to secure capital financing. Efforts to find a buyer for the company were similarly unsuccessful. On July 22, 1991, the bank which had been providing operating capital for the business informed management that it would be immediately withdrawing its funding. The company had no choice but to close its three plants. Workers were notified on July 25 of their terminations, which were effective the next day. The company's notice letter included the following statement:

The operating performance of the Furniture Division has been disappointing and the substandard working capital required of business does not make it a viable entity.

In an attempt to save the jobs of the Furniture Division employees, Keller pursued several options for possible purchase, but was unable to secure a qualified buyer. Further, Keller was unable to find parties interested in supplying the enormous working capital for such a high risk and under performing business… Please consider this letter to be your official notice as required by [WARN], and specifically by 2102 Section 3(b)(1).

Several employees sued under WARN, alleging that the company had failed to provide the required 60 days' notice of the plant closing. During the litigation, the plaintiffs conceded that the plant closing fell within both the "unforeseeable business circumstance" and "faltering company" exceptions to WARN's notice requirement. However, the plaintiffs claimed that the company's notice lacked an adequate statement of the reasons for the shortened notice period and therefore was invalid.

The court accepted the plaintiffs' theory of the case; if the notice did not provide an adequate statement of the reasons for the shortened notice, it would be invalid under WARN and the plaintiffs would be entitled to judgment. After reviewing the statutory language and legislative history, the court concluded that the purpose of the "brief statement" requirement is "to provide employees with information that would assist them in determining whether the notice was properly shortened." Such a statement, the court reasoned, "should set forth the underlying factual events which led to the shortened period, thereby allowing workers to understand the employer's situation and its reasons for shortening the notice period." The notice must provide "adequate, specific explanation" of the factual circumstances.

Keller's notice stated that "Keller was unable to find parties interested in supplying the enormous working capital for such a high risk and under performing business" and specifically referred to 29 U.S.C. § 2102(3)(b)(1), which is the faltering company exception. The company asserted that this statement, combined with other statements in the notice about the poor performance of the company and the inability to find a buyer, was adequate notice under both the unforeseeable business circumstances and faltering company exceptions to WARN.

The court, however, found the notice to be insufficiently detailed under the unforeseeable business circumstances exception because it did not specifically refer to the withdrawal of funding by the bank. Had this been the only applicable exception under WARN, the company's notice would have been invalid. The court went on to note that a sufficiently clear statement might have avoided litigation. The court suggested that the following alternative language would have been adequate: "the notice is short because our bank has unexpectedly notified us that it will no longer provide working capital for the Division as of this date and we can find no other party interested in providing such capital."

Nevertheless, the court ruled in favor of the company, finding that the notice was minimally adequate under the faltering company exception because it specifically referred to the inability to secure "working capital" and stated that Keller had pursued several options. Also, Keller's specific citation to the faltering company provision in the statute put the employees on notice of the basis for shortening the notice period. "The cumulative effect of this information was to provide a sufficiently specific statement of the basis for the shortened notice period." Although the brief statement in the notice could have been clearer, it was sufficient to be valid under WARN.

Employers seeking the shelter of the exceptions to WARN must provide to the affected employees a clear and detailed explanation of the reasons why full notice was not provided. The court's admonition in Alarcon is sound: furnishing a clear, detailed, and factually specific notice will serve to satisfy the intent of the statute and avoid needless litigation.