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WARN Developments: Second Circuit Holds Management Company Liable as WARN

October 1, 1992

In the July, 1992 issue of this Newsletter, we reported that even unintentional violations of the federal plant-closing law - the Worker Adjustment and Retraining Notification Act ("WARN") - can result in significant damage awards against an employer. In a recent decision, the U.S. Court of Appeals for the Second Circuit has provided some guidance about who is the "employer" and therefore obligated to give the required notice under WARN. In Local 217, Hotel & Restaurant Employees Union v. MHM, Inc., 1992 U.S. App. LEXIS 23597 (2d Cir. 1992), the court ruled that a management company, which had a collective bargaining agreement with a union, was the employer under WARN even though it did not own the property at which the employees worked and had no control over the ultimate decision to close the work site. The court, however, rejected a request by the union to grant injunctive relief requiring the employer to provide medical insurance coverage to the terminated employees, finding that injunctive relief is not available under WARN.

The case arose from the closing of the Summit Hotel in Hartford, Connecticut in August 1990. MHM, Inc., a management company that contracted with the hotel's owner to operate the establishment, gave the hotel's employees, represented by Local 217, only three days' notice of the closing. MHM had a collective bargaining agreement with Local 217 and was the entity which controlled the hiring, firing, and payment of workers. When the hotel's owner, Colonial Constitution East Limited Partnership ("Colonial") issued the order to close the hotel, however, MHM had no option but to immediately comply. The union later sued both MHM and Colonial, asserting violations of WARN. In addition to a claim for damages, the union sought injunctive relief requiring MHM and Colonial to provide medical insurance coverage to the terminated employees for 57 days (the number of days the notice of the closing was insufficient under WARN).

The court first addressed the threshold issue of who was the "employer" subject to WARN liability. The district court had held that Colonial was the WARN employer because it exercised the ultimate power to close the hotel and it was the entity that "ordered" the closing. The Second Circuit disagreed, finding that there was no reason to ignore the plain language of the statute that the "employer" is the "business enterprise that employs" the terminated employees. It was MHM that directed the work force, hired and fired the employees, and made out the pay checks. MHM, rather than Colonial, was therefore found to be the employer.

MHM argued that, for WARN purposes, it should not be held liable for any violation as the "employer" because it exercised no control over the decision to close the hotel. The court, however, was unmoved, stating that "nothing prevented MHM from charging a management fee that took potential liability under WARN into account… Nor did anything prevent MHM from bargaining [with Colonial] for specific contractual terms that would give it notice of closure sufficient to meet its obligations under WARN." MHM therefore is subject to damages under WARN despite the fact that its ability to provide the required sixty days of advance notice was completely subordinate to Colonial's decision to close the hotel without advance notice.

On the issue of injunctive relief, the Second Circuit had no difficulty affirming the district court's judgment that injunctions are not available under WARN. The statute itself specifies that actions for damages "shall be the exclusive remedies for any violation of [WARN]." Thus, although WARN permits a prevailing plaintiff to recover the cost of medical care incurred during the sixty-day period that should have been subject to WARN notice, and that would have been covered by insurance but for the termination of employment, "a preliminary injunction compelling MHM to provide fifty-seven days of insurance coverage under WARN… [is] not one of the remedies specified in WARN."

This decision most significantly affects employers who are contractors or who otherwise cannot control the timing of a site closing. In a concurring opinion, Judge Mahoney stated that MHM might be able to avail itself of the "unforeseeable business circumstances" defense under WARN to avoid liability, since the closing was beyond its control. This defense excuses an employer's failure to give required notice where the closing is the result of business circumstances that were not reasonably forebearable at the time that WARN notice should have been provided. Whether this defense would shield a contractor from liability is uncertain, especially in light of the majority decision's admonition in Local 217 that WARN should not be interpreted in a way that allows companies to avoid WARN by separating the real estate and operational aspects of a business. As the court noted, "we would not seriously entertain an argument that an employer need not comply with safety laws or regulations governing physical plants because the plant was leased and the landlord refused to allow modifications or repairs." Employers who may be subject to closure orders from their landlord or client should consider how they will comply with WARN in such a circumstance and should consider negotiating indemnity agreements that will provide insurance against a WARN claim they may be powerless to avoid.