Warn Act Liability may be Greater than you Think

Originally appeared in Labor Law Newsletter - January 2002

In today’s uncertain economy, many employers are re-structuring operations, laying off workers and closing facilities. Employers with 100 or more employees may be required to provide 60 days’ advance notice of a "mass layoff" or "plant closing" under the Workers Adjustment Retraining Notification Act ("WARN"). An Employer deciding when to make an announcement regarding a mass layoff or plant closing must, in addition to considering the possible reactions by investors, merger partners, the public, the government, and its own employees, comply with obligations at risk of penalties under WARN. Employers who fail to provide timely notice of an impending mass layoff or plant closing may be liable to their employees for up to 60 days of back pay.

As part of the decision-making process, an employer must determine the expense it would incur if it has to pay back pay to its employees for the number of days it is in violation of the notice requirement. WARN provides that the back pay must be paid at "the average regular rate received by such employee during the last 3 years of the employee’s employment" or "the final regular rate received by such employee," whichever is higher. While it appears that it should be simple to determine the potential liability for a WARN violation, the statute never clearly defines the term "back pay." Consequently, if an action is brought against an employer for unpaid WARN damages, the courts have the discretion to define back pay in a way that an employer may not have considered. Some court decisions show that an employer’s back pay liability may be greater than expected.

First, while the majority of courts hold that an employer’s liability under WARN should be the number of days the employees would have worked during the violation period, a few jurisdictions, most notably the Third Circuit Court of Appeals (with jurisdiction over Pennsylvania, New Jersey and Delaware), have held that the liability is for the number of calendar days during the violation period. In United Steelworkers of America v. North Star Steel Co., 5 F.3d 39 (3d Cir. 1993), the Third Circuit concluded that back pay damages under WARN were intended to be a form of liquidated damages. According to the court, the use of the term "back pay" was meant to establish a measure of daily damages to be multiplied by the number of days during the period of violation and not intended to represent the actual wages an employee would have earned during that period.

In a recent case, Local Joint Executive Bd. of Culinary/Bartender Trust Fund v. Las Vegas Sands Inc., 244 F.3d 1152 (9th Cir. 2001), the Court of Appeals for the Ninth Circuit considered the definition of back pay under WARN. The employer, Sands, violated WARN by giving its employees only 45 days’ notice that the casino would be closing. Facing a WARN violation for not providing the full 60 days’ notice, Sands agreed to pay the workers an additional 15 days of back pay. However, Sands did not include tips the employees might have earned during that 15-day period or the extra pay for those employees who would have worked on the July 4 th holiday. Sands also deducted the amounts of severance payments it had made to the employees in exchange for staying on the job until the casino closed.

The employees’ union sued Sands, seeking the tips and holiday pay and objecting to the severance pay set-off. The lower court agreed that tips and holiday pay should be included in the back pay award and severance pay should not be deducted. The Ninth Circuit Court of Appeals affirmed.

The court of appeals reasoned that back pay under WARN is intended to provide laid-off employees with a sum equal to what they would have received had the notice violation not occurred. The court also noted that back pay awards under other federal statutes (e.g., the National Labor Relations Act and Title VII of the Civil Rights Act of 1964) include forms of compensation such as holiday pay, overtime pay, shift differentials, interest, sick days, vacation pay and tips. Then, the court rejected the employer set-off for severance pay, stating that under WARN an employer may reduce its back pay liability only by "any voluntary and unconditional payment by the employer to the employee that is not required by any legal obligation." 29 U.S.C. § 2104(a)(2)(B). Because Sands was obligated to make the severance payments to the employees under a legally enforceable agreement, its WARN liability could not be reduced by those amounts.

The United States Supreme Court denied the employer’s request for further review.

These cases show that employers must take care to make correct calculations of WARN liability based on the law in their jurisdiction. Employers should ensure that they are including the correct types of compensation and correct number of days and do not deduct payments made under a separate legal commitment. If calculations are made incorrectly, the additional costs can include not only the extra back pay but interest, legal fees, and possibly the plaintiffs’ attorneys’ fees.