Federal Court Finds Employer Not Liable for Sudden Layoff under WARN

February 4, 2009

An employer satisfied the “unforeseeable business circumstances” exception under the Worker Adjustment and Retraining Notification Act (“WARN”) when it implemented a layoff just days after losing its biggest customer, the federal appellate court in Denver has held.  Gross v. Hale Halsell Co., No. 08-5028 (10th Cir. Jan. 20, 2009).  WARN’s unforeseeable business circumstances exception applied because the customer’s withdrawal, and the attendant 40 percent loss in potential business, was not reasonably foreseeable, the Court concluded, affirming a lower court’s grant of summary judgment for the employer.

Under WARN, employers with 100 or more employees must provide employees with 60 days’ advance notice of a plant closing or a mass layoff.  Under certain circumstances, the law permits an employer to provide less than the full 60 days’ notice.  This notice must include the reason for the shortened notice period, saying the employer furnished the WARN notices as soon as practicable.

The plaintiffs worked for Hale-Halsell Co. (“HHC”), a wholesale grocery warehouse and distribution center in Tulsa, Oklahoma.  HHC’s biggest customer was United Supermarkets (“United”), with which it had a 31-year business relationship.   Although HHC occasionally fell short in fulfilling United’s orders, experiencing “stockouts,” as late as the end of November 2003, United said it was not considering terminating its relationship with HHC.  Even when stockouts reached a high of 58.3 percent on January 7, 2004, United still had not decided to end the relationship.  At this time, HHC was awaiting approval of a working capital loan.  The bank eventually declined to make the loan in January 2004.

On January 8, 2004, United wrote HHC that although it was willing to continue doing business with HHC despite the stockouts, it would be using other suppliers.  On January 15, United wrote HHC that it has decided to use another company as its primary supplier, meaning that HHC would receive significantly fewer orders from United.  On January 20, 2004, the company decided “it was not going to be able to survive.”  The next day the company met with employees, informing them that approximately 200 employees would be laid off and the employees would receive notices in their paychecks the next day. On January 22, the company informed employees by letter that they would be laid off, citing the loss of its primary customer. The company later filed for bankruptcy.

In February 2004, the laid off workers filed suit against HHC for violation of WARN. HHC moved for summary judgment, contending it was excused from WARN requirements based on the “unforeseeable business circumstances” exception and the “faltering company” exception. The district court granted summary judgment for HHC based on the “unforeseeable business circumstances” exception, holding United’s termination of HHC was unforeseeable, resulted in the mass layoffs and that HHC provided notice “as soon as practicable.” The court did not reach the issue of the “faltering company” exception. The Tenth Circuit Court of Appeals agreed and affirmed summary judgment for the employer.

Unforeseeable Business Circumstances Exception

WARN requires employers to give at least 60 days’ notice in advance of a plant closing or mass layoff.  However, an employer may provide less than 60 days of notice if the closing or mass layoff is caused by business circumstances that were not reasonably foreseeable as of the time that notice would have been required.  To satisfy this narrowly construed exception, the employer bears the burden of proving:

• the circumstances were unforeseeable — not reasonably foreseeable at the time the 60-day notice was due;
• the circumstances were caused by some sudden, dramatic and unexpected action or condition outside the employer’s control;
• the circumstances caused the layoffs; and
• the employer exercised commercially reasonable business judgment as would a similarly situated employer in predicting the demands of its particular market.

The Court found that even though at the end of 2003 HHC was experiencing financial difficulties that affected its relationship with United, HHC did not know until January 16, 2004, that United had decided to terminate its primary supplier relationship.  Notably, the Court stated, “While HHC was aware of United’s dissatisfaction, that knowledge alone does not bar the application of the unforeseeable business circumstances exception.  Rather, an objective focus is required.”  After considering the “history of the business and of the industry in which that business operated,” which led to the layoffs, the Court concluded that while the situation leading up to United’s eventual termination of the primary supplier relationship “would undoubtedly raise the eyebrows of any prudent business person,” the evidence did not suggest that United’s decision was reasonably foreseeable prior to HHC’s receipt of its January 15 letter. 

Moreover, the Court observed, “Business downturns in a cyclical economy are not unusual and we should not burden employers with the task of notifying employees of possible contract cancellation and concomitant lay-offs every time there is a cost overrun or similar difficulty…. Such difficulties are invariable, and most often do not lead to contract cancellation.”  It concluded: “HHC experienced the loss of its major customer in a very short time, on top of all of its other difficulties” and, while losing United was always a possibility, according to the Court, it was “unforeseeable.”

Causation

Under the unforeseeable business circumstance exception, the mass layoff must be caused by business circumstances that were not reasonably foreseeable as of the time that notice would have been required.

The Court found that while HHC had other financial problems, the decision to lay off employees came only when the company received United’s letter of withdrawal. Significantly, the Court found the downturn in business was “not industry-wide” and that “HHC had a reasonable hope that business would improve with [fresh] financing” and that its relationship with United would continue.  When HHC received United’s letter terminating it as primary supplier, “hope was vitiated …. The facts here unequivocally support the conclusion that United’s withdrawal was the cause of HHC’s decision to lay off its workers,” the Court said. 

Required Notice

Under the unforeseeable business circumstance exception, an employer must give notice of the layoff as soon as practicable upon knowledge of the causal event.

The plaintiffs argued that the written notice given them in their paychecks on January 22, 2004, was not delivered as soon as practicable.  They pointed out that HHC knew of United’s withdrawal on January 16, and the Associated Press issued a news release on January 21 reporting that HHC had announced the layoff of “about 200 Tulsa warehouse workers after losing a key customer.” 

The Court held that the employer did not unduly delay in providing written WARN notices on January 22, after taking three business days to discuss the matter with its financial advisers and lawyers, and that it acted quickly in light of the devastating news. The Court added that HHC did not act unreasonably in taking only a few days to determine whether “it could survive the carnage” and affirmed summary judgment for the employer.

***

In the current economy, this decision reinforces the recommendation that an employer must seek legal guidance in analyzing the risks and determining the viability of relying on the unforeseeable business circumstances exception (or any other exception) if it believes it cannot provide the full 60 days of advance written WARN notice. More importantly, these exceptions do not excuse an employer from providing WARN notices; they simply require an employer to provide as much notice as is practicable, along with a description in each WARN notice of its basis for providing a reduced WARN notice period.