Government Contracts Monitor
WARN Notices and Sequestration
November 15, 2012
Over the last several months and right up through the recent election, there has been much public discussion about possible sequestration and its automatic and severe budget cuts to defense and domestic federal spending that are supposed to take effect January 2, 2013. Given the uncertainty surrounding these billions in potential federal budget cuts and their possible effect on large defense contractors and the overall national economy, there has been some concern regarding the Worker Adjustment and Retraining Notification (WARN) Act obligations of federal contractors. If the lame duck Congress and the President cannot temporarily or permanently agree on how to avoid sequestration between now and January, what are federal contractors’ federal WARN Act obligations? The U.S. Department of Labor (DOL) and the Office of Management and Budget (OMB) have attempted to answer this question.
By way of background and oversimplifying things, the federal WARN Act generally requires all employers, with more than one hundred employees, to give employees at least sixty days advanced notice of any plant closings or mass layoffs that will affect at least fifty employees. Failure to comply with applicable WARN Act requirements can expose employers to backpay and benefits liability for employees terminated prior to the end of the sixty day notice, as well as attorneys’ fees and possible civil penalties. See 29 U.S.C. §§ 2101-2109.
On July 30, 2012, DOL issued Training and Enforcement Guidance Letter No. 3-12 (“Guidance Letter”) in an attempt to address the interplay between the WARN Act and potential sequestration. In the Guidance Letter, DOL explained that “in the absence of any additional information [about the certainty of sequestration or its actual impact on particular programs or contracts], potential plant closings or layoffs resulting from such contract terminations or cutbacks are speculative and unforeseeable.” Because terminations and cutbacks related to possible sequestration budget cuts are characterized as “unforeseeable,” DOL argues that government contractors currently have no obligation to provide their employees with WARN notices over future and indeterminable effects of sequestration, such as possible plant closings or mass layoffs. DOL also points to two twenty year old federal appellate cases involving defense contractors to buttress its argument that the current sequestration threat does not trigger sixty day WARN notice requirements. DOL’s guidance does not have the force of a law or regulation, but contractors should be able to rely on it in waiting until sequestration actually occurs and causes cuts to their federal contracts before being required to send out WARN Act notices.
On September 28, 2012, OMB provided additional WARN Act guidance to federal agencies regarding the allowability of certain sequestration related costs. Click here to read the OMB Memorandum. This OMB guidance essentially says that (a) if sequestration occurs and a contractor is forced to close a plant or conduct a mass layoff; and (b) if that contractor follows DOL’s sequestration and WARN Act
guidance and is then held liable to its employees for an alleged failure to comply with the WARN Act; then (c) any monetary WARN Act liability, attorneys’ fees, or other litigation costs incurred will qualify as an “allowable cost” which can be passed on to the contracting federal agency. It is currently unclear what effect this OMB guidance will have on the actual allowability and recoverability of WARN Act liability.
Given the recent claims of bipartisanship and cooperation coming from Washington after the election, it is possible that there could be a budget deal to avoid sequestration. However, if there is no deal then federal contractors should be able to rely on DOL’s guidance and avoid sending federal WARN Act notices to their employees unless and until it is certain that federal contractors’ contracts will be terminated or reduced, and any mass layoffs or plant closings are directly attributable to such sequestration cuts. Employers should also be aware of applicable state WARN Act’s and comply with those legal requirements should sequestration-related mass layoffs or plant closings be required. Let’s hope that Congress and the President can reach an agreement to avoid sequestration.
Michael J. Schrier is the attorney responsible for the content of this article.