WARN Act and Bankruptcy: 5 Situations Where Notice Is Still Owed

Filing for bankruptcy does not suspend the federal plant closing law, and the employees it protects may sue for themselves and for every coworker in the same position. The Worker Adjustment and Retraining Notification Act says that a covered employer "shall not order a plant closing or mass layoff until the end of a 60-day period after the employer serves written notice," and neither its definitions in 29 U.S.C. Section 2101 nor its short list of exemptions in Section 2103 (temporary facilities, completed projects, strikes and lockouts) mentions bankruptcy at all.

The statute reaches employers with 100 or more employees, excluding part-time workers, or 100 or more who together work at least 4,000 hours a week. A plant closing means an employment loss for 50 or more full-time workers at a single site within any 30-day period; a mass layoff means at least 33 percent of the site's employees and at least 50 of them, or at least 500. Within those limits, five situations common to a business in distress still require notice.

1. The Company Still Operating in Chapter 11

A debtor in possession that keeps running its business remains the same business enterprise it was the day before the petition. It has the same workforce, the same sites, and the same decisions about who stays. Neither WARN's text nor its exemptions relieve it of the duty to give 60 days of written notice to employee representatives (or each affected employee), the state rapid response unit, and the chief elected local official.

The contrast case is narrow. In In re United Healthcare System, Inc., 200 F.3d 170 (3d Cir. 1999), the Third Circuit considered the Department of Labor's position "that a fiduciary whose sole function in the bankruptcy process is to liquidate a failed business for the benefit of creditors does not succeed to the notice obligations of the former employer," and held, on the facts of a hospital that had decided to wind down: "Because we conclude United Healthcare was no longer an 'employer' and therefore was not subject to the WARN Act, we will reverse." The lower courts had treated the employees' WARN claims as administrative expenses.

That holding is about an enterprise that had stopped being one. It is a poor fit for a company still selling its product in the month the layoffs occur.

2. The Sale of the Business in the Middle of the Case

A going-concern sale can be the whole reason a Chapter 11 case exists, and WARN assigns the notice duty across the closing date. Under Section 2101(b)(1), the seller is responsible for notice of any plant closing or mass layoff "up to and including the effective date of the sale," the purchaser is responsible afterward, and every employee of the seller (other than part-time employees) on the effective date "shall be considered an employee of the purchaser immediately after the effective date of the sale."

The Department of Labor's regulation at 20 CFR 639.4(c) puts it more plainly: "Affected employees are always entitled to notice; at all times the employer is responsible for providing notice." A seller may give notice as the buyer's agent if authorized, but responsibility stays with the buyer. What a buyer who plans to run a leaner operation owes to people it has never met is, on this text, a full 60 days. Whether the buyer priced that into the bid is a separate matter, and one the sale order may or may not address.

3. The Faltering Company Still Seeking Money

Section 2102(b)(1) lets an employer shorten the notice period for a shutdown if, when notice would have been due, it "was actively seeking capital or business which, if obtained, would have enabled the employer to avoid or postpone the shutdown," and it reasonably and in good faith believed notice would have defeated the effort. It is the exception built for a business still trying to avoid bankruptcy.

It is also narrower than it reads. The regulation at 20 CFR 639.9 says it "applies to plant closings but not to mass layoffs and should be narrowly construed," that the employer bears the burden of proof, and that it is judged "in a company-wide context," so a parent with access to cash cannot look only at the struggling site. The employer must be able to identify specific steps taken to obtain financing, a realistic opportunity to obtain it, and financing sufficient to have kept the site open for a reasonable time.

But the exception shortens notice; it does not remove it. Section 2102(b)(3) requires an employer relying on it to "give as much notice as is practicable" and, at that time, "a brief statement of the basis for reducing the notification period." A company that was negotiating with a lender until the afternoon before it closed still owes the workforce a letter that afternoon, and a reason.

The exceptions in WARN shorten the notice period. None of them lets the employer say nothing.

Why Congress confined the faltering company defense to plant closings and left the mass layoff outside it is a question the statute's text does not take up.

4. The Unforeseeable Collapse

Section 2102(b)(2)(A) allows shortened notice when a closing or mass layoff "is caused by business circumstances that were not reasonably foreseeable as of the time that notice would have been required." The regulation's examples are concrete: a principal client's sudden termination of a major contract, a strike at a major supplier, an unanticipated and dramatic economic downturn, or a government-ordered closing without prior notice. The test turns on "commercially reasonable business judgment."

A slow decline that the owner watched for a year is harder to call unforeseeable. The same duty to give as much notice as practicable applies, and 20 CFR 639.9 adds that in some circumstances it "may be notice after the fact."

5. Cuts Made in Waves

A company in Chapter 11 may shrink in steps. It lays off a shift in March, a department in April, and a second shift in May, each group below the thresholds. Section 2102(d) treats employment losses for two or more such groups at a single site that "occur within any 90-day period" as a plant closing or mass layoff "unless the employer demonstrates that the employment losses are the result of separate and distinct actions and causes." The burden sits with the employer.

What the Liability Looks Like, and Where Delancey Street Sits

Under 29 U.S.C. Section 2104, a violating employer owes each aggrieved employee back pay and benefits "for the period of the violation, up to a maximum of 60 days, but in no event for more than one-half the number of days the employee was employed," and up to $500 a day in civil penalty for failing to notify the local government unless it pays employees within three weeks. A federal court cannot enjoin the closing itself. In bankruptcy, back pay attributable to the period after the petition may be an administrative expense under 11 U.S.C. 503(b)(1)(A)(ii), subject to the court's finding about current jobs, while WARN liability for layoffs before the filing generally stands as a prepetition claim. New York adds its own statute with 90 days of notice and lower thresholds.

Advice on WARN compliance or bankruptcy falls outside Delancey Street's work, since the company is not a law firm; a company approaching a closing with a large workforce needs employment and bankruptcy counsel, and should retain them before the layoff date is set. For owners whose cash is being drawn down by merchant cash advance debits, Delancey Street provides a confidential review of that debt at no cost and works with independently licensed lawyers on matters that require one.

The notice itself is a short letter. What it costs to skip is measured in days of pay, one employee at a time.