What is the effect of a Chapter 11 bankruptcy filing on an employer’s notice obligation under the WARN Act?

Even if your employer has declared bankruptcy it still may have violated the Worker Adjustment and Retraining Notification Act (the “WARN Act”) when it failed to give required and timely notice of a mass termination of employees.

The WARN Act offers protection to workers by requiring employers to provide 60 days advance written 60 days of covered plant closings and covered mass layoffs. In general, employers are covered by The WARN Act if they have 100 or more employees. The failure to comply with the WARN Act gives rise to potential civil actions by employees for damages in the form of back pay for each day of violation and benefits under any employee benefit plan which would have been covered under an employee benefit plan if the employment loss had not occurred.

While the WARN Act itself does not make reference to bankrupt employers the Department of Labor’s rule promulgated thereunder interpreting the statute declined to exclude bankruptcy “fiduciaries” from the WARN Act’s definition of employer. Instead the Department suggested 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 … [but] where the fiduciary may continue to operate the business for the benefit of creditors, the fiduciary would succeed to the WARN obligations of the employer.”

In In re United Healthcare System, Inc., 200 F.3d 170 (3rd Cir. 1999), the Third Circuit found that a debtor-hospital which had filed a Chapter 11 petition in the Bankruptcy Court sixteen days earlier was a “liquidating fiduciary” at the time it laid off 1,200 of its 1,300 employees. The court found that the debtor-hospital was not a “business enterprise” under the WARN Act at the time of the layoff and thus not liable for back pay to employees under the WARN Act for having failed to give its employees 60 days’ notice.

The court in In re Jamesway Corporation, 235 B.R. 329 (Bankr. S.D.N.Y. 1999), likewise recognized that the status of “liquidating fiduciary” could relieve a debtor-in-possession from WARN Act liability, but nevertheless found the retailer liable under the WARN Act because, six days prior to filing its Chapter 11 petition in the Bankruptcy Court, it had 1) decided to liquidate, 2) identified all of the employees who would lose their jobs in the layoff, 3) determined the schedule of terminations in the layoff, and 4) commenced terminating employees as part of the layoff. Based on these facts, the Court found that the employer was liable under the WARN Act prior to the Chapter 11 filing because the employees became entitled to notice of the termination of their employment at the time of these events.

Abbey Spanier, LLP is investigating whether MF Global’s mass termination of employees violated the WARN Act.  If you want to know more about our investigation please contact me.