New Law Governs Mass Layoffs And Plant Closures

California is about to have a baby. A baby WARN Act, that is. All California businesses who directly or indirectly own and operate facilities employing 75 or more persons, including part-timers, should be aware of the problems created by the new law.

With Governor Davis’s signature of AB 2957 on September 21, 2002, California joined the growing minority of states to enact a so-called “baby WARN” statute. For those unfamiliar with it, the name refers to the federal Worker Adjustment Retraining and Notification Act of 1988 (the “WARN Act”), which requires 60 days advance notification to affected employees and certain government officials for events such as mass layoffs and plant closures, as defined under the Act, its regulations, and subsequent cases. Certain business transfers can trigger the Act, which raises issues affecting contract negotiations, final deal structure, and price. WARN is a complicated federal law and the penalties for noncompliance are very high, including full back pay and benefits for all affected employees during the period of the violation, civil penalties and attorneys’ fees.

As with the federal statute, the state law will require notice when a mass layoff, relocation, or plant closure would affect 50 or more employees. The California law will cover a wide range of employers not covered by the federal WARN Act, however, and may often be triggered more easily than the federal law. For example, a business employing 26 part-time employees and 74 regular employees would not be covered by the federal law (under which part-timers are excluded in a count toward 100), but would likely be covered by the new state law (under which part-timers are arguably included in a count toward 75). It should be noted that, under both laws, additional complexity would affect the counting in a real case, requiring analysis of employee-specific data such as dates of hire, expectations at hire, the nature of each employee’s work, and other matters.

The new state law also does not treat parent corporations and their subsidiaries as separate employers for purposes of determining coverage, whereas the federal law would in many circumstances. In addition, a “mass layoff” occurs under federal law when at least 50 employees AND at least 33% of the workforce experience an employment loss (the 33% requirement does not apply to a “closing”, nor when 500 or more employees are affected). The percentage of the workforce requirement provides some short-term staffing flexibility to employers in relation to their size. The state law contains no such percentage parameter and requires 60 days advance notice whenever 50 or more employees are laid off in a 30-day window. In practical terms, the bigger the company, the narrower the workforce flexibility becomes.

The new state law also fails to include one of the important defenses available under the federal law — the defense of unforeseeable business circumstances. Thus, businesses forced to implement reductions cancellations may not immediately have the same opportunity that already exists under federal law to make reasonable arguments when defending their actions in suits under the new state law. The penalties for violating the California baby WARN will resemble the harsh federal law penalties.

The new state law is conspicuously and dangerously silent on the special issues presented by business transfers. Such issues were hot topics that had to be hammered out during the passage of the federal WARN Act, promulgation of its regulations, and in subsequent litigation. Yet the state statute includes no provisions in this area. Standards have been developed under the federal law to deal with questions such as whether a business transfer triggers a notice obligation, and whether the buyer or seller is liable for failure to provide the notice. California’s new statute could easily have stated such standards in its text, or incorporated the federal standards by reference, but did neither. It will also invite litigation that could have been eliminated, or at least reduced, by more careful statutory drafting.

The new law presents complicated and immediate counseling issues. The bill has non-urgency status, meaning that it will become effective January 1, 2003. Thus, California businesses should be proactive in ensuring that any presently contemplated reduction in force strategies OR business transfer strategies occurring after the New Year will comply with both the new state law and the federal WARN Act.in force, closures, or business transfers in response to unexpected economic events or major contract.