By Barbara Roth and Tyler Hendry

Law360 (May 8, 2020, 5:54 PM EDT )

Barbara Roth

Tyler Hendry

Few industries have avoided difficult cost-saving decisions during the ongoing pandemic. Mass layoffs, closings, suspended operations and furloughs have become an unfortunate reality.

Two early class action claims that allege violations of the federal Worker Adjustment and Retraining Notification, or WARN, Act portend a wave of litigation questioning whether certain decisions to terminate employees were unforeseeable, necessary or truly caused by COVID-19.

This article (1) summarizes the allegations in each case, (2) analyzes the defendants' three potential defenses for failing to provide 60 calendar days of notice to employees before terminating their employment, and (3) concludes with best practices for WARN Act compliance during the pandemic.

Claims Against Hooters and Velodyne Lidar

The WARN Act requires a minimum of 60 days' written notice to employees and governmental authorities and union representatives in unionized workforces, of terminations because of mass layoffs or plant closings affecting more than 50 employees at a single site of employment. The WARN Act's 60-day notice requirement can be reduced for three reasons only: (1) unforeseeable business circumstances, (2) natural disasters, and (3) because of "faltering" companies (discussed in detail below).

In both of the recent class action claims under WARN, the employers admittedly did not provide 60 days' notice and therefore need to rely on at least one of the three exceptions to excuse their noncompliance with WARN's notice requirements.

Hooters Restaurants

The first claim has been brought on behalf of all Hooters restaurant employees in Florida (some 679 employees). On March 20, Florida Gov. Ron DeSantis banned all dine-in food and beverage consumption in Florida.[1] On March 25, Hooters allegedly terminated all Florida restaurant employees with no advance notice.

The employees allege that the failure to provide 60 days of notice was unlawful and that their terminations were not necessary because there were other less drastic measures Hooters could have taken. The employees specifically assert that notwithstanding "the fact that Congress recently made available to [Hooters] and many other businesses nationwide millions of dollars in forgivable loans through the 'Paycheck Protection Program,'" Hooters "still opted to instead engage in a mass layoff" without any advance written notice to its employees.

By these allegations, the employees contend that Hooters was obligated to seek a loan under the Paycheck Protection Program, or PPP, before availing itself of the WARN exception.

Velodyne Lidar

The other claim, brought on behalf of 140 employees, alleges subterfuge by Velodyne Lidar — a light, detection and radar technology company in Silicon Valley.  The employees allege that Velodyne Lidar had already started the process of sending certain jobs overseas before the onset of COVID-19 and that it used COVID-19 as an excuse to accelerate this process and avoid compliance with the WARN Act (as well as with California's version of the WARN Act).

WARN Act Exceptions

As noted, there are only three exceptions for covered employers to avoid WARN Act liability. The penalties for WARN Act noncompliance are significant. Failure to provide timely notice can result in back pay and benefits for each employee for each day of the violation (during a 60-calendar-day period), plus a civil penalty of up to $500 per day and the plaintiff's reasonable attorney fees.

If one of the below exceptions applies, an employer still must provide as much notice as possible under the circumstances, and the notice must provide a brief description of why the employer could not provide the full 60 days of notice. If an exception applies, but the employer fails to provide as much notice as possible, it will be liable for back pay and benefits for as many days as the court deems notice could have been provided (as well as a civil penalty of up to $500 per day and the plaintiff's reasonable attorney fees).

To date, the U.S. Department of Labor has provided no guidance on whether these exceptions apply to the pandemic, and therefore — with the important caveat that this analysis applies existing case law to a situation that has not been considered previously — each potential defense is examined below.

Unforeseeable Business Circumstances

The first exception — which will almost certainly be invoked by both employers — is that their noncompliance with WARN's notice requirements is excused by unforeseeable business circumstances. For this exception to apply, the employer must establish that the situation that prevented the employer from giving 60 days' notice was not reasonably foreseeable at the time the notice would have been required.

WARN Act regulations provide specific examples of situations that may justify a reduced notice period for layoffs resulting from the pandemic, including:

• A government-ordered closing of an employment site without prior notice.
• An unanticipated and dramatic economic downturn.

Government-Ordered Closing

For employers that have been ordered closed by governmental authorities or that cannot operate remotely in jurisdictions with mandatory stay-at-home orders — such as theaters, nail salons, barber shops, and nonessential manufacturers or retailers — this exception is likely to be successfully invoked to defeat a WARN claim. Similarly, in jurisdictions such as Florida where restaurants are banned from providing dine-in services, the exception is likely to be successful when used by restaurants that obtain most of their revenue from dine-in service.

The specific claim by Hooters employees that their termination was not necessitated by COVID-19 because Hooters could have applied for a PPP loan is likely to be rejected; a court is unlikely to mandate that an employer that cannot legally provide its most valuable service should be forced to continue to pay employees and take on the additional risk of a loan — even if a portion of that loan is forgivable. The issue of whether the need for layoffs became foreseeable at any date before March 25 however — the date the employees were terminated and notice was provided — is more difficult to predict.

Nonetheless, as federal and state governments implement relief packages incentivizing employers to keep employees on the payroll, employers should evaluate the feasibility of other cost-cutting measures or other creative solutions to continue operating (and be prepared to show that they did so) before terminating employees.

Unanticipated and Dramatic Economic Downturn

Despite the specific reference in the WARN Act regulations to an unanticipated and dramatic economic downturn — which seemingly would apply to current economic conditions — employers should not be overly confident that any actions taken during this downturn will automatically fit within this exception. Courts analyzing this exception have confirmed that each decision is highly fact-specific and that the employer needs to establish a causal link between the unexpected circumstance and the layoffs. 

A general economic downturn may be insufficient on its own to establish this exception. For example, if Velodyne Lidar employees can establish that the company made the decision to send their jobs overseas before the onset of COVID-19, Velodyne Lidar may not be able to establish the necessary causal link between the terminations and the virus to establish this exception.

The U.S. Court of Appeals for the Eighth Circuit's[2] decision in United Steel Workers v. United States Steel Corp. — in which U.S. Steel successfully invoked the unforeseeable business circumstances exception to layoffs that occurred during the economic crisis of late 2008 — is instructive.[3]

U.S. Steel established the exception by pointing not only to the severe economic downturn, but also by demonstrating its dramatic decline in customer orders, and by showing that it first implemented cost-cutting measures before the layoffs (as it had in previous economic downturns) but that these measures proved insufficient. The court found that U.S. Steel's shortened notice was "timely" because it provided notice promptly after it realized that other cost-cutting measures were insufficient.

The likely success of the unforeseeable business circumstances defense may turn on geography, industry as well as the timing of when employers laid off employees. In analyzing this defense, courts will look at how other employers in similar markets or industries have reacted in determining whether the layoffs were reasonably foreseeable. Moreover, as this pandemic continues, it may become more difficult for employers to argue that future layoffs were unforeseeable.

Natural Disaster

The natural disaster exception applies if the layoff or plant closing is caused by a natural disaster such as a flood, earthquake, drought or other similar disaster. The plant closing or mass layoff must be a direct result of the natural disaster. The exception will not apply if the plant closing or mass layoff occurs as an indirect result of a natural disaster.

In one of the very few cases analyzing this exception, Carver v. Foresight Energy LP, the U.S. District Court for the Central District of Illinois held that coal mine fires that were in part aided by human intervention (specifically poor underground housekeeping) could not be considered "natural" disasters.[4]

Unless the DOL or the courts interpret this exception beyond its previous applications, this exception might not be successfully invoked because (1) a pandemic is not sufficiently similar to a flood, earthquake or drought that physically destroys the workplace, and (2) the majority of layoffs have been indirectly caused by the economic fallout of COVID-19 or governmental orders to protect employees from the pandemic — which are both indirect and aided by governmental or human intervention.

Faltering Company

The final exception is the faltering-company exception. This exception is narrowly construed and applies only to plant closings and not to mass layoffs. To establish the exception, the employer must show:

• It was actively seeking capital or business, which if obtained would have enabled the employer to avoid or postpone the shutdown; and
  
  
• The employer reasonably and in good faith believed giving the notice to employees would have precluded the employer from obtaining the needed capital or business. 

Based only on preliminary publicly available information, it seems unlikely that either Hooters or Velodyne Lidar will raise this particular defense.

For employers applying for loans through the PPP that may seek to rely on this defense, it may be difficult to successfully argue that providing employees with a notice stating that they will be terminated if the loan application is unsuccessful would somehow preclude the employer from obtaining the loan.

The availability of this defense will rely heavily on the specific capital or business that the employer is seeking and the explanation for why providing notice would have precluded the employer from obtaining this capital or business. As noted, this exception has been narrowly construed, and it should be used with caution.

Best Practices and Considerations

The key takeaway from these early filings and from existing case law is that employers should expect their decisions to be carefully scrutinized and that citing COVID-19 alone may not be sufficient to establish a WARN Act exception. Suggested best practices include:

• Determine whether the WARN Act would apply to any considered mass layoff or plant closing and err on the side of caution.[5]
  
  
• Analyze applicable state mini-WARN laws and any specific COVID-19-related guidance. For example, New York and California have issued specific guidance on the application of their state WARN laws to COVID-19.
  
  
  • California's WARN Act does not have an unforeseeable business circumstances or natural disaster exception. In response to COVID-19, Gov. Gavin Newsom issued an executive order that suspends the 60-day notice requirement if the mass layoff, relocation or termination is caused by COVID-19-related business circumstances that were not reasonably foreseeable as of the time that notice would have been required — effectively adding the unforeseeable business circumstance defense to California law. Employers still must provide as much notice as possible.[6] The order applies from March 4 through the end of the COVID-19 emergency. 
    
    
  • New York's WARN Act generally requires 90 calendar days of notice for business closings and mass layoffs, and it can apply to layoffs of 25 or more employees. The unforeseeable business circumstance exception is available, and the New York State Department of Labor has provided specific guidance that this exception may apply to government-mandated closures or other specific circumstances resulting from the pandemic.[7] 
    
    
• Assess how other employers in the market or industry are responding and document attempts at other cost-cutting measures short of terminating employees.
  
  
• Document the direct financial impact of COVID-19 on the employer's operations.
  
  
• If notice is required, clearly state the reason that 60 days' advance notice could not be provided.
  
  
• Generally, the federal WARN Act does not apply to temporary layoffs lasting less than six months. If furloughed employees are kept out of work for longer than six months, however, this will constitute a layoff under the act. As the pandemic continues, keep track of the length of employee furloughs, as well as communications to employees on return dates, and their potential impact on WARN Act requirements and thresholds.

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Barbara Roth is a partner and Tyler Hendry is a senior associate at Herbert Smith Freehills LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] A copy of the Executive Order Number 20-71 is available at https://www.flgov.com/wp-content/uploads/orders/2020/EO_20-71.pdf.

[2] The Eighth Circuit covers Arkansas, Iowa, Minnesota, Missouri, Nebraska, and North and South Dakota.

[3] 683 F.3d 882 (8th Cir. 2012).

[4] Carver v. Foresight Energy LP, 2016 WL 3812376 (C.D. Ill. 2016).

[5] For example, Hooters is likely to argue that each individual restaurant is a "single site of employment" under the WARN Act and the Act cannot apply to any restaurant that laid off fewer than 50 employees. The employees will likely argue that the restaurants should be aggregated together and considered as one single site of employment. To determine whether different locations should be aggregated under the single-site rule, courts analyze a variety of factors, including the similarity of day-to-day management at the different locations, the distance between restaurants, and whether the sites share employees.

[6] A copy of Executive Order N-31-20 is available at https://www.gov.ca.gov/wp-content/uploads/2020/03/3.17.20-EO-motor.pdf.

[7] The NYSDOL's Guidance is available at https://labor.ny.gov/workforcenypartners/warn/warnportal.shtm.

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