WARN Act Liability For Private Equity Funds

There is a recent tendency for workers who lose employment at a private equity fund's portfolio company as a result of a plant closing or a layoff to sue the private equity fund for violations of the federal Worker Adjustment and Retraining Notification Act (WARN Act) and similar state statutes. Since it is likely a portfolio company that takes such actions may be failing financially, the terminated employee often looks to the private equity firm as the "deep pocket" source of compensation, claiming that the private equity firm is liable because it made the termination decision with the portfolio company as a "single employer" under the WARN Act. As discussed below, courts will typically apply a test to determine potential "single employer" liability to the specific facts of the case.

Generally speaking, the WARN Act offers protection to employees, their families and communities by requiring employers to provide written notice to such affected employees 60 days in advance of covered plant closings and covered mass layoffs. Such notice is also required to be delivered to appropriate local government units. Below is a brief discussion of the WARN Act, including the legal test generally employed by courts to determine whether "single employer" liability applies. Following this discussion are some practical steps that a private equity firm can take to decrease potential liability under the "single employer" doctrine and increase the chances of a successful motion to dismiss, or of winning a lawsuit if sued by former employees of one of its portfolio companies.

What employers are subject to the WARN Act?

In general, employers are covered by the WARN Act if they have 100 or more employees, exclusive of employees who have worked less than six months in the last 12 months and employees who work an average of less than 20 hours a week (collectively, "exempt employees").

What triggers the notice requirement?

For plant closings, a covered employer must give written notice if an employment site (or one or more facilities or operating units within an employment site) will be shut down, and the shutdown will result in an "employment loss" for 50 or more non-exempt employees during any 30-day period. The exempt employees, however, are also entitled to such notice.

A covered employer must also give written notice if there is to be a mass layoff. A mass layoff is one which results in an employment loss at the employment site during any 30-day period for 500...