Watch Out! Protecting Private Equity from WARN Act Claims



Private equity firms are increasingly being hit with WARN Act claims.  These claims arise when a company terminates or layoffs off a large number of its employees without first issuing a statutorily prescribed notice.  Thereafter, the employees sue the company’s owners, active investors and possibly its lenders seeking recovery of statutory damages.

What is a WARN Act claim?

The Worker Adjustment Retraining and Notification Act (“WARN Act”) is a federal law designed to provide workers with a 60-day notice of mass job terminations or layoffs such that they may have sufficient time to adjust to the prospect of a job loss.¹  Employers that fail to comply with WARN Act notice requirements may be liable for up to 60-days pay and benefits.²  WARN Act claims can occur in connection with or wholly independent of a company’s bankruptcy filing.

Various courts (including the influential Second and Third Circuits) have adopted five non-exclusive factors set forth by the Department of Labor’s regulations for determining whether related entities constitute a single employer for purposes of determining WARN Act liability.³  These factors are: “(i) common ownership, (ii) common directors and/or officers, (iii) de facto exercise of control, (iv) unity of personnel policies emanating from a common source, and (v) the dependency of operations.”4

Critically, WARN Act liability is not limited to just entities who may have a direct or indirect ownership interest in the company.  “[W]hen a lender becomes so entangled with its borrower that it has assumed responsibility for the overall management of the borrower’s business...the degree of control necessary to support employer responsibility under [the] WARN [Act will] be achieved.”5

Fortunately, there are three general exceptions which excuse the issuance of a WARN Act notice: (1) active efforts to obtain needed on-going capital where the employer has a good faith belief that issuing the required notice will preclude it from obtaining the needed capital; (2) unforeseen business circumstances and (3) natural disasters.6  The applicability of these exceptions will depend upon the unique circumstances of each case.

How can you protect your client?

Alert your client to the risk of WARN Act claims.  The simple fact that a private equity fund may be either (a) a partial owner of the company or (b) a lender with no direct or indirect ownership interest will not be an automatic defense to a WARN Act claim.  Rather, courts will focus on the degree of involvement and control that the fund exercised over the company.  In that regard, it is essential for counsel to know and understand generally what their clients are doing with the troubled company.  To the extent there is heightened concern about liability from being “too close,” a private equity firm would be well advised to establish objective parameters which delineate its involvement with the company and establish a comfortable level of autonomy to make its own decisions regarding its employees.

Michael Fielding
Partner, Husch Blackwell LLP

¹ See 29 U.S.C. § 2101 et seq.; see also 20 C.F.R. § 639.1(a).
² 29 U.S.C. § 2104(a)(1).
³ See Guippone v. BH S&B Holdings LLC, 737 F.3d 221, 226 (2d Cir. 2013) and Pearson v. Component Tech. Corp., 247 F.3d 471, 503-04 (3d Cir. 2001).
4 Guippone v. BH S&B Holdings LLC, 737 F.3d 221, 226 (2d Cir. 2013) (citing 20 C.F.R. § 639.3(a)(2)).
5 Guippone v. BH S&B Holdings LLC, 737 F.3d 221, 225 (2d Cir. 2013) (citing Coppola v. Bear Stearns & Co., 499 F.3d 144, 150 (2d Cir. 2007)).
629 U.S.C. § 2102(b)(3).

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