Investors May Be Liable to WARN Act Plaintiffs

Major investors in companies that commit violations of the federal Worker Adjustment and Retraining Notification (WARN) Act may not be immune to liability, according to a federal court sitting in the Southern District of New York. Vogt v. Greenmarine Holding, LLC, No. 02 Civ. 2059 (S.D.N.Y. Jan. 1, 2004). Relying on Department of Labor (DOL) regulations, the court denied a motion to dismiss the claims of a class of plaintiffs who were terminated by a bankrupt company against the investors in the bankrupt entity.

The Case

Outboard Marine Corporation (OMC) designed, manufactured, and sold outboard motors at 13 facilities in multiple states until December 2000, when it filed for Chapter 11 bankruptcy. When OMC declared bankruptcy, it shut down all 13 of its facilities “virtually on Christmas Eve,” with no notice to the 6500 employees who were laid off as a result of the shutdowns. Under the WARN Act, 29 U.S.C. ' 2101 et seq., an entity employing more than 100 employees must provide 60 days' notice (or pay in lieu of notice) before mass layoffs or plant closings in order to allow affected employees transition time to arrange for other employment without a loss of pay. The enforcement provisions of the WARN Act allow employees who are terminated without notice to recover damages equal to 60 days' pay and fringe benefits from their employer.

It was thus clear, the court found, that OMC's failure to provide any notice to the 6500 employees was a “blatant violation” of the WARN act. A judgment against OMC would have been little use to the affected employees, however, because OMC was bankrupt. As a result, the plaintiffs pursued WARN Act claims in federal courts in Georgia, Illinois, and New York against eight investment companies that together owned or controlled most of OMC's stock. (Ultimately, the Georgia and Illinois actions were dismissed for lack of personal jurisdiction, and only the New York action survived.) The defendant companies moved to dismiss the plaintiffs' claims, arguing that the defendants were merely OMC's investors, not joint employers liable under the WARN Act. The employees countered that they should be permitted to pursue their claims against the investment companies for three interrelated reasons. First, the defendant companies owned or controlled a majority of OMC's stock and “control[led] all corporate transactions of OMC.” Second, the investment companies and OMC were part of a “single, integrated enterprise,” the plaintiffs alleged, because the board members of the investment companies were also directors of OMC. Finally, the plaintiffs claimed, certain of the defendant companies actually made the decision that OMC should file for bankruptcy and effect the mass layoff in violation of the WARN Act.

In ruling on the motion to dismiss, the court noted that tests for determining whether related entities are a single employer have developed over the years under general corporate law, National Labor Relations Board (NLRB) authority, and DOL regulations. The court opted to consider the standards set forth in the DOL guidelines because WARN Act regulations specifically identify those guidelines as the test to be used and because the DOL guidelines incorporate the factors considered in the NLRB test. The DOL guidelines set forth five factors to test whether interrelated enterprises should be found liable as joint employers under the WARN Act: 1) common ownership; 2) common directors and/or officers; 3) de facto exercise of control; 4) unity of personnel policies emanating from a common source; and 5) the dependency of operations. No one factor controls, and it is not necessary that all be present, the court noted; rather, the factors define a “balancing test,” the point of which is to determine “whether nominally separate entities functioned as a single business.” In deciding to employ the DOL test, the court cited Court of Appeals authority from the Third Circuit and noted that the Second Circuit had not definitively addressed the issue of which test should be used. (While the Fifth Circuit has also applied the DOL standards to determine that an off-site human resources company was not a joint employer for WARN Act purposes in Administaff Companies, Inc. v. New York Joint Board, Shirt & Leisurewear Div., 337 F.3d 454 (5th Cir. 2003), other Circuits appear not to have considered the issue.)

Applying the DOL test to the case at bar, the court focused primarily on the defendants' de facto control of OMC. The plaintiffs' complaint alleged that the investment companies controlled reorganization activity at OMC, made decisions regarding layoffs and plant closings, and made the decision to file for bankruptcy. While the other factors of the DOL test did not determine the “single employer” issue conclusively, the investors' alleged de facto control of OMC tipped the scale in favor of finding that the plaintiffs might be able to show that the companies were a single related enterprise that had effected the plant closings. The court thus decided to deny the defendants' motion, permitting the plaintiffs to pursue their lawsuit.

Conclusion

This decision may signal a future threat of liability in the Second Circuit and elsewhere to companies who act as major investors to other business entities that allegedly commit WARN Act violations.

Major investors in companies that commit violations of the federal Worker Adjustment and Retraining Notification (WARN) Act may not be immune to liability, according to a federal court sitting in the Southern District of New York. Vogt v. Greenmarine Holding, LLC, No. 02 Civ. 2059 (S.D.N.Y. Jan. 1, 2004). Relying on Department of Labor (DOL) regulations, the court denied a motion to dismiss the claims of a class of plaintiffs who were terminated by a bankrupt company against the investors in the bankrupt entity.

The Case

Outboard Marine Corporation (OMC) designed, manufactured, and sold outboard motors at 13 facilities in multiple states until December 2000, when it filed for Chapter 11 bankruptcy. When OMC declared bankruptcy, it shut down all 13 of its facilities “virtually on Christmas Eve,” with no notice to the 6500 employees who were laid off as a result of the shutdowns. Under the WARN Act, 29 U.S.C. ' 2101 et seq., an entity employing more than 100 employees must provide 60 days' notice (or pay in lieu of notice) before mass layoffs or plant closings in order to allow affected employees transition time to arrange for other employment without a loss of pay. The enforcement provisions of the WARN Act allow employees who are terminated without notice to recover damages equal to 60 days' pay and fringe benefits from their employer.

It was thus clear, the court found, that OMC's failure to provide any notice to the 6500 employees was a “blatant violation” of the WARN act. A judgment against OMC would have been little use to the affected employees, however, because OMC was bankrupt. As a result, the plaintiffs pursued WARN Act claims in federal courts in Georgia, Illinois, and New York against eight investment companies that together owned or controlled most of OMC's stock. (Ultimately, the Georgia and Illinois actions were dismissed for lack of personal jurisdiction, and only the New York action survived.) The defendant companies moved to dismiss the plaintiffs' claims, arguing that the defendants were merely OMC's investors, not joint employers liable under the WARN Act. The employees countered that they should be permitted to pursue their claims against the investment companies for three interrelated reasons. First, the defendant companies owned or controlled a majority of OMC's stock and “control[led] all corporate transactions of OMC.” Second, the investment companies and OMC were part of a “single, integrated enterprise,” the plaintiffs alleged, because the board members of the investment companies were also directors of OMC. Finally, the plaintiffs claimed, certain of the defendant companies actually made the decision that OMC should file for bankruptcy and effect the mass layoff in violation of the WARN Act.

In ruling on the motion to dismiss, the court noted that tests for determining whether related entities are a single employer have developed over the years under general corporate law, National Labor Relations Board (NLRB) authority, and DOL regulations. The court opted to consider the standards set forth in the DOL guidelines because WARN Act regulations specifically identify those guidelines as the test to be used and because the DOL guidelines incorporate the factors considered in the NLRB test. The DOL guidelines set forth five factors to test whether interrelated enterprises should be found liable as joint employers under the WARN Act: 1) common ownership; 2) common directors and/or officers; 3) de facto exercise of control; 4) unity of personnel policies emanating from a common source; and 5) the dependency of operations. No one factor controls, and it is not necessary that all be present, the court noted; rather, the factors define a “balancing test,” the point of which is to determine “whether nominally separate entities functioned as a single business.” In deciding to employ the DOL test, the court cited Court of Appeals authority from the Third Circuit and noted that the Second Circuit had not definitively addressed the issue of which test should be used. (While the Fifth Circuit has also applied the DOL standards to determine that an off-site human resources company was not a joint employer for WARN Act purposes in Administaff Companies, Inc. v. New York Joint Board, Shirt & Leisurewear Div. , 337 F.3d 454 (5th Cir. 2003), other Circuits appear not to have considered the issue.)

Applying the DOL test to the case at bar, the court focused primarily on the defendants' de facto control of OMC. The plaintiffs' complaint alleged that the investment companies controlled reorganization activity at OMC, made decisions regarding layoffs and plant closings, and made the decision to file for bankruptcy. While the other factors of the DOL test did not determine the “single employer” issue conclusively, the investors' alleged de facto control of OMC tipped the scale in favor of finding that the plaintiffs might be able to show that the companies were a single related enterprise that had effected the plant closings. The court thus decided to deny the defendants' motion, permitting the plaintiffs to pursue their lawsuit.

Conclusion

This decision may signal a future threat of liability in the Second Circuit and elsewhere to companies who act as major investors to other business entities that allegedly commit WARN Act violations.