WARN Act Reaches Equity Owners

The Federal District Court for the Southern District of New York has allowed a class of 6,500 plaintiffs to pursue their complaint against several investment companies for violations of the Workers Adjustment and Notification, or WARN, Act. In doing so, the court in In re Vogt, 2004 WL 187153, adopted and applied not the traditional piercing-the-corporate-veil test but instead the more narrowly focused and easier to establish “DOL test,” based on the Department of Labor's WARN regulations.

This case should be of concern to all employers, not just equity investors. The nation's economy now seems to be hovering between recession and recovery. Thus, employers may find themselves laying off employees for reasons as diverse as making way for strategic outsourcing, to facilitating effective integration of mergers and acquisitions, to true life-or-death restructuring. This new decision, then, makes the assertion of liability against parent companies and equity owners easier to establish and may give encouragement to effected employees to seek WARN penalties against deeper pockets.

WARN's Provisions

Born out of a spate of rust-belt plant closings, WARN sought to soften the blow of job loss to workers and their families by providing some advance notice, allowing them transition time to different employment. WARN applies to employers with at least 100 employees and requires at least 60 days' notice to their employees before mass layoffs or plant closings. A principal enforcement mechanism of the Act permits employees to seek damages from their employer in federal court in an amount equivalent to 60 days' pay and fringe benefits when the employer fails to give proper notice of a mass layoff. The Act allows employees to pursue these actions as a class.

The Vogt Action

The Vogt plaintiffs ' some 6,500 laid-off employees ' took advantage of these class provisions, suing eight investment companies that together owned or controlled the majority of the stock of their employer, Outboard Motor Corporation, or OMC, a manufacturer of outboard motors. Plaintiffs claimed that these defendant investment companies de facto controlled OMC, directed their layoffs and caused OMC to file for bankruptcy. Plaintiffs sought 60 days' pay and benefits for each person in the class, plus costs and attorneys' fees.

The defendants moved to dismiss the complaint, asserting that plaintiffs had failed to state a cause of action and that their behavior was no different than the way parent companies commonly act in regard to a subsidiary. They argued that no extraordinary circumstances existed that would make them liable for the acts of OMC in petitioning for bankruptcy, shutting down its facilities, or laying off its workers.

The threshold issue for the court, then, was which test to apply, as courts have applied different tests to determine whether multiple companies form a single entity for purposes of various state or federal laws. For example, courts have applied the alter ego/veil piercing test, the Federal labor law “integrated enterprise” test first developed by the National Labor Relations Board, and the test set forth in Department of Labor (DOL) regulations concerning application of WARN itself. Significantly, the court chose to apply the DOL test because the WARN regulations specifically define it as the test to be used in such circumstances, and because the five-factor DOL test encompasses the four-factor Federal labor law integrated-enterprise test.

Explaining its choice, the court cited with approval the Third Circuit's decision in Pearson v. Component Technology Corp., 247 F.3d 471, 483-84 (3d Cir.2001), and its observation that the current trend toward applying more than one test for affiliated corporate liability under WARN is unworkable because it could lead to different outcomes ' thus creating confusion not clarity. Furthermore, the court noted that applying solely the DOL test has the virtue of simplicity, as it allows for the creation of a uniform standard of liability for the enforcement of this Federal statute. And unlike the other tests, which were created to deal with different sorts of problems, the DOL test was designed by the administrative agency responsible for implementing WARN, having in mind the particular situations addressed by the Act.

Under this test, then, subsidiaries that are wholly or partially owned by a parent company are treated as separate from the parent company depending upon their degree of independence. The DOL regulations specify five factors to be considered in making this determination:

• Common ownership;
• Common directors and/or officers;
• Unity of personnel policies emanating from a common source;
• The dependency of operations; and
• De facto exercise of control.

The court then compared the allegations of the complaint to determine whether sufficient facts had been alleged to support favorable findings under each of these factors against each defendant.

In the end, the court found that standard met as to only three of the eight defendants. As to these three, the court found the first factor met because these companies actually owned shares in OMC. Likewise, the second factor was easily met because there were common directors and officers among these defendants and OMC. On the third factor, the court found that day-to-day personnel policies in fact did not originate from the defendants. But more important, the complaint did assert that the defendant companies made the decision to effect the mass layoff of OMC employees in violation of the WARN Act notice provisions. In the context of the WARN Act, the decision to effect a mass layoff is the single most important personnel policy, and since the WARN's purpose is to protect workers by encouraging employers to provide advance warning of plant closings, in a sense the only personnel policy that the statute is concerned with is the mass layoff decision. Thus, this factor carries considerable weight in a WARN-liability analysis, and the fact that the personnel policy relevant to WARN liability is alleged to have emanated directly from the defendants would count strongly in favor of WARN liability for those entities.

The fourth factor ' the dependency of operations ' is usually met by the sharing of administrative or purchasing services, interchanges of employees or equipment, or commingled finances, none of which were the case at OMC. As the court noted, the mere fact that the subsidiary's chain-of-command ultimately results in the top officers of the subsidiary reporting to the parent corporation does not establish the kind of day-to-day control necessary to establish an interrelation of operations.

As to de facto control, the final factor, the court ruled that this one is not intended to support liability based on a parent's exercise of control pursuant to the ordinary incidents of stock ownership. Instead, this factor is appropriately employed if the parent or lender was the decision maker responsible for the employment practice that gave rise to the litigation. Here, plaintiffs alleged that the defendants had the power to and actually made the layoff decision, thus fulfilling this factor.

Granting the motion to dismiss as to all but three defendants, the court allowed what is likely to be grueling discovery to proceed against the remaining targets.

Conclusion

Equity investors ' such as those targeted in Vogt ' are generally well protected from direct liability by the rigors of the traditional alter-ego/piercing-the-corporate veil test. But the DOL test that the Vogt court chose is far simpler to meet because it is more narrowly focused to the most important WARN issue ' who ordered the layoffs. Courts in at least two circuits, then, have chosen this test, and given its relevancy to WARN concerns, it is likely other will follow suit. That so, investors and other business owners should not rely on the availability of these tougher tests, but instead must incorporate WARN issues into any strategic business planning to avoid potential liability.

The Federal District Court for the Southern District of New York has allowed a class of 6,500 plaintiffs to pursue their complaint against several investment companies for violations of the Workers Adjustment and Notification, or WARN, Act. In doing so, the court in In re Vogt, 2004 WL 187153, adopted and applied not the traditional piercing-the-corporate-veil test but instead the more narrowly focused and easier to establish “DOL test,” based on the Department of Labor's WARN regulations.

This case should be of concern to all employers, not just equity investors. The nation's economy now seems to be hovering between recession and recovery. Thus, employers may find themselves laying off employees for reasons as diverse as making way for strategic outsourcing, to facilitating effective integration of mergers and acquisitions, to true life-or-death restructuring. This new decision, then, makes the assertion of liability against parent companies and equity owners easier to establish and may give encouragement to effected employees to seek WARN penalties against deeper pockets.

WARN's Provisions

Born out of a spate of rust-belt plant closings, WARN sought to soften the blow of job loss to workers and their families by providing some advance notice, allowing them transition time to different employment. WARN applies to employers with at least 100 employees and requires at least 60 days' notice to their employees before mass layoffs or plant closings. A principal enforcement mechanism of the Act permits employees to seek damages from their employer in federal court in an amount equivalent to 60 days' pay and fringe benefits when the employer fails to give proper notice of a mass layoff. The Act allows employees to pursue these actions as a class.

The Vogt Action

The Vogt plaintiffs ' some 6,500 laid-off employees ' took advantage of these class provisions, suing eight investment companies that together owned or controlled the majority of the stock of their employer, Outboard Motor Corporation, or OMC, a manufacturer of outboard motors. Plaintiffs claimed that these defendant investment companies de facto controlled OMC, directed their layoffs and caused OMC to file for bankruptcy. Plaintiffs sought 60 days' pay and benefits for each person in the class, plus costs and attorneys' fees.

The defendants moved to dismiss the complaint, asserting that plaintiffs had failed to state a cause of action and that their behavior was no different than the way parent companies commonly act in regard to a subsidiary. They argued that no extraordinary circumstances existed that would make them liable for the acts of OMC in petitioning for bankruptcy, shutting down its facilities, or laying off its workers.

The threshold issue for the court, then, was which test to apply, as courts have applied different tests to determine whether multiple companies form a single entity for purposes of various state or federal laws. For example, courts have applied the alter ego/veil piercing test, the Federal labor law “integrated enterprise” test first developed by the National Labor Relations Board, and the test set forth in Department of Labor (DOL) regulations concerning application of WARN itself. Significantly, the court chose to apply the DOL test because the WARN regulations specifically define it as the test to be used in such circumstances, and because the five-factor DOL test encompasses the four-factor Federal labor law integrated-enterprise test.

Explaining its choice, the court cited with approval the Third Circuit's decision in Pearson v. Component Technology Corp., 247 F.3d 471, 483-84 (3d Cir.2001), and its observation that the current trend toward applying more than one test for affiliated corporate liability under WARN is unworkable because it could lead to different outcomes ' thus creating confusion not clarity. Furthermore, the court noted that applying solely the DOL test has the virtue of simplicity, as it allows for the creation of a uniform standard of liability for the enforcement of this Federal statute. And unlike the other tests, which were created to deal with different sorts of problems, the DOL test was designed by the administrative agency responsible for implementing WARN, having in mind the particular situations addressed by the Act.

Under this test, then, subsidiaries that are wholly or partially owned by a parent company are treated as separate from the parent company depending upon their degree of independence. The DOL regulations specify five factors to be considered in making this determination:

• Common ownership;
• Common directors and/or officers;
• Unity of personnel policies emanating from a common source;
• The dependency of operations; and
• De facto exercise of control.

The court then compared the allegations of the complaint to determine whether sufficient facts had been alleged to support favorable findings under each of these factors against each defendant.

In the end, the court found that standard met as to only three of the eight defendants. As to these three, the court found the first factor met because these companies actually owned shares in OMC. Likewise, the second factor was easily met because there were common directors and officers among these defendants and OMC. On the third factor, the court found that day-to-day personnel policies in fact did not originate from the defendants. But more important, the complaint did assert that the defendant companies made the decision to effect the mass layoff of OMC employees in violation of the WARN Act notice provisions. In the context of the WARN Act, the decision to effect a mass layoff is the single most important personnel policy, and since the WARN's purpose is to protect workers by encouraging employers to provide advance warning of plant closings, in a sense the only personnel policy that the statute is concerned with is the mass layoff decision. Thus, this factor carries considerable weight in a WARN-liability analysis, and the fact that the personnel policy relevant to WARN liability is alleged to have emanated directly from the defendants would count strongly in favor of WARN liability for those entities.

The fourth factor ' the dependency of operations ' is usually met by the sharing of administrative or purchasing services, interchanges of employees or equipment, or commingled finances, none of which were the case at OMC. As the court noted, the mere fact that the subsidiary's chain-of-command ultimately results in the top officers of the subsidiary reporting to the parent corporation does not establish the kind of day-to-day control necessary to establish an interrelation of operations.

As to de facto control, the final factor, the court ruled that this one is not intended to support liability based on a parent's exercise of control pursuant to the ordinary incidents of stock ownership. Instead, this factor is appropriately employed if the parent or lender was the decision maker responsible for the employment practice that gave rise to the litigation. Here, plaintiffs alleged that the defendants had the power to and actually made the layoff decision, thus fulfilling this factor.

Granting the motion to dismiss as to all but three defendants, the court allowed what is likely to be grueling discovery to proceed against the remaining targets.

Conclusion

Equity investors ' such as those targeted in Vogt ' are generally well protected from direct liability by the rigors of the traditional alter-ego/piercing-the-corporate veil test. But the DOL test that the Vogt court chose is far simpler to meet because it is more narrowly focused to the most important WARN issue ' who ordered the layoffs. Courts in at least two circuits, then, have chosen this test, and given its relevancy to WARN concerns, it is likely other will follow suit. That so, investors and other business owners should not rely on the availability of these tougher tests, but instead must incorporate WARN issues into any strategic business planning to avoid potential liability.