The Applicability Of The WARN Act To Law Firms

In addition to its obligations to its clients and creditors, a law firm partnership which is in dissolution, or about to merge or be sold, may have certain statutory obligations to its employees. In recent years there has been litigation surrounding whether the Workers Adjustment and Retraining Notification Act (WARN), 29 U.S.C. '1201 et. seq., is applicable to partnerships, and in particular, law firm partnerships.

It is clear that WARN may be applicable to law firms when they dissolve and even when they are merged into other law firms or are bought or sold. WARN requires employers who are planning a “plant closing” or a “mass layoff” to give affected employees at least 60 days notice of such employment action. 20 C.F.R. '639.2.

A “plant closing” is the permanent or temporary shutdown of a single site of employment if the shutdown results in an employment loss at the single site of employment during any 30-day period for 50 or more employees, excluding any part-time employees. 23 U.S.C. '2101(2). A “mass layoff” is a reduction in force which 1) is a not a plant closing; and 2) results in an employment loss at the single site of employment during any 30-day period for 500 employees or at least 33% of the employees if at least 50 employees are affected. 23 U.S.C. '2101(3). (A 90-day rolling period will be used if, within that 90-day period, employee reductions occurred on more than one occasion and each such reduction affects fewer than the minimum number required to trigger the WARN Act notice requirement.)

Prior to determining whether a particular action by a law firm employer requires WARN notice, it is first necessary to determine whether the employer is covered by WARN. Pursuant to the statute, WARN applies to any employer that has: 1) 100 or more employees, excluding part-time employees or (2) 100 or more employees who in the aggregate work at least four thousand hours per week, not including hours of overtime. 29 U.S.C. '2101.

Thus, if a law firm is large enough and meets these criteria it is covered by WARN. See, Grimmer v. Lord Day & Lord, 937 F. Supp. 255 (S.D.N.Y. 1996). In a case involving a large, dissolving firm, the former employees of the law firm Lord Day & Lord sued the firm claiming that it violated WARN by closing its offices without giving the employees the required sixty days notice. The law firm had given the employees only twenty-nine days notice. The firm argued that it was entitled to give shorter notice under the “faltering company exception” and the “unforeseeable business circumstances exception.” Under each of these exceptions, an employer shall give as much notice as practicable and at the same time give a brief statement of the basis for the reduced notification period. The Lord Day & Lord employees moved for summary judgment to strike these two defenses and the Court granted the motion concluding that the law firm's notice did not satisfy the requirement for a “brief statement of the basis for reducing the notification period.” Id. at 256-57. The case was eventually settled at Mediation after the employees had been certified by the court as a class.

While WARN clearly applies to larger law firms such as Lord Day & Lord, determining whether a law firm has one hundred or more “employees” can be difficult. In most workplaces, determining who is an “employee” is straightforward. However, because law firms vary in corporate structure and style of operations, determining whether certain attorneys in a firm are “employees” is not always easy. While it is clear that secretaries, staff, and associates are employees of the firm, individuals with the titles such as “counsel,” “of counsel,” “partner,” or “shareholder” may be more difficult to classify.

Neither WARN nor its regulations define the term “employee.” The regulations do, however, define the term “affected employees.” “Affected employees” are those employees who are to receive notice under WARN and are defined as employees who may reasonably expect to experience an employment loss as a result of the proposed plant closing or mass layoff. 20 C.F.R. '639.3. Under the definition, affected employees include managerial and supervisory employees, but not “business partners.” Id. By excluding only “business partners” it is apparent that only those who presumably share in the losses and profits of the employer, and are the primary strategic decision-makers, are meant to be beyond the protections of the Act. Nonetheless, the term “business partner” does not necessarily translate easily to titles at law firms. Further, the term “affected employees” concerns who should be given notice and does not refer to the threshold of when the firm has enough “employees” to be covered by WARN. Accordingly, on the face of the statute and its regulations, it is still unclear whether those with the title “counsel,” “of counsel,” “partner,” or “shareholder” should be counted towards the minimum number of employees required to be covered by WARN.

Due to the lack of clarity in the statute, it is necessary to look to court decisions for guidance in this area. “[C]ongressional silence often reflects an expectation that courts will look to the common law to fill gaps in statutory text.” Clackamas Gastroenterology Associates v. Wells, 123 S. Ct. 1673, 1679 (2003) (defining “employee” under the Americans with Disabilities Act (ADA)). Specifically, the courts have “often been asked to construe the meaning of 'employee' where the statute containing the term does not helpfully define it.” Nationwide Mutual Insurance Co. v. Darden, 112 S. Ct. 1344, 1348 (1992) (defining “employee” under the Employee Retirement Income Security Act (ERISA)).

In a published decision regarding the issue, the United States District Court for the Eastern District of Pennsylvania, construed a meaning for the term “employee” under WARN in Corbo v. Tomkins Rubber Company, 2002 WL 1969653, 146 Lab. Cas., 10,0171 (E.D. Pa. Jan. 23, 2002), and was faced with determining whether seven individuals listed on the employer's payroll counted towards WARN's 100-employee threshold. Even though these individuals were on the payroll, two of them were family members who did not actually work for the employer and the other five had already been laid off. Id. Since WARN does not contain a definition of “employee,” in order to make the determination regarding these individuals' status, the District Court promulgated a test for determining who is an “employee” by adapting the test established by the United States Supreme Court in Nationwide Mutual Insurance Co. v. Darden, 112 S. Ct. 1344 (1992). Based on this standard from Darden, an ERISA case, the District Court found that none of the seven individuals at issue was an “employee” under WARN. 2002 WL 1969653 at 4-5.

The standard adopted from Darden was that the test for an individual's status as an “employee” is based on common law principles of agency. In Darden, the Supreme Court established this standard when faced with determining whether the company's insurance agents were independent contractors or “employees” under ERISA. 112 S. Ct. at 1348. While ERISA provided a statutory definition of “employee,” it was circular (“any individual employed by an employer”) and provided little guidance. Id. at 1347. Under the common law standard, according to the Supreme Court, courts should determine whether an individual is an “employee” by examining factors from the common law of agency for identifying master-servant relationships including:

• The hiring party's right to control the manner and means by which the product is accomplished;
• The location of the work;
• The duration of the relationship between the parties;
• Whether the hiring party has the right to assign additional projects to the hired party;
• The extent of the hired party's discretion over when and how long to work;
• The method of payment;
• The hired party's role in hiring and paying assistants;
• The provision of employee benefits; and
• The tax treatment of the hired party.

Id. at 323-324.

In addition, a recent Supreme Court case concerning the ADA may have offered additional guidance toward a standard for determining the status of individuals in law firms with the titles of “counsel,” “of counsel,” “partner,” or “shareholder.” In Clackamas Gastroenterology Associates v. Wells, the Supreme Court was faced with the issue of whether “director-shareholder physicians” of a professional corporation should be counted as “employees” under the ADA. 123 S. Ct. 1673, 1676. Referring to the standard established in Darden, the Supreme Court held that instead of relying on a particular title, the status of the director-shareholder physicians should be decided by evaluating the individual's relationship with the employer with reference to the common law factors identifying the master-servant relationship. Id. at 1681.

Further, since the Court was dealing with shareholder-directors in particular, it stated that while the totality of the circumstances of the relationship should be considered, the following factors are particularly relevant to the inquiry, although no one factor is decisive:

• Whether the organization can hire or fire the individual or set the rules and regulations of the Individual's work;
• Whether and, if so, to what extent the organization supervises the individual's work;
• Whether the individual reports to someone higher in the organization;
• Whether and, if so, to what extent the individual is able to influence the organization;
• Whether the parties intended that the individual be an employee, as expressed in written agreements or contracts; and
• Whether the individual shares in profits, losses, and liabilities of organization.

Id.

Pursuant to this analysis, the Court remanded the case and stated that evidence showing that the director-shareholder physicians controlled the operation of the clinic, shared in the profits, and were personally liable for malpractice claims weighed in favor of them not being classified as “employees.” However, the Court added, other evidence that these physicians receive salaries, must comply with the standards established by the clinic, and report to a personnel manager weigh in favor of them being classified as “employees.”

Since WARN does not provide a definition of “employee,” Congress seemingly expected the courts to use the common law to fill the gaps in the statutory language. Accordingly, it appears that the common law principles of agency that define the master-servant relationship should be used to determine who is an “employee” under WARN. This approach is consistent with decisions concerning the other federal remedial employment statutes such as the ADA and ERISA.

In summary, in determining whether WARN applies to a particular law firm facing dissolution, merger or sale, the number of secretaries, staff, and associates should first be determined. If this does not reach the threshold number under WARN, then the role of individuals with the title of “partner,” “counsel,” “of counsel,” or “shareholder” in the firm should be evaluated on a case-by-case basis based upon principles of agency law. The less of a role the individual has in the management of the firm and the less that the individual is directly financially tied to the success of the law firm, the greater chance that they are “employees.” If, based on this analysis, it appears that an individual is an “employee” of the law firm, then he or she should be added to the number of secretaries, staff, and associates to determine if there are enough employees and/or employee hours to be covered by WARN.

In addition to its obligations to its clients and creditors, a law firm partnership which is in dissolution, or about to merge or be sold, may have certain statutory obligations to its employees. In recent years there has been litigation surrounding whether the Workers Adjustment and Retraining Notification Act (WARN), 29 U.S.C. '1201 et. seq., is applicable to partnerships, and in particular, law firm partnerships.

It is clear that WARN may be applicable to law firms when they dissolve and even when they are merged into other law firms or are bought or sold. WARN requires employers who are planning a “plant closing” or a “mass layoff” to give affected employees at least 60 days notice of such employment action. 20 C.F.R. '639.2.

A “plant closing” is the permanent or temporary shutdown of a single site of employment if the shutdown results in an employment loss at the single site of employment during any 30-day period for 50 or more employees, excluding any part-time employees. 23 U.S.C. '2101(2). A “mass layoff” is a reduction in force which 1) is a not a plant closing; and 2) results in an employment loss at the single site of employment during any 30-day period for 500 employees or at least 33% of the employees if at least 50 employees are affected. 23 U.S.C. '2101(3). (A 90-day rolling period will be used if, within that 90-day period, employee reductions occurred on more than one occasion and each such reduction affects fewer than the minimum number required to trigger the WARN Act notice requirement.)

Prior to determining whether a particular action by a law firm employer requires WARN notice, it is first necessary to determine whether the employer is covered by WARN. Pursuant to the statute, WARN applies to any employer that has: 1) 100 or more employees, excluding part-time employees or (2) 100 or more employees who in the aggregate work at least four thousand hours per week, not including hours of overtime. 29 U.S.C. '2101.

Thus, if a law firm is large enough and meets these criteria it is covered by WARN. See , Grimmer v. Lord Day & Lord , 937 F. Supp. 255 (S.D.N.Y. 1996). In a case involving a large, dissolving firm, the former employees of the law firm Lord Day & Lord sued the firm claiming that it violated WARN by closing its offices without giving the employees the required sixty days notice. The law firm had given the employees only twenty-nine days notice. The firm argued that it was entitled to give shorter notice under the “faltering company exception” and the “unforeseeable business circumstances exception.” Under each of these exceptions, an employer shall give as much notice as practicable and at the same time give a brief statement of the basis for the reduced notification period. The Lord Day & Lord employees moved for summary judgment to strike these two defenses and the Court granted the motion concluding that the law firm's notice did not satisfy the requirement for a “brief statement of the basis for reducing the notification period.” Id. at 256-57. The case was eventually settled at Mediation after the employees had been certified by the court as a class.

While WARN clearly applies to larger law firms such as Lord Day & Lord, determining whether a law firm has one hundred or more “employees” can be difficult. In most workplaces, determining who is an “employee” is straightforward. However, because law firms vary in corporate structure and style of operations, determining whether certain attorneys in a firm are “employees” is not always easy. While it is clear that secretaries, staff, and associates are employees of the firm, individuals with the titles such as “counsel,” “of counsel,” “partner,” or “shareholder” may be more difficult to classify.

Neither WARN nor its regulations define the term “employee.” The regulations do, however, define the term “affected employees.” “Affected employees” are those employees who are to receive notice under WARN and are defined as employees who may reasonably expect to experience an employment loss as a result of the proposed plant closing or mass layoff. 20 C.F.R. '639.3. Under the definition, affected employees include managerial and supervisory employees, but not “business partners.” Id. By excluding only “business partners” it is apparent that only those who presumably share in the losses and profits of the employer, and are the primary strategic decision-makers, are meant to be beyond the protections of the Act. Nonetheless, the term “business partner” does not necessarily translate easily to titles at law firms. Further, the term “affected employees” concerns who should be given notice and does not refer to the threshold of when the firm has enough “employees” to be covered by WARN. Accordingly, on the face of the statute and its regulations, it is still unclear whether those with the title “counsel,” “of counsel,” “partner,” or “shareholder” should be counted towards the minimum number of employees required to be covered by WARN.

Due to the lack of clarity in the statute, it is necessary to look to court decisions for guidance in this area. “[C]ongressional silence often reflects an expectation that courts will look to the common law to fill gaps in statutory text.” Clackamas Gastroenterology Associates v. Wells , 123 S. Ct. 1673, 1679 (2003) (defining “employee” under the Americans with Disabilities Act (ADA)). Specifically, the courts have “often been asked to construe the meaning of 'employee' where the statute containing the term does not helpfully define it.” Nationwide Mutual Insurance Co. v. Darden , 112 S. Ct. 1344, 1348 (1992) (defining “employee” under the Employee Retirement Income Security Act (ERISA)).

In a published decision regarding the issue, the United States District Court for the Eastern District of Pennsylvania, construed a meaning for the term “employee” under WARN in Corbo v. Tomkins Rubber Company, 2002 WL 1969653, 146 Lab. Cas., 10,0171 (E.D. Pa. Jan. 23, 2002), and was faced with determining whether seven individuals listed on the employer's payroll counted towards WARN's 100-employee threshold. Even though these individuals were on the payroll, two of them were family members who did not actually work for the employer and the other five had already been laid off. Id. Since WARN does not contain a definition of “employee,” in order to make the determination regarding these individuals' status, the District Court promulgated a test for determining who is an “employee” by adapting the test established by the United States Supreme Court in Nationwide Mutual Insurance Co. v. Darden , 112 S. Ct. 1344 (1992). Based on this standard from Darden, an ERISA case, the District Court found that none of the seven individuals at issue was an “employee” under WARN. 2002 WL 1969653 at 4-5.

The standard adopted from Darden was that the test for an individual's status as an “employee” is based on common law principles of agency. In Darden, the Supreme Court established this standard when faced with determining whether the company's insurance agents were independent contractors or “employees” under ERISA. 112 S. Ct. at 1348. While ERISA provided a statutory definition of “employee,” it was circular (“any individual employed by an employer”) and provided little guidance. Id. at 1347. Under the common law standard, according to the Supreme Court, courts should determine whether an individual is an “employee” by examining factors from the common law of agency for identifying master-servant relationships including:

• The hiring party's right to control the manner and means by which the product is accomplished;
• The location of the work;
• The duration of the relationship between the parties;
• Whether the hiring party has the right to assign additional projects to the hired party;
• The extent of the hired party's discretion over when and how long to work;
• The method of payment;
• The hired party's role in hiring and paying assistants;
• The provision of employee benefits; and
• The tax treatment of the hired party.

Id. at 323-324.

In addition, a recent Supreme Court case concerning the ADA may have offered additional guidance toward a standard for determining the status of individuals in law firms with the titles of “counsel,” “of counsel,” “partner,” or “shareholder.” In Clackamas Gastroenterology Associates v. Wells, the Supreme Court was faced with the issue of whether “director-shareholder physicians” of a professional corporation should be counted as “employees” under the ADA. 123 S. Ct. 1673, 1676. Referring to the standard established in Darden, the Supreme Court held that instead of relying on a particular title, the status of the director-shareholder physicians should be decided by evaluating the individual's relationship with the employer with reference to the common law factors identifying the master-servant relationship. Id. at 1681.

Further, since the Court was dealing with shareholder-directors in particular, it stated that while the totality of the circumstances of the relationship should be considered, the following factors are particularly relevant to the inquiry, although no one factor is decisive:

• Whether the organization can hire or fire the individual or set the rules and regulations of the Individual's work;
• Whether and, if so, to what extent the organization supervises the individual's work;
• Whether the individual reports to someone higher in the organization;
• Whether and, if so, to what extent the individual is able to influence the organization;
• Whether the parties intended that the individual be an employee, as expressed in written agreements or contracts; and
• Whether the individual shares in profits, losses, and liabilities of organization.

Id.

Pursuant to this analysis, the Court remanded the case and stated that evidence showing that the director-shareholder physicians controlled the operation of the clinic, shared in the profits, and were personally liable for malpractice claims weighed in favor of them not being classified as “employees.” However, the Court added, other evidence that these physicians receive salaries, must comply with the standards established by the clinic, and report to a personnel manager weigh in favor of them being classified as “employees.”

Since WARN does not provide a definition of “employee,” Congress seemingly expected the courts to use the common law to fill the gaps in the statutory language. Accordingly, it appears that the common law principles of agency that define the master-servant relationship should be used to determine who is an “employee” under WARN. This approach is consistent with decisions concerning the other federal remedial employment statutes such as the ADA and ERISA.

In summary, in determining whether WARN applies to a particular law firm facing dissolution, merger or sale, the number of secretaries, staff, and associates should first be determined. If this does not reach the threshold number under WARN, then the role of individuals with the title of “partner,” “counsel,” “of counsel,” or “shareholder” in the firm should be evaluated on a case-by-case basis based upon principles of agency law. The less of a role the individual has in the management of the firm and the less that the individual is directly financially tied to the success of the law firm, the greater chance that they are “employees.” If, based on this analysis, it appears that an individual is an “employee” of the law firm, then he or she should be added to the number of secretaries, staff, and associates to determine if there are enough employees and/or employee hours to be covered by WARN.