Buyer and seller update: legislation creates a new version of the "WARN" act for California employer
NOTE: The following article is from the collection of articles in our Automobile Dealership Buy/Sell Newsletters. The newsletter deals with the complex area of buying and selling automobile dealerships. Some of the material may not be up to date because of changes in the law from the date shown at the end of the article. This article is not to be taken as legal, accounting, tax, or other advice. You should consult your own professionals for such advice and for any updating of the information provided.
In the Fall 1998 edition of Dealer Buy-Sell, we summarized the federal law mandating certain employers to give affected employees a sixty-day notice of a plant closing or mass layoff. This federal act, known as the Federal Worker Adjustment and Retraining Notification Act (“Federal WARN Act”), was of particular importance to buyers and sellers of existing businesses, such as automobile dealerships, with 100 or more employees. While the Federal WARN Act has traditionally affected only a limited number of employers, recently enacted legislation in California (“California WARN Act”) has effectively expanded the reach of the Federal WARN Act to include a broader range of California employers in a wider range of settings. As a result, all buyers and sellers of California automobile dealerships should be made aware of the implications of the California WARN Act, which became effective January 1, 2003.
More Employers Are Affected Under The California WARN Act
Under the California WARN Act, all California businesses that directly or indirectly own and operate facilities that employ, or have employed, 75 or more persons within the 12 months preceding the layoff are subject to the notification requirements. Part-time employees are included in the calculation of the number of persons employed.
By contrast, the Federal WARN Act applies only to employers who employ: (1) 100 or more employees,excludingpart-time employees; OR (2) 100 or more employees who in the aggregate work at least 4,000 hours per week (excluding overtime hours).
California WARN Act Treats Parent Corporations And Their Subsidiaries As One Employer
The Federal WARN Act defines an employer as a “business enterprise”, which includes parent-subsidiary groups or brother-sister corporationsso long asthere is common ownership and management. Therefore, two corporations (each with less than 100 employees but with an aggregate of more than 100 employees) that share common ownership and management will be considered a single employer under the Federal WARN Act.
Unlike the Federal WARN Act, the California WARN Act specifically states that a parent corporation is an “employer” as to any covered establishment directly owned and operated by its corporate subsidiary. As a result, parent-subsidiary groups are treated as a “single-employer” for purposes of determining eligibility under the California WARN Act, regardless of whether or not the entities have common ownership and management. Since the California WARN Act is silent with regard to its treatment of brother-sister corporations, California employers should seek the advice of legal counsel when confronted with the prospect of reducing the workforce of a corporation that has a brother-sister counterpart. We anticipate that the new law’s treatment of brother-sister corporations will be resolved in the coming months and years once regulations have been promulgated and cases have been litigated.
Advance Notice Required In More Circumstances Under The California WARN Act
Under the Federal WARN Act, a notice requirement is triggered when there is either a “plant closing or mass layoff.” A “plant closing” is defined as the permanent or temporary shutdown of a single site of employment, or one or more facilities or operating units within a single site of employment, if the shutdown results in an employment loss of 50 or more employees (excluding any part-time employees) during any 30-day period.
A mass layoff under the Federal WARN Act is defined as a reduction in workforce which is not the result of a plant closing, and results in an employment loss at a single site of employment during any 30-day period for either: (1) at least 33% of the employees and at least 50 employees (excludingpart-time employees); or (2) at least 500 employees, regardless of the percentage of the workforce that is affected.
By contrast, a mass layoff under the California WARN Act is defined much more broadly. Under the California law, a “mass layoff” is a layoff during any 30-day period of 50 or more employees at a single site of employment. Part-time employeesareincluded in the calculation and it does not matter if 50 employees comprise less than 33% of the total employees.
In addition to a mass layoff, a notice is required under the California WARN Act when there is either a “relocation or termination”. (There is no reference to a “plant closing” in the California WARN Act.) A “relocation” is defined as the removal of all or substantially all of the industrial or commercial operations in a covered establishment to a different location 100 miles or more away. A “termination” is the cessation or substantial cessation of industrial or commercial operations at an employment site.
The California WARN Act Has Fewer Exceptions To The Notice Requirement
Fortunately, there are a number of exceptions to the notice requirement under both WARN Acts. First, there is no notice requirement if the plant closing, mass layoff, termination or relocation is the result of a relocation or consolidation of part or all of the employer’s business, and prior to the closing or layoff, the employer offered to transfer an affected employee to a different site of employment within a reasonable commuting distance with no more than a six-month break in employment; or the employer offered to transfer the employee to any other site of employment regardless of distance with no more than a six-month break in employment, and the employee accepts within 30 days of the offer.
Second, advance notice is not required if the plant closing, mass layoff, termination or relocation is due to an earthquake, drought, flood or other natural disaster. In addition, no advance notice is required in situations where an employer is able to establish that as of the time that notice would have been required, the employer was actively seeking capital or business, which, if obtained, would have enabled the employer to avoid or postpone the relocation or termination, and the employer reasonably and in good faith believed that giving the notice would have precluded the employer from obtaining the needed capital or business. Finally, advance notice does not apply to situations involving the closing of temporary facilities or a layoff upon completion of a particular project or undertaking, where it was understood by the employees that the project had a limited life.
The above-referenced exceptions apply under both the Federal and California WARN Acts. An additional exception which is found only in the Federal WARN Act, and therefore not applicable to California employers, is the defense of “unforeseeable business circumstances”. As a result, California businesses which are forced to implement closures, business transfers or reductions in workforce due to unexpected economic developments or major contract cancellations may not utilize the defense of “unforeseeable business circumstances” in actions against them for violating the California WARN Act.
More Entities Must Receive Notice Under The California WARN Act
Under the Federal WARN Act, employers must give notice to the affected employees, the Employment Development Department (“EDD”) and the chief elected officer of the cityorcounty where the action takes place. The California WARN Act requires that employers give notice to more entities than that required under the Federal WARN Act. In addition to providing notice to the affected employees and the EDD, the California law also requires that the local investment board be notified as well as the chief elected officer of the cityandcounty where the action takes place.
Penalties Under Both Acts Are The Same
Buyers and sellers should be aware that there are severe penalties for non-compliance with the Federal and California WARN Acts. An employer who violates either of the WARN Acts will be liable to each affected employee who suffers employment loss for back pay and benefits for each day that the Federal or California WARN Act was violated. “Benefits” include the costs of medical expenses incurred during the employment loss which would have been covered under an employment benefit plan if the employment loss had not occurred. The liability for back pay and benefits is calculated for the period of the violation, up to a maximum of 60 days, but in no event for more than one-half the number of days the employee was employed by the employer. An employer may also be subject to a civil penalty of $500 for each day of the employer’s violation.
Application Of The Federal And California WARN Acts When A Business Is Sold
In the case of a sale of part or all of an employer’s business, the seller is responsible for providing the WARN Act notice for the period prior to the closing of the sale. After the effective date of the sale, the buyer is responsible for providing notice for any plant closing, mass layoff, termination or relocation. It is important to note that a sale that does not result in a plant closing, mass layoff, termination or relocation does not trigger the advance notice requirement. Whether a WARN Act notice will be triggered in the event of a sale of a dealership will depend upon the particular circumstances present and whether the selling dealer meets the requirements of an employer under the Acts whose employees will suffer a “mass layoff”, i.e. an employment loss of at least fifty (50) employees. Because of the differences in who constitutes an “employer” under each Act, circumstances could occur where a notice might not be required under the Federal WARN Act but would be required under the California WARN Act.
This is illustrated by the following examples:
Example No. 1: Seller has two franchises at the same location. Seller has entered into a sale agreement with buyer to sell the assets of both franchises. At the time of signing the buy-sell agreement, seller has 110 full-time employees. At the time of closing the buy-sell transaction, seller terminates its employees and buyer immediately rehires 90% of seller’s employees. There are no notification requirements under either the California or Federal WARN Acts since the “employment loss” experienced by the employees falls below the mass layoff notification requirements of a loss of 50 or more employees.
Example No. 2: Same facts as in Example No. 1, except that at the time of signing the buy-sell agreement, seller has 90 full-time employees and 20 part-time employees who in the aggregate work less than 4,000 hours per week. After the time of closing the buy-sell transaction, seller terminates its employees and buyer immediately rehires 60 of seller’s full-time employees. No notice would be required under the Federal WARN Act since there were not 100 full-time employees at the time of the layoff. Noticewouldbe required under California law however, since at the time of sale, Seller’s employees exceeded 75 and 50 or more employees were terminated, regardless of the fact that 20 of them were part-time employees.
Conclusion
While the California WARN Act tracks the Federal WARN Act in many respects, there are some important differences between the Acts. Specifically, the California law affects more employers and more layoffs than those already covered under the Federal WARN Act. As a result, more California employers will be forced to provide notice more often and to more entities than ever before. For this reason, it is important for both buyers and sellers of large automobile dealerships to address the implications of these Acts early on in the buy-sell process. Avoiding the notification requirements of these Acts can benefit the seller and buyer by preserving both the confidential nature of the sale agreement and employment stability pending the close of the buy-sell transaction. Since most buyers of an automobile dealership intend to rehire a substantial number of the seller’s employees at the time of the sale, the notice requirements can be avoided by mutual agreement between the parties that the buyer will hire a specified number of the seller’s employees at closing. In all events, dealers who meet the definition of employer under the new California law should consult with legal counsel early in the transaction in the event of a sale or transfer of their dealership so as to ensure compliance with the requirements of the WARN Acts at both the state and federal level.
This article was written in 2003.