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Eighth Circuit Confirms - No Contracting Out of WARN Act Obligations Where Sale of Business is “Going Concern”

The U.S. Court of Appeals for the Eighth Circuit issued an opinion reminding employers that they cannot contract out of the Worker Adjustment and Retraining Notification Act (WARN) obligations requiring employers to provide 60 days’ written notice to employees of a plant closing or mass layoff. See Day v. Celadon Trucking Services, Inc., Case. No. 15-1711, 827 F.3d 817 (8th Cir. July 5, 2016). In Day, the circuit court held that the purchaser of a business, Celadon Trucking Services Inc. (Celadon), was responsible under the WARN Act for providing notice of a mass layoff to more than 400 employees, even though Celadon never hired or fired those employees, the sales agreement characterized the transaction as a sale of assets, and stated that the seller, Continental Express Inc. (Continental), was solely responsible for providing the WARN notices.

Background Regarding the Day v. Celadon Trucking Services, Inc. Case

The matter arose after the two commercial trucking companies entered into an asset purchase agreement which provided, among other terms, that Celadon desired to “purchase certain assets and assume certain liabilities….” of Continental. Some of the pertinent terms of the agreement are as follows:

Celadon would deliver to Continental a list of Continental employees to whom Celadon intended to offer employment.

Celadon would not offer employment to any employees who were drivers and did not meet Celadon’s standard driver employment requirements.

For a period of 14 days immediately following the closing of the sale, Continental would continue to employ the employees not offered employment by Celadon and who were required for transition activities.

Celadon would not have WARN liability, and Continental would be responsible for sending any required WARN notices.

After the sale, Celadon hired 201 of Continental’s former employees and chose not to hire 457 former Continental employees. Within two weeks after the sale, Continental terminated the employment of the 457 employees Celadon chose not to hire. Continental failed to provide WARN notices to all of the 457 employees who were terminated.

Subsequently, the terminated employees filed a class action lawsuit against Celadon for failure to provide WARN notices. Although Continental initially agreed to pay Celadon’s defense costs, it later said it could not because it did not have the funds. Ultimately, the district court concluded that Celadon was responsible for providing WARN notices and failed to do so.

Celadon’s Appeal of the District Court’s Ruling Finding WARN Liability

On appeal, the circuit court found that the companies’ agreement constituted a sale of Continental's business. Pursuant to WARN, after the date of “the sale of part or all of the employer’s business,” the purchaser is responsible for providing [WARN] notice. Because “sale” of the “business” is not defined in WARN, the court considered whether the sale involved a mere asset purchase or whether the sale involved a sale of the business as a “going concern.” The court found the transaction, rather than an asset sale as stated in the contract, was in fact a purchase of the business as a going concern. In reaching its finding, the court pointed to the following determining factors:

The purchase included “all of the instruments” that were key to the business, such as the company name, customer and subscriber lists, agreements, contracts, commitments, plans, bids, and quotations.

The agreement required Celadon to maintain the viability of the Continental business.

The agreement required Continental’s president and vice president to execute noncompete agreements which stated that Continental intended to merge the operation of its business into Celadon.

The court rejected Celadon’s argument that the purchase of an entity as a going concern requires “hallmarks” of such sales, such as:

The automatic transfer of the seller’s employees to the buyer; and

The purchase of the seller’s accounts receivable.

The court determined that since the purchase of the company was a going concern, Continental’s employees were automatically deemed Celadon’s employees immediately after the effective date of the sale of the business, even though the employees never actually accepted employment or became employees of Celadon after the close of sale. As such, Celadon was responsible for providing WARN notices for any employment terminations occurring after the effective date of the transaction.

WARN Act Damages

Companies with possible WARN Act liability should be conservative when assessing their options and possible risk, because violations can result in hefty damage awards. Employees are entitled to an award of back pay and benefits for each day of violation, in addition to an award of attorneys’ fees. For example, in Day, the district court awarded $2.1 million in statutory damages for the WARN Act violation.

“Companies considering purchasing a business should carefully consider the intent of the proposed transaction when assessing their WARN Act obligations.”

Key Takeaways

Companies considering purchasing a business should carefully consider the intent of the proposed transaction when assessing their WARN Act obligations. Under the holding of Day, an agreement’s characterization of a transaction as a purchase of mere assets may not protect a purchaser from WARN liability. Rather, a court will likely consider whether a sale involves the purchase of a company as a “going concern.” If the court finds a sale a “going concern,” and employee layoffs or plant closings occur after the effective date of the purchase, the purchaser may likely have WARN obligations.

Given this, companies should keep the following in mind when purchasing a business and confer with counsel to assess potential WARN Act liabilities and options:

Many asset deals will likely be considered a purchase of a going concern.

There is potential for the buyer to be responsible for WARN notices to employees who are left behind and not hired by the buyer, even if the sale agreement confers that responsibility to the seller.

WARN Act violations include an award of attorneys’ fees, back pay, and benefits, which can be significant.

If the seller does not have deep pockets, or no longer exists after the sale, any indemnity agreement between the parties may not help the buyer.

Buyers should attempt to be conservative and minimize risk by requiring that all terminations occur prior to the closing date of the sale.

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