The Third Circuit joined five other circuits by holding that an employer’s liability under the federal Worker Adjustment and Retraining Notification Act, or WARN Act, “is triggered when a mass layoff becomes probable – that is, when objective facts reflect that the layoff was more likely than not.”
The Aug. 4 opinion authored by Circuit Judge Cheryl Ann Krause rejected the employees’ argument that liability attaches at a lower threshold when there is a foreseeable possibility of layoffs. The opinion is important because the Third Circuit makes law for Delaware, where many of the country’s largest reorganizations occur and where mass layoffs are more likely than elsewhere.
The WARN Act holds an employer liable for 60 days’ wages if workers are not given advance notice of mass layoffs. The statute contains several exceptions. The case before the Third Circuit revolved around the unforeseeable business circumstances exception, which absolves an employer of liability when the layoffs were “caused by business circumstances that were not reasonably foreseeable at the time that notice would have been required.” 29 U.S.C. § 2102(b)(2)(A).
Judge Krause said that the “probability test will always be an objective one. Even the most well-intentioned subjective beliefs will not excuse failure to comply . . . if they are not ‘commercially reasonable.’”
The probability standard was first enunciated by the Fifth Circuit in 1998 and since then has been adopted by the Sixth, Seventh, Eighth and Tenth Circuits, and now by the Third.
Judge Krause’s opinion included an exhaustive factual analysis that must be analyzed for comparative purposes in later cases. The case involved an aircraft manufacturer that had filed a chapter 11 petition alongside an asset purchase agreement, later approved by the bankruptcy court, where a long-time European customer and investor would buy the assets, financed by a Russian bank.
As it turned out, the Russian bank became insolvent. Funding the loan ultimately depended on the Russian government’s decision to recapitalize the bank, a decision that evidently rested in the hands of President Vladimir Putin.
Applying the law to the facts, Judge Krause said that the debtor had “received constant reassurances . . . that funding was forthcoming,” even from representatives of the Russian government. She said that the longstanding relationship between the debtor and the buyer bore “heavily” because they were “not grandiose promises from a stranger, but assurances from a credible business partner with demonstrated commitment to [the debtor’s] survival.”
Judge Krause upheld the bankruptcy court’s grant of summary judgment in favor of the debtor. The district court had upheld the bankruptcy court, with both courts employing the Fifth Circuit’s test.
Judge Krause offered a practical explanation for adopting the Fifth Circuit’s higher standard for liability. If the test were “something less than a probability, nearly every company in bankruptcy, or even considering bankruptcy, would be well advised to send a WARN notice.” Sending premature notice, she said, “has the potential to accelerate a company’s demise and necessitate layoffs that otherwise would have been avoided.”