Under the federal Worker Adjustment and Retraining Notification Act (WARN), employers with 100 or more employees are required to provide workers with 60 calendar days' notice in advance of a plant closing or mass layoff. Employers who fail to provide such notice are liable to each affected employee for back pay and benefits for the period of violation, and may also be subject to civil penalties and attorneys' fees.

This directive is relatively straightforward when only one entity falls within the definition of an “employer” under the statute. However, a much thornier issue presents itself when two or more entities may be considered the “employer” of the affected employees for purposes of WARN. Under the “single employer” theory of liability, employees who do not receive proper WARN notice may seek recovery from affiliated or parent entities if they can demonstrate that the affiliate or parent entity acted in concert with the subsidiary as a “single employer” in failing to heed WARN's mandates. If the employees can make such a showing, the affiliated entity may be on the hook for substantial back pay damages, attorneys' fees and penalties, despite never having directly employed the employees in question.

Private equity firms, in particular, often find themselves in this exact predicament when one of the companies in their investment portfolio begins to falter and pressure mounts to increase involvement in the struggling company's day-to-day operations to help turn the tide back towards profitability. The situation is further complicated by the inherent conflict between WARN's early notice mandate and the practical need to forestall as long as possible any action that may call into question the portfolio company's stability and financial viability. How does a private equity firm safely navigate the water between the need to protect its investment and the need to avoid WARN liability?

Two recent Delaware cases have shed some light on the matter, albeit with drastically different outcomes for the entities involved. In Woolery v. MatlinPatterson Global Advisors, LLC, a Delaware district court allowed a class-action WARN lawsuit to proceed against defendant private equity firm MatlinPatterson Global Advisers. The named plaintiffs in the lawsuit alleged that approximately 400 employees of Premium Protein Products, LLC, a Nebraska-based meat processing company and one of MatlinPatterson's portfolio businesses, had not received the required 60 days advance notice of layoffs under WARN.

According to the complaint, MatlinPatterson became increasingly involved with Premium's day-to-day operations when Premium's performance began to deteriorate in 2008. For example, MatlinPatterson made strategic operating decisions (such as the decision to enter a new product line), demoted Premium's existing president to secretary, and installed a new president of MatlinPatterson's choosing. When it became obvious in June of 2009 that Premium was not going to make it, MatlinPatterson directed Premium's managers to shut down its facilities in three days' time. The plants were closed, and the employees, although initially told that the closures were merely temporary, were permanently laid off without the requisite 60 days' notice. Premium's employees brought suit against both Premium and MatlinPatterson, alleging that the two entities were a “single employer” for purposes of WARN. The court applied the Department of Labor's (DOL) five-factor balancing test, which looks at:

1. Whether the companies share common ownership
2. Whether the companies share common directors and/or officers
3. The existence of de facto exercise of control of the parent over the subsidiary
4. The existence of a unity of personnel policies emanating from a common source
5. The dependency of operations between the companies, in order to determine whether MatlinPatterson and Premium should be treated as a single employer.

The Woolery court found that the plaintiffs had made a “strong showing” as to the third factor—the existence of de facto exercise of control—and effectively gave this factor dispositive weight in allowing the case to proceed against MatlinPatterson. The court explained that “a particularly striking showing of de facto control” may warrant liability even in the absence of other factors. The court went on to state that “de facto control” exists when the parent entity acts as “the decision-maker responsible for the employment practice giving rise to the litigation” and found that in deciding to close Premium's facilities, lay off employees without the statutorily-mandated 60 days' notice and declare bankruptcy, MatlinPatterson was responsible for the very business decisions governed by the WARN Act. Accordingly, the court found that MatlinPatterson had exceeded the degree of control normally exercised over a subsidiary under a stock ownership arrangement.

Conversely, in Czyzewski v. Jevic Transportation, Inc., the Delaware Bankruptcy Court held that Sun Capital Partners, Inc., a private equity firm, was not liable for the alleged WARN Act violations of its portfolio company Jevic Transportation, Inc.. Although Jevic was a wholly-owned subsidiary of Sun Capital and its affiliate companies, and the two entities shared common directors and/or officers, the court found that the level of oversight Sun Capital maintained over Jevic did not amount to a “de facto exercise of control” under the DOL's “single employer” test because Sun Capital had little to no involvement in Jevic's day-to-day operations and had not “specifically directed the allegedly illegal employment practice that forms the basis for the litigation” —namely, the decision to terminate Jevic's employees without issuing the proper WARN notices. The court also noted that Sun Capital's refusal to continue investing in Jevic was not actionable under WARN, as Jevic was ultimately responsible for keeping the company afloat; indeed, Jevic's senior management made the final decision to shut down the company and sign off on the defective WARN notices, without any input from Sun Capital personnel.

In the wake of these two decisions, it is clear that private equity firms must strike the right balance between managing and protecting their investments, and allowing portfolio businesses to maintain an appropriate degree of autonomy in order to minimize the exposure to WARN liability. The more difficult question for investors is how to toe that line. While private equity firms can, and are often expected to, offer advice and provide oversight as to the strategic direction of the portfolio company, direct involvement in the operational and tactical activities of the portfolio company can and often will result in a finding that two entities are a single-employer under WARN. To avoid this result, when financial performance of a portfolio company begins to falter, private equity firms must resist the temptation to usurp the decision-making authority of the subsidiary's management team. The private equity firm should maintain normal board oversight and leave critical decisions, particularly with respect to plant closings and employee layoffs, to the management personnel of the portfolio business. Furthermore, any contractual obligations pertaining to employment should bind only the subsidiary, not the private equity fund, and the subsidiary should independently develop and maintain its own employment policies and human resources functions.

Although the “single employer” analysis under WARN is admittedly fact-intensive, and can vary widely from case to case, acting in accordance with these principles can help private equity firms ensure that liability for WARN Act violations is contained to the entity that actually employs WARN-affected employees without sacrificing the oversight needed to effectively manage investments.

Under the federal Worker Adjustment and Retraining Notification Act (WARN), employers with 100 or more employees are required to provide workers with 60 calendar days' notice in advance of a plant closing or mass layoff. Employers who fail to provide such notice are liable to each affected employee for back pay and benefits for the period of violation, and may also be subject to civil penalties and attorneys' fees.

This directive is relatively straightforward when only one entity falls within the definition of an “employer” under the statute. However, a much thornier issue presents itself when two or more entities may be considered the “employer” of the affected employees for purposes of WARN. Under the “single employer” theory of liability, employees who do not receive proper WARN notice may seek recovery from affiliated or parent entities if they can demonstrate that the affiliate or parent entity acted in concert with the subsidiary as a “single employer” in failing to heed WARN's mandates. If the employees can make such a showing, the affiliated entity may be on the hook for substantial back pay damages, attorneys' fees and penalties, despite never having directly employed the employees in question.

Private equity firms, in particular, often find themselves in this exact predicament when one of the companies in their investment portfolio begins to falter and pressure mounts to increase involvement in the struggling company's day-to-day operations to help turn the tide back towards profitability. The situation is further complicated by the inherent conflict between WARN's early notice mandate and the practical need to forestall as long as possible any action that may call into question the portfolio company's stability and financial viability. How does a private equity firm safely navigate the water between the need to protect its investment and the need to avoid WARN liability?

Two recent Delaware cases have shed some light on the matter, albeit with drastically different outcomes for the entities involved. In Woolery v. MatlinPatterson Global Advisors, LLC, a Delaware district court allowed a class-action WARN lawsuit to proceed against defendant private equity firm MatlinPatterson Global Advisers. The named plaintiffs in the lawsuit alleged that approximately 400 employees of Premium Protein Products, LLC, a Nebraska-based meat processing company and one of MatlinPatterson's portfolio businesses, had not received the required 60 days advance notice of layoffs under WARN.

According to the complaint, MatlinPatterson became increasingly involved with Premium's day-to-day operations when Premium's performance began to deteriorate in 2008. For example, MatlinPatterson made strategic operating decisions (such as the decision to enter a new product line), demoted Premium's existing president to secretary, and installed a new president of MatlinPatterson's choosing. When it became obvious in June of 2009 that Premium was not going to make it, MatlinPatterson directed Premium's managers to shut down its facilities in three days' time. The plants were closed, and the employees, although initially told that the closures were merely temporary, were permanently laid off without the requisite 60 days' notice. Premium's employees brought suit against both Premium and MatlinPatterson, alleging that the two entities were a “single employer” for purposes of WARN. The court applied the Department of Labor's (DOL) five-factor balancing test, which looks at:

1. Whether the companies share common ownership
2. Whether the companies share common directors and/or officers
3. The existence of de facto exercise of control of the parent over the subsidiary
4. The existence of a unity of personnel policies emanating from a common source
5. The dependency of operations between the companies, in order to determine whether MatlinPatterson and Premium should be treated as a single employer.

The Woolery court found that the plaintiffs had made a “strong showing” as to the third factor—the existence of de facto exercise of control—and effectively gave this factor dispositive weight in allowing the case to proceed against MatlinPatterson. The court explained that “a particularly striking showing of de facto control” may warrant liability even in the absence of other factors. The court went on to state that “de facto control” exists when the parent entity acts as “the decision-maker responsible for the employment practice giving rise to the litigation” and found that in deciding to close Premium's facilities, lay off employees without the statutorily-mandated 60 days' notice and declare bankruptcy, MatlinPatterson was responsible for the very business decisions governed by the WARN Act. Accordingly, the court found that MatlinPatterson had exceeded the degree of control normally exercised over a subsidiary under a stock ownership arrangement.

Conversely, in Czyzewski v. Jevic Transportation, Inc., the Delaware Bankruptcy Court held that Sun Capital Partners, Inc., a private equity firm, was not liable for the alleged WARN Act violations of its portfolio company Jevic Transportation, Inc.. Although Jevic was a wholly-owned subsidiary of Sun Capital and its affiliate companies, and the two entities shared common directors and/or officers, the court found that the level of oversight Sun Capital maintained over Jevic did not amount to a “de facto exercise of control” under the DOL's “single employer” test because Sun Capital had little to no involvement in Jevic's day-to-day operations and had not “specifically directed the allegedly illegal employment practice that forms the basis for the litigation” —namely, the decision to terminate Jevic's employees without issuing the proper WARN notices. The court also noted that Sun Capital's refusal to continue investing in Jevic was not actionable under WARN, as Jevic was ultimately responsible for keeping the company afloat; indeed, Jevic's senior management made the final decision to shut down the company and sign off on the defective WARN notices, without any input from Sun Capital personnel.

In the wake of these two decisions, it is clear that private equity firms must strike the right balance between managing and protecting their investments, and allowing portfolio businesses to maintain an appropriate degree of autonomy in order to minimize the exposure to WARN liability. The more difficult question for investors is how to toe that line. While private equity firms can, and are often expected to, offer advice and provide oversight as to the strategic direction of the portfolio company, direct involvement in the operational and tactical activities of the portfolio company can and often will result in a finding that two entities are a single-employer under WARN. To avoid this result, when financial performance of a portfolio company begins to falter, private equity firms must resist the temptation to usurp the decision-making authority of the subsidiary's management team. The private equity firm should maintain normal board oversight and leave critical decisions, particularly with respect to plant closings and employee layoffs, to the management personnel of the portfolio business. Furthermore, any contractual obligations pertaining to employment should bind only the subsidiary, not the private equity fund, and the subsidiary should independently develop and maintain its own employment policies and human resources functions.

Although the “single employer” analysis under WARN is admittedly fact-intensive, and can vary widely from case to case, acting in accordance with these principles can help private equity firms ensure that liability for WARN Act violations is contained to the entity that actually employs WARN-affected employees without sacrificing the oversight needed to effectively manage investments.