Single-Employer Test Emphasizes De Facto Control Factor

The Worker Adjustment and Retraining Notification Act (WARN Act) provides that an employer may not order a plant closing or mass layoff until the end of a 60-day period after the employer serves written notice of such an order to each affected employee. The purpose of the act is to protect workers and their families by providing them with advance notice of a layoff. Because employee layoffs are a necessary condition to WARN Act liability, and layoffs frequently presage a corporation’s demise, plaintiffs frequently attempt to recover from affiliates like a parent company or lender. Two recent decisions from the Delaware bankruptcy and district courts illustrate how the courts deal with such suits. In one, the bankruptcy court granted summary judgment in favor of the parent entity and denied liability; in the other, the district court held that the plaintiffs’ complaint stated a claim upon which relief could be granted and survived the parent’s motion to dismiss.

In order to recover against an affiliate under the WARN Act, the former employees must show that the affiliate acted with the employer entity as a “single employer” in making the wrongful termination decision. The U.S. Court of Appeals for the Third Circuit has adopted a five-factor balancing test based on Department of Labor regulations to determine whether subsidiary and parent entities should be treated as a single employer. These factors are: (1) whether the companies share common ownership; (2) whether the companies share common directors or officers; (3) the existence of de facto exercise of control by the parent over the subsidiary; (4) the existence of a unity of personnel policies emanating from a common source; and (5) the dependency of operations. These factors are not rigidly applied and are not exhaustive. The Third Circuit emphasizes a “functional approach” that takes into consideration the nature and degree of control possessed by one company over another. Moreover, common ownership and common directors or officers alone are not sufficient to establish that two entities constitute a single employer, and the dependency of operations between two entities cannot be established simply from the parent’s exercise of ordinary powers of ownership over the subsidiary.