What to Tell Employees as Sequestration Looms

Some view the fast approaching sequestration deadline — imposed by the 2011 budget deal cut between the Obama administration and Congress — to be on a collision course with the Worker Adjustment Retraining and Notification (WARN) Act requirement that employers give employees 60 days notice of impending layoffs.

Recently published guidance from the Department of Labor states that the WARN Act does not apply to hypothetical sequestration-related layoffs by government contractors. In light of political charges that this guidance is wrong legally — and perhaps even politically motivated — a look at applicable law should help in determining legal and ethical obligations employers owe under this law to their employees.

In August 2011, as a trade-off for an increase in the debt ceiling to avert a default on the government’s sovereign debt, the Budget Control Act of 2011 imposed automatic, across-the-board spending cuts, at a uniform percentage, to all non-exempt government accounts to take effect Jan. 2, 2013, unless an agreement on a deficit-reducing spending bill can be reached before then.

Sequestration obviously will force termination of unfunded government contracts, which in turn may force affected federal contractors to layoff a large number of workers. The exact consequences of sequestration are difficult to predict but the Defense Department could see its budget shrink by $500 billion over the next 10 years, and some experts estimate that the economy could shed as many as 1.5 million jobs. Needless to say, the bulk of these jobs will be federal civilian employees and employees of federal government contractors.

Enter the WARN Act, the core provision of which, with three exceptions, requires employers with at least 100 employees to provide written notice at least 60 days before ordering a plant closing or mass layoffs. The three exceptions are: faltering companies seeking capital to stay afloat; the occurrence of a natural disaster; and, as is most relevant here, “business circumstances that were not reasonably foreseeable as of the time that the notice would have been required.”  WARN Act implementing regulations put a finer point on the “unforeseeable” exception: companies are relieved of the notice requirement when the layoffs are “caused by some sudden, dramatic and unexpected action or condition outside the employer’s control.”

Labor Department guidance issued on July 30 announced, due to “lack of certainty” that hypothetical contractor layoffs stemming from a hypothetical sequestration are not “reasonably foreseeable,” and hence not subject to the WARN Act. One could argue that this guideline is wrong because the sequestration deadline has been known for more than a year and there is nothing sudden or dramatic about it. However, as the department explained, there is no guarantee that sequestration will ever occur, and its effects as to any given contract or contractor are totally unknown.

The speculative nature of a possible sequestration was recently highlighted in the Sequestration Transparency Act of 2012, enacted on Aug. 7. The act requires the president to provide Congress with a report detailing budget lines he intends to cut as required by sequestration. This new law implicitly confirms that no one, Congress included, knows where the cuts will occur, nor, obviously, which government contractors may be forced to lay off workers.

Nonetheless, Congressional Republicans argue that the memorandum is an obvious attempt to discourage companies from announcing layoffs in the midst of election season. Some defense contractors are rejecting the guidance, and saying they will issue WARN Act notices to tens of thousands of their employees, with no intent to actually lay them off, in an effort simply to draw attention to the repercussions to government contractors posed by sequestration.

Derivative political benefits notwithstanding, Labor’s definition of “foreseeable” is hardly far-fetched, given court cases interpreting the WARN Act. One federal court of appeals case held that layoffs were not foreseeable to a large accounting company that knew it was under federal investigation and knew that an indictment of the firm was possible, but continued to negotiate with government investigators. The company only turned to layoffs once the investigation suddenly became public and the company suffered massive losses.

In another federal court of appeals case, even though the board of a Navy contractor knew that contract cancellation was possible due to months of cost overruns, layoffs were not “foreseeable” until the Navy issued an order to show cause why the contract should not be cancelled. These two cases entailed specific, isolated companies that had become targets of focused agency attention, yet neither appellate court found that the company-specific focus rose to a level of foreseeability that would trigger the WARN Act 60-day notice requirement.

The Office of Management and Budget has yet to speak on this, and presumably will, but these two decisions make it clear, for now at least, that consistent with Labor’s interpretation, the generalized threat that possible sequestration poses for all federal contractors, en masse, is not enough to trigger the WARN Act 60-day notice requirement for any one contractor.

That said, nothing precludes a company from voluntarily notifying its employees of the possible layoff consequence of sequestration. Any suggestion, however, that such notice is legally required, or even related to applicable law, legally crosses the line.

Clear here is that advising employees of the general implications if sequestration takes place, and taking full responsibility for such guidance, without suggesting that the law requires such notice, is fair game.

Jacob B. Pankowski (pankowskij@gtlaw.com) is chair of Greenberg Traurig LLP’s government contracts practice group and Ryan C. Bradel (bradelr@gtlaw.com) is an associate in Greenberg Traurig LLP’s government contracts practice group. The views expressed are solely those of the authors.

Photo Credit: iStockphoto

Topics: Defense Contracting, Defense Contracting, Defense Department, DOD Policy