Guest Author: Sajeev Malaveetil, Berkeley Research Group, writes: 

The 1988 Worker Adjustment and Retraining Notification (WARN) Act requires employers with at least 100 employees to provide written notice to “affected employees” at least 60 days before ordering a plant closing or mass layoff.[1] Pursuant to the act, failure to provide such notice can result in liabilities equal to back pay and benefits for the period of the violation, up to 60 days.[2] As the threat of a January 2, 2013, sequestration inches closer, the government contracting community is preparing for the possibility of contract terminations and deductive changes. A handful of contractors have already provided WARN Act notices to their employees. The larger contracting community has wondered whether notices under the WARN Act are required in preparation for sequestration. We wanted to alert you to the Office of Management and Budget (OMB) memo on this issue, which appears to answer “No” to this question.

On September 28, 2012, the OMB issued a memo to the chief financial officers and senior procurement executives of all executive agencies and departments providing guidance on allowable contracting costs associated with the WARN Act. The OMB memo references a July 30, 2012, Department of Labor (DOL) guidance memo, which concluded that federal contractors do not need to provide WARN Act notice to employees 60 days in advance of the potential sequestration because of uncertainty about whether sequestration will occur and uncertainty on the actual effect of a sequestration on particular contracts.

Citing an exception within the WARN Act for “unforeseeable business circumstances,” the DOL memo stated that WARN Act notices are “not required 60 days in advance of January 2, 2013, and such notice would be inappropriate, given the lack of certainty about how the budget cuts will be implemented and the possibility that the sequester will be avoided before January.” The DOL memo referenced historical case law that would indicate that contractors are not obligated to provide WARN Act notifications 60 days before the date the sequestration is to take effect.

In its memo, the OMB establishes criteria for when WARN Act costs would be allowable. Specifically, the OMB states that (1) if sequestration occurs, (2) an agency terminates or modifies a contract that necessitates that the contractor order a plant closing or mass layoff of a type subject to WARN Act requirements, and (3) the contractor has followed a course of action consistent with DOL guidance; then any resulting employee compensation costs for WARN Act liability as determined by a court, as well as attorneys’ fees and other litigation costs, would be allowable costs and should be covered by the contracting agency, if otherwise reasonable and allocable. The OMB guidance indicates this would be the case irrespective of the outcome of litigation.

In establishing its criteria for allowability, the OMB does not appear to distinguish between the prospective costs of compliance with the WARN Act and the retrospective liability costs of the noncompliance with the act. However, the memo does characterize what it refers to as “unwarranted layoff notices” as a potential for waste and disruption.

Contractors should take note of both the OMB and DOL guidance memos regarding the WARN Act, both as it relates to providing notifications associated with sequestration and the allowability of costs associated with the Act.

[1] 29 U.S.C., § 2010-2109
[2] 29 U.S.C., § 2014(a)