WARN Act considerations in dealership buy/sells

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Dealership asset sales commonly involve the termination by the seller of its employees at closing and the rehiring of the employees by the buyer. Depending on the number of affected employees, both federal and California law may impose prior notification requirements on the seller, failing which the seller could be hit with substantial financial damages and penalties.

The Federal WARN Act (29 USC § 2101 et seq.) prohibits a “mass layoff” of 50 or more employees at a single business location, unless the employer gives the employees 60-day notice of the layoff or unless certain detailed exceptions apply. California’s “Mini-WARN” Act (Labor Code § 1400 et seq.) includes the same 60-day notification requirement. The main difference between the statutes is that the Federal WARN act applies to employers with at least 100 full time employees, whereas California’s law applies to employers with at least 75 full time employees. Both laws include detailed rules on the content of the statutory notice to employees if a mass layoff occurs at closing.

Dealership buy-sell agreements often provide that the seller will terminate all of its employees at the closing and the buyer will have the option to rehire whichever employees the buyer chooses (or none at all, in the buyer’s sole discretion). Although the buyer needs latitude in choosing which employees to retain, a qualified seller’s planned act of terminating 50 or more employees at closing will trigger the 60-day notification requirement (i.e., the statutory 60-day notice must be given to such employees at least 60 days before closing). Failure to give this notice can result in the seller being liable for up to 60 days’ worth of back pay and lost benefits to affected employees, as well as a $500 per day civil penalty, and attorney’s fees to any employee who is successful in a resulting civil action. Accordingly, during the buy-sell negotiation and document-drafting phase, and certainly well before the closing, parties to a buy-sell should take stock of how many people are currently employed by the seller and how many will be terminated at closing to determine whether the statutory 60-day notice is required. Each party may want to shift the contractual responsibility to the other party of providing a compliant notice to affected employees, but practically speaking, it is the seller who is responsible in the first instance for giving the required notice.

California case law provides guidance for buyers and sellers. In MacIsaac v. Waste Management Collection & Recycling, Inc.,[1] the California Court of Appeals reviewed whether or not a “layoff” occurs when employees stop being employed by an entity that sold its business and are hired immediately afterwards by a new entity that purchased the business. The plaintiff argued that since employees were “separated from their positions” with the selling entity, they were subject to a “layoff” and entitled to statutory notice. The appellate court rejected this very technical reading of the California “Mini-WARN” Act. Since the transferred employees were retained by the purchasing entity and continued to earn the same compensation, with the same benefits and seniority, in virtually identical job positions (at a plant across the street from their original employer), the court reasoned that no “layoff” of the transferred employees occurred, and thus no 60-day notification was required.

If the buyer and seller agree that a statutory 60-day notice is required, they should work with legal counsel in ensuring that the notice is legally compliant and timely sent. That said, the seller should consider taking advantage of the MacIsaac holding and include language in the buy-sell agreement that the buyer agrees (i) to offer employment to the seller’s employees for substantially the same pay, benefits and position, and (ii) not to terminate 50 or more employees or change their compensation, benefits (retirement plans, health insurance, vacation and sick days etc.), level of seniority, working conditions or job responsibilities, within the first 30 days after closing. Provided the buyer abides by these anti-termination provisions, the seller’s termination of the employees at closing should not be deemed a “mass layoff” under the MacIsaac holding and the 60-day notice would therefore not be required. In such a scenario, the seller should also try to bargain for indemnity from the buyer if the buyer violates these anti-termination provisions.

Although this article addresses WARN Act liability, we note briefly that buyers in an asset sale can face successor liability for a seller’s violation of labor and employment laws before the asset transfer. Courts have often looked to factors such as the buyer retaining a similar workforce, in similar jobs and working conditions, at the same workplace, in determining that employees harmed by the seller can recover from the “successor” asset buyer. The topic of potential successor liability is beyond the scope of this article but we note that when a buyer agrees to retain most of the seller’s workforce, it is especially important for the buyer to ensure that the asset purchase agreement includes clear seller indemnification for all employee liability arising out of acts and omissions that occurred before the closing. With that additional detail in mind, the federal and California WARN Acts should not be forgotten and should always be taken into account in any dealership asset sale. Dealers – whether buyers or sellers – should always consult with experienced legal counsel on the application of these laws in any buy-sell transaction.

[1] MacIsaac v. Waste Management Collection & Recycling, Inc., (2005) 134 Cal. App. 4th 1076, 1080