A recent decision from the Seventh Circuit Court of Appeals serves as an important reminder to companies considering the sale or purchase of an entity that their obligations under the Worker Adjustment and Retraining Notification Act of 1988 ("WARN") may be greater than expected. WARN requires, among other things, that companies with 100 or more workers at any location provide at least 60 days' notice before subjecting 50 or more workers to an "employment loss." The Seventh Circuit's March 15 decision in Phason v. Meridian Rail Corp. underscores that this obligation exists if there will be any break between the employee's termination by the seller and hiring by the buyer.

In Phason, the company reached a "handshake deal" to sell the company and announced to its workforce that the company was being sold. The company then terminated its employees and encouraged them to apply for jobs with the successor corporation. Within eight days, the sale formally closed, and shortly thereafter, all but 40 of the employees were rehired by the new entity. Despite the fact that less than 50 employees were affected by the sale of the company, some former employees sued claiming a violation of the WARN Act. They argued that more than 100 employees suffered an "employment loss" because there was an eight day gap between when the employees were terminated and the formal sale of the company.

The trial court found that there was no WARN violation because the purchaser had hired all but forty of the former company's employees within short order, but the Seventh Circuit disagreed. It held that the WARN Act is triggered when employment is terminated, and here, all of the employees were terminated prior to the closing of the sale of the company. The court found that it did not matter that all but 40 of the employees were eventually hired by the successor corporation — all of the employees suffered an "employment loss" and therefore, the company was liable under WARN for failure to provide the required notices. The court explained that the statute must be applied literally, and that a "handshake deal" to sell a company is not a "done deal," and that many companies who thought they had a "done deal" soon discovered that the deal was not going to be closed. As the court found, saying to an employee: "You're fired, but you have prospects of catching on with someone else real soon now" qualifies as a "termination" under WARN.

This case serves as a reminder that companies should carefully consider the termination of employees in conjunction with a sale of the company, as such action may trigger liability under WARN. Additional obligations may also exist under parallel state laws. Please contact any member of Schiff Hardin's Labor and Employment Group for additional information about this case or for more information regarding potential liability under the WARN Act.

Catherine Hobart Thompson, "Immigration Law for the Construction Industry," Atlanta Electrical Contractors Association, Atlanta, Ga. (May 3, 2007)

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