Q: "What due diligence and considerations should a buyer contemplate surrounding the Workers Adjustment and Retraining Notification (WARN) Act liability in light of the COVID-19 pandemic?"

June 11, 2020

Answered by Laura Friedel and Ashik Shah

The WARN Act is a federal law which requires that the employer notify the workforce and certain officials if there will be a mass layoff or a temporary shutdown or closure of all or a part of a business. In addition, many states (including Illinois) have state "mini-WARN" Acts that set stricter or different standards than the federal law. For ease, we will refer to the federal WARN Act, and state mini-WARN Acts' collectively as WARN here. There are various events under the WARN Act that would trigger notification requirements, and whether and when notice is required is analyzed on a case-by-case determination, all of which LP can help determine and advise on.

In light of the COVID-19 pandemic, numerous businesses have conducted mass layoffs and/or furloughs or have temporarily shut down their facilities, all of which could potentially trigger WARN. A buyer will want to know whether a target company conducted layoffs or furloughs or temporarily shut down. If a target company did so, then the buyer will need to analyze whether WARN was triggered or could be triggered by additional reductions post-closing, and any resulting notice requirements.

This analysis under WARN is critical because the buyer will need to know if the target company was in compliance or, conversely, committed any WARN violations. Under federal law, these violations could result in back pay and pay for benefits for each employee calculated per day the company violated WARN (up to 60 days) and certain monetary penalties.

In addition, the buyer will want to understand whether any post-closing actions they are contemplating (such as a layoff due to redundancies) – when paired with pre-closing reductions – would trigger WARN, so that it can avoid this liability. 

Due to the uncertainties of COVID-19, a buyer will need to make sure it is asking probing due diligence questions surrounding reductions in force and closures to confirm WARN compliance and any necessary modifications to the purchase agreement allocate risk and liability appropriately.

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