The federal Worker Adjustment and Retraining Notification Act (“WARN Act”) was enacted in 1988 to help protect employees, their families, and communities from the sudden, and potentially severe, impact of large-scale company closures and layoffs.
The primary mechanism for such employee protections under the WARN Act is the requirement that employers provide prior notice of plant closures or mass layoffs to give employees an opportunity to make other arrangements for gainful employment.
By way of further detail, the WARN Act generally requires employers with 100 or more employees to provide employees with 60 days’ advance notice of a plant closing or mass layoff. A “plant closing” is generally deemed to occur when, within a 30-day period, the employment of 50 or more employees is terminated. A “mass layoff” is the termination of at least 500 employees, or 50-499 employees if they make up at least 33% of the active workforce – again, within this 30-day window. Employers must provide 60-day notice to each affected employee or their representative (e.g., a union representative, if any), as well as to certain state and local authorities.
Failure to provide the required advance notice can result in steep employer penalties, including back pay, the cost of benefits for each day the employer failed to provide the required notice, and attorneys’ fees incurred by employees in pursuing WARN Act violations. Alleged violations are pursued through private civil lawsuits in federal court, often on a class basis, and can be costly to employers.
Pay in Lieu of Notice
Because back pay and benefits penalties are limited to the 60-day notice period, some employers choose to pay affected employees wages and benefits equal to 60 days’ pay in lieu of providing 60 days’ notice. Other employers opt to provide less than 60 days’ notice, and to pay employees for the remainder of the 60-day period.
Such approaches, while not specifically contemplated under the WARN Act, effectively zero out any damages an employee might claim for not receiving the required notice, and help to avoid costly, time-consuming lawsuits and attorneys’ fees.
Failure to Provide Notice or Pay in Lieu of Notice – Exceptions to the Rule
However, the WARN Act also recognizes some circumstances under which the failure to provide advance notice—or pay in lieu of notice—is excusable. Affirmative defenses to the notice requirements exist when:
- the plant closing or mass layoff is caused by an “unforeseeable business circumstance”;
- the plant closing or mass layoff is caused by a “natural disaster”; or
- the business is a “faltering company.”
What constitutes an “unforeseeable business circumstance” is fairly self-explanatory. A common example is when there is a strike at a major supplier’s business that abruptly halts operations and results in a loss of employment as that term is defined under the WARN Act.
What satisfies the “natural disaster” exception is likewise easy to understand. For example, closing a plant because it is suddenly, and unpredictably, destroyed by a tornado is a closure caused by a natural disaster, excusing an employer from providing WARN Act notice in advance.
However, understanding what satisfies the “faltering company” exception to the WARN Act’s notice requirement is less obvious.
Faltering Company Exception
The faltering company exception to the WARN Act’s notice requirement applies when:
- at the time the WARN Act notice would have been required, the company actively sought financing or other opportunities that could have saved the business or postponed closure;
- the company could have realistically obtained that financing; and
- the company reasonably believes that giving advance notice to employees and the community at large would hamper efforts to obtain financing.
In other words, if a company legitimately attempts to save its business by securing financing, it should not be required to disclose that it may have to shut the business down if it does not retain financial backing, which would jeopardize its ability to secure such financing.
Faltering Company Exception Recently Tested in Federal Court
The faltering company exception was recently tested, and the employer succeeded with respect to that exception, giving further clarity to employers considering whether WARN Act notice is required or excused when undergoing mass layoffs or plant closures.
In 2023, trucking company Yellow Corp. laid off 25,500 employees—approximately 3,500 non-unionized employees and 22,000 unionized employees—with only one week’s notice, and then filed for chapter 11 bankruptcy. The number of employees affected by the layoff well exceeded the WARN Act’s employee threshold for a mass layoff requiring notice, and the employees complained to the bankruptcy court that the notices Yellow Corp. sent to its employees did not satisfy the WARN Act’s notice requirements. The bankruptcy court agreed because the notice was less than 60 days.
However, after a 2025 trial on the merits, the bankruptcy court excused Yellow Corp. from satisfying the 60-day notice requirement as a “faltering company.” The bankruptcy court found that Yellow Corp. qualified for the WARN Act’s “faltering company” exception because, leading up to the layoffs, it was $1.5 billion in debt and attempting to raise new capital and refinance its debt, which may have helped it avoid a shutdown and mass layoffs.
Union representatives appealed that decision, and this June a Delaware federal court upheld the bankruptcy court’s decision, finding that “Yellow was a faltering company at the time notice was required,” and that “Yellow was actively seeking capital at the required time, thereby qualifying for the exception, even if those efforts ‘were ultimately unsuccessful.’” The court agreed that Yellow Corp. “reasonably and in good faith” believed that providing 60 days’ notice would have prevented Yellow Corp. from obtaining the capital it sought to continue operations.
Although Yellow Corp. avoided WARN Act liability related to its 2023 layoffs, the U.S. Supreme Court declined to change the trial court’s ruling that Yellow Corp. owes billions of dollars to union employees’ retirement funds. Regardless of Yellow Corp.’s retirement fund liability, its WARN Act victory further confirms and clarifies that companies may have protection under the faltering company exception to the WARN Act when certain requirements are met.
Employer Takeaways
As the Yellow Corp. case illustrates, the WARN Act is frequently implicated and litigated, and clients require guidance to ensure WARN Act compliance. In the event of a contemplated mass layoff or plant closing, employers should consult with legal counsel regarding:
- whether the layoff or plant closing triggers WARN Act notice obligations;
- whether any exceptions to the notice obligations exist; and
- if no exception exists, whether pay in lieu of 60-days’ notice, or a combination of some notice and pay in lieu of notice, may be the best approach under the circumstances.
Employers should also consult with counsel to ensure that any notice complies with the WARN Act’s technical requirements, and that any required state or local authorities receive proper and timely notice of any plant closing or mass layoff.
J. Marshall Horton is a senior attorney with Hunton Andrews Kurth LLP in Houston. He can be reached at marshallhorton@hunton.com.
Holly Williamson is a partner with the firm in Houston. She can reached at hwilliamson@hunton.com.