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Layoffs? Downsizing? Time to Evaluate WARN ACT Notices and Other Requirements and to Protect Your Company's Trade Secrets

Rosanna Sattler, Laura Otenti March 5, 2009

If economic pressure is forcing you to reduce your work force, you need to identify and comply with federal and state notice obligations and ensure protection of your trade secrets.  Employers contemplating closing or downsizing, even as the result of a sale or merger, will need to comply with federal law and the laws of each state of operation.  Recent compliance failures have resulted in lawsuits.  Furthermore, it is a good idea to review existing trade secret protections, such as signed covenants not to compete, solicit other employees, or disclose proprietary information.  In the absence of such agreements, it may be beneficial to compensate key employees who will be laid off in exchange for their signing such documents upon their exit from the company.

WARN Act

The federal Worker Adjustment and Retraining Notification Act (“WARN Act”) requires employers with more than 100 employees to notify employees and government officials 60 days prior to closing a plant or conducting a mass layoff.  The notice requirement is triggered when a facility closing or mass layoff results in an employment loss for 50 or more employees during a 30-day period.  Certain exceptions may excuse an employer’s obligation to comply with the WARN Act.  For example the notice requirement is not triggered if the employer offers to transfer the employees to a new location.

In the context of a business sale, the WARN Act requires that the seller provide notice of any covered plant closing or mass layoff, which occurs up to and including the date of the sale.  The buyer is responsible for providing notice of any covered plant closing or mass layoff that occurs after the date of the sale.  However, no notice is required if the sale does not result in a covered plant closing or mass layoff.  Employees of the seller (other than those who have worked less than 6 months in the last 12 months or employees who work an average of less than 20 hours per week) on the date of the sale become, for WARN Act purposes, employees of the buyer immediately following the sale. 

Many states also have their own version of the WARN Act.  The regulations of the Massachusetts Department of Employment and Training (now the Division of Unemployment Assistance) provide that “every employing unit having knowledge of an anticipated mass separation of its employees shall give notice thereof to the public employment office nearest to the place wherein is located the particular establishment, 48 hours prior to the effective date of such separation.”  This notice requirement applies only to businesses that had 50 or more employees during any month in the six months prior to the closing or partial closing.  Such notification to the Commonwealth must be made to Edward Malmborg, Director of the Division of Unemployment Assistance, 19 Staniford Street, 3rd Floor, Boston, 02114.

Companies that anticipate separating employees also need to comply with the Consolidated Omnibus Budget Reconciliation Act (“COBRA”), which requires that employers with more than 20 employees notify its employees of their right to continue health insurance coverage for up to 18 months at their own cost if the employee is terminated or his or her hours reduced.  This includes both medical and dental coverage.  The continuation period may be longer under certain circumstances.  If the employee elects to continue coverage, the employer may require the employee to pay both the employer and employee share of the premium, subject to the American Recovery and Reinvestment Act  (“the Act”) of 2009.  The Act entitles certain employees, involuntarily terminated from their employment between September 1, 2008 and December 31, 2009, to receive up to a 65% COBRA premium subsidy paid by the employer.  The employer must notify the employee in writing of his or her right to continue health insurance coverage at the time that the employee is terminated.  Within the next week, the United States Department of Labor is scheduled to release an updated “model” COBRA notice, which will include information relating to the Act’s premium subsidy.  Massachusetts employers should note that the Commonwealth, as well as many other states, has a mini-COBRA statute with somewhat different requirements than COBRA.

In addition to COBRA and the WARN Act, many states have other laws regarding an employer’s obligations when it closes its plant or lays off employees, some of which require special financial planning.  For example, Maine, New Hampshire, and Massachusetts require that the employer pay severance, pay final wages within 72 hours, and provide for health insurance coverage under certain circumstances, respectively.  Failure to comply with the federal or state laws may result in monetary penalties, including civil liability for the payment of insurance premiums, attorneys’ fees, and court costs.

Protecting Trade Secrets 

When reducing your workforce, it is important to determine whether your employees have signed non-compete, non-disclosure, or non-solicitation agreements.  If they have, any separation letter or release of claims form should reference these signed agreements and state that they remain in full force and effect.  If the employer wants to ensure that employees do not compete, disclose confidential company information, or solicit other employees who have been retained by the company, it should consider requiring departing employees to sign such agreements in exchange for some form of consideration, such as a payment or other form of compensation, not ordinarily otherwise due to the employee.  

If you have any questions or need additional information regarding layoffs and downsizing, please contact our employment lawyers:  Rosanna SattlerValerie C. Samuels and Nancy J. Puleo.

This Alert is provided for information purposes only, and does not constitute legal advice.  According to Mass. SJC Rule 3:07, this material may be considered advertising. ©2009 Posternak Blankstein & Lund LLP.  All rights reserved. 

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