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Employer Risks Related to Distressed Facility Closures

Managing decisions around facility closures and employee notifications is a delicate dance. On the one hand, there are federal and often state requirements for notifications, such as the Worker Adjustment and Retraining Notification Act (WARN Act) (generally 60 days if certain criteria are met, but this varies from jurisdiction to jurisdiction). On the other hand, a notification of this nature can become a self-fulfilling prophecy to ensure a closure when parties are working tirelessly and aggressively to avoid one. In fact, one of the defenses to withholding such a notice is a good faith attempt to accomplish a transaction that allows the facility to remain open.

Other implications to notices or failures to provide them can be purely economic. If a notice were required, but failed to occur, then upon a bankruptcy filing this triggers claims. In many cases these claims can be large dollars—think of two months’ worth of payroll for hundreds and hundreds of employees. Not only can these claims be large, but each individual employee of a bankrupt employer are given a priority of up to $12,850 (as of April 2016, adjusted to inflation every 36 months). This applies to all wages, salaries or commissions earned up to 180 days prior to the organization filing for bankruptcy. This can significantly increase the financing required to finance a bankruptcy case and, in extreme cases, prevent a reorganization from taking place.

Generally, when there is a notice requirement, it applies for facilities with 100 or more employees. However, the exact employee threshold is not entirely black and white. Additionally, headcount requirements (if applicable) are generally not static; they are judged by trends over time (e.g., if a facility reduced staff from 250 employees down to 95 over a six-month period and then announced closure at a time when only 95 staff were employed the employer may not be judged by 95-employee threshold and notice requirements may still apply).

Plant closures and notices related to them also involve issues of fiduciary duties and personal liability for officers and directors of employers facing plant shutdowns.

Lastly, there are practical considerations to notice decisions. For example: What alternatives may employees have? Said differently, what are market conditions for alternative or re-employment? How does the risk profile associated with turnover at certain key positions vary? Which positions are most critical to operations and a turnaround? Are certain employee groups more or less likely to sever employment upon a notice than others?

These are all key considerations as directors, officers and their professional advisors navigate a restructuring involving the possibility of plant closures.