Businesses operating in Iowa need to take into consideration both the Federal WARN Act, which applies to companies with 100 or more employees, as well as the Iowa Layoff Notification Law, or the Iowa Mini-WARN, which applies to companies with 25 or more employees. For a large-scale layoff, both statutes require notice not only to employees (federal 60-day notice/state 30-day notice) but also to Iowa Workforce Development or the Department of Labor.

Penalties for failing to meet WARN Act obligations can be significant as they are calculated based on each day of the violation. Specifically, federal law requires payment of lost wages and benefits to all affected employees for each day of violation. A recent Delaware bankruptcy court looked into some of these issues when dealing with the pandemic.

About the Case

This case involved a furniture company going through bankruptcy. The undisputed facts of the claim, set forth by the Court, indicate that there were substantial pre-COVID issues for the employer, including a significant amount of debt.

In early March 2020, the company issued its first WARN Act notice, indicating a potential closure date of May 5, 2020. The court then takes note that on March 13, 2020, then President Trump declared a national emergency based on COVID. This was subsequently reaffirmed by various state governors, either urging nonessential businesses to close during the state of emergency or entering executive orders mandating closures.

This caused the employer to issue a second WARN Act notice on March 19, 2020, which included a statement that due to COVID-19, “the company can no longer support the wind-down of its retail operations through the originally projected termination date.” This resulted in either immediate or close to immediate terminations of all remaining employees. 

A few former employees believed the employer had failed to meet the requirements of the Federal WARN Act, failing their notice obligations. The employer / fiduciary defense asserted three defenses: that notice was not required because:

1. The relevant debtors were “liquidating fiduciaries and not employers under the WARN Act” - the employer was already in the process of shutting down the business.
2.  “An unforeseeable business circumstance caused the mass layoffs” - relating to COVID
3. “A natural disaster caused the mass layoffs.” - relating to COVID

What the Court Decided

In this instance, the Court found the unforeseeable business circumstance and natural disaster arguments persuasive, and the trustee’s summary judgment motion was granted. In relationship to the various arguments presented, the Court:

1. Denied that the defendants were a “liquidating fiduciary, not an employer.” While there is a Third Circuit case involving United Health Care where the liquidating fiduciary defense had been accepted with the Third Circuit stating, “Whether a bankrupt entity is an employer under the WARN Act depends on the nature and extent of the entity’s business and commercial activities while in bankruptcy and not merely whether these employees continued to work on a daily basis” it results in a factual analysis.

In other words, in this process, particularly if bankruptcy is involved, when employees are continuing to engage in their regular day-to-day activities, Trustees and others may be considered employers. If all of the activity is directed solely toward the liquidation of the company, then the United Healthcare exemption may apply. However, in this instance, the employees were engaging in regular activities regarding the sale of furniture. The Court specifically noted that the “Debtor’s orderly wind-down process contemplated continued post-Petition operations,” resulting in a hybrid of continuing their business while liquidating.

2. Upheld the unforeseen business circumstances exception. WARN provides that certain unforeseen business circumstances can render the need to provide WARN notices invalid. Such circumstances must not be “reasonably foreseeable as of the time the notice would have been required” in order to be applicable. The Court notes here that a key element of such a circumstance is caused by “some sudden traumatic and unexpected action or condition” which the court clearly describes as the COVID-19 pandemic, and the resulting business closures and chaos.

In this instance, the plaintiffs argued that a better solution would have been a furlough or temporary layoff. However, given the businesses’ ongoing liquidation plan, this appears to be a distinction without a difference and either classification would not have impacted their ability to receive job service benefits. In this instance, there was an existing plan for winddown, but businesses were subject to closure due to a global pandemic which the Court determined was, in fact, an unforeseen circumstance. Further unforeseen business circumstances do not need to be the sole cause of a closure in order to be considered.

3. Determined that the natural disaster exception also applied. The Court notes that numerous courts have considered the issue and concluded that COVID-19 was a “natural disaster” with a significant analysis provided in Easom v. US Well Services, Inc., 527 F.Supp 3d 898, 907-11 (S.D.Tex. 2021)

The Big Picture

The Court looked not only to state and federally declared emergencies and a significant amount of case law developing over multiple circuits regarding COVID-19 business disasters but also looked to the comprehensive nature of the original WARN Act notice and the secondary notice. Plaintiffs had raised a concern that the second notice was factually insufficient. However, the business/trustees had quoted directly to the COVID-19 orders, state and federal business closures, and similar items, thereby providing adequate information for employees to justify the employer’s decision.

Careful and comprehensive assessment of employment communications particularly during a business closure is critical, not only in managing public relations with employees or your community but also in legal compliance for both state and federal purposes.