Nuts and Bolts of Furloughs, Layoffs, and Plant Closings in the Age of Coronavirus (COVID-19) Stay-At-Home Orders: The WARN Act and Beyond

The last week brought a wave of unprecedented government orders for non-essential businesses to close and people to stay at home. These orders have forced many employers to lay off or furlough large portions of their workforces or completely shut down their businesses on extremely short notice. We provide here an update to our prior alerts regarding Leaves, Furloughs and the WARN Act and the Implications of California’s Coronavirus Stay at Home Order for Employers to provide more nuts and bolts information for employers navigating these waters.

Outline

1. SOME DEFINITIONS

2. OVERVIEW OF THE FEDERAL WARN ACT

• The Basics
• WARN Act Questions Related To COVID-19

3. CONSIDERATIONS BEYOND THE WARN ACT

• Be Mindful of Regular Termination Protocols
• For Employers in a Position to Do More for Employees
• Health Insurance Benefits

Some Definitions

The terms layoff, furlough, reductions in force, reorganization, and terminations are often used interchangeably although they are not necessarily the same thing. There is no standard legal definition of these terms. Before we dive into the substance of this discussion, we provide our definitions so we and our readers are on the same page.

• Termination: Whenever an employee’s employment with a company permanently ends, the employee’s employment terminates. Termination may be voluntary or involuntary, and involuntary terminations can be for cause or without cause. 
• Layoff is generally used to describe a termination occurring through no fault of the employee, especially terminations due to poor company finances, lack of work, or a decision to reorganize or shut down the company. In some circles, especially in unionized workforces, the term layoff is used to refer to a termination where there is a possibility the employee may one day be recalled to work. 
• Reduction in Force (RIF) usually applies to a layoff resulting from the decision of an employer to permanently reduce headcount in the company or a subset of the company. 
• Reorganization is sometimes used to describe a layoff that results from a decision to reorganize the structure of the company or a subset of the company. A reorganization does not necessarily result in a reduction in headcount. For example, an employee may be laid off in a reorganization when the employer decides to eliminate one kind of position in favor of another that the existing employee is not qualified to perform.
• Furlough refers to a temporary unpaid leave of absence. Like layoffs, furloughs are used to reduce headcount (and payroll costs) temporarily. Unlike a layoff, however, the employment of furloughed workers is typically not terminated. Instead, these employees are placed on an unpaid leave of absence. Furloughed employees may be eligible for unemployment insurance benefits and COBRA coverage for health benefits even though their employment is not terminated. Depending on the length of the furlough, some government entities may consider the furlough a termination and accordingly, if a lengthy furlough (more than a couple of weeks) is contemplated, consideration should be given to treating it as a termination. Indefinite furloughs are likely to be treated as terminations by most government entities.

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Overview of the Federal WARN Act

The Worker Adjustment and Retraining Notification (WARN) Act obligates covered employers to provide advance notice of an “employment loss” to “affected employees.”

The Basics

Which employers are covered by the WARN Act?

The WARN Act applies to private for-profit, private non-profit, or quasi-public entity (separately organized from regular government) employers who have:

• 100 or more full-time employees, or
• 100 or more employees, including part-time employees, who work at least a combined 4,000 hours per week.

A “full-time employee” is an employee who works 20 or more hours per week and worked for at least six of the twelve months preceding the date on which the notice is required.

What is an “employment loss”?

The term “employment loss” means:

• An employment termination, other than a discharge for cause, voluntary departure, or retirement;
• A layoff exceeding six months; or
• A reduction of more than 50% in hours of work of individual employees during each month of any six-month period. (Note that this provision can bring furloughs within the definition of “employment loss,” even though the employees’ employment may not be terminated.)

Who are “affected employees”?

The “affected employees” are:

• Employees who are terminated or laid off for more than six months;
• Employees who have their hours reduced 50% or more as a result of the plant closing or mass layoff;
• Employees who may reasonably be expected to experience an employment loss as a result of proposed plant closing or mass layoff;
• Employees who are on temporary layoff but have a reasonable expectation of recall (such as those on workers’ compensation or medical, maternity, or other leave); and
• Part-time workers.

What is a “mass layoff”?

A “mass layoff” is a reduction in force that:

• Does not result from a plant closing; and
• Results in an employment loss at the single site of employment during any 30-day period for:
  
  • At least 50 to 499 employees if they represent at least thirty-three percent (33%) of the total active workforce (excluding any part-time employees); or
  • 500 or more employees (excluding any part-time employees).
    
    • The 33% rule does not apply where 500 or more employees will suffer an employment loss.

What is a “plant closing”?

A “plant closing” is a permanent or temporary shutdown, resulting in an employment loss for at least 50 employees during a 30-day period, of either (i) a single site of employment; or (ii) facilities or operating units within a single site of employment.

What are the obligations of an employer in the case of a mass layoff or plant closing?

Covered employers are required to provide written notice to affected employees, the union representative in the case of a unionized workforce, the state dislocated worker unit, and the local chief elected official, at least 60 days in advance of mass layoffs and plant closings. There are exceptions where the 60-day notice period may be shortened, but in those cases, employers must still provide notice as soon as is practicable. 

What are the exceptions to the 60-day advance notice requirement?

• Faltering company: This exception applies when, before a plant closing, a company is actively seeking capital or business and reasonably in good faith believes that advance notice would preclude its ability to obtain such capital or business, and this new capital or business would allow the employer to avoid or postpone a shutdown for a reasonable period.
• Unforeseeable business circumstances: This exception applies when the plant closing or mass layoff is caused by business circumstances that were not reasonably foreseeable at the time that 60-day notice would have been required.
• Natural disaster: This exception applies when a plant closing or mass layoff is the direct result of a natural disaster such as a flood, earthquake, drought, storm, tidal wave, or similar effects of nature. In this case, notice may be given after the event.

Do states have their own advance notice requirements?

There are at least twenty states and at least one municipality that have “mini-WARN” or similar laws requiring advance notice of certain layoffs, plant closings or related actions. The states are: California, Connecticut, Georgia, Hawaii, Illinois, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New York, North Dakota, Ohio, Oregon, Tennessee, Vermont, and Wisconsin. Employers should check with their state Department of Labor or equivalent state agency for more information on state obligations, as they may be stricter than federal obligations and may have different notice triggers.

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WARN Act Questions Related To COVID-19

Does a layoff as a result of COVID-19 events trigger notice obligations under the WARN Act or state “mini-WARN” acts?

The federal WARN notice obligation is not triggered if employees will be laid off for fewer than six months, since those employees have not suffered an “employment loss.” The key issue with the COVID-19 pandemic is that employers do not know how long the pandemic will last. The United States Department of Labor (DOL) has yet to issue any guidelines relating to what businesses should do to stay compliant with the WARN Act during this period of uncertainty. State mini-WARN laws vary in their definitions of an employment loss such that notice for short term layoffs may trigger notice obligations in the state despite the six-month minimum under federal law.

A few states have addressed covered employers’ obligations to notify employees of layoff or closure (temporary or not) during this crisis. For example, California Governor Gavin Newsom suspended advance notice requirements under the state’s “mini-WARN” law in his March 17, 2020 Executive Order N-31-20. Further analysis of this Executive Order and its potential impact on employers can be found here.

New York, on the other hand, continues to require that businesses covered by the state’s “mini-WARN” law provide 90 days’ advance notice.[1] The New York State Department of Labor notes that “the WARN Act already recognizes that businesses cannot predict sudden and unexpected circumstances beyond an employer’s control, such as government-mandated closures, the loss of your workforce due to school closings, or other specific circumstances due to the [C]oronavirus pandemic,” and urges employers to provide notice as soon as possible.[2] The Illinois Department of Commerce and Economic Opportunity instructs employers to “state in your notice if the layoff is a direct result of the impact the COVID-19 outbreak has had on your business,”[3] but offers no further guidance. 

Most states with “mini-WARN” laws have not yet spoken on any modifications to advance notice requirements due to the impact of COVID-19. 

Do mass layoffs or plant closings due to the COVID-19 pandemic fall within any exceptions under the WARN Act or state “mini-WARN” laws?

The “unforeseeable business circumstances” exception arguably applies but neither the DOL nor any courts have definitively said so. So far, the DOL regulations describe the “natural disaster” exception as applying to a flood, earthquake, drought, storm, tidal wave, “or similar effects of nature.” Again, arguments can be made that the COVID-19 pandemic is a natural disaster, but there is no definitive authority. If an employer decides to proceed under one of these exceptions, the employer is still required to provide as much notice as is practicable. The notice should include a brief statement describing the basis for a shortened notice period, including a description of the circumstances making the exception applicable.  

What should employers do if they have to extend a layoff that was originally expected to last fewer than six months?

If an employer extends a layoff that was originally expected to last fewer than six months (and therefore was not subject to the law’s notification requirements), the employer must show that the extension was caused by business circumstances that were not foreseeable at the time of the initial layoff. The employer also must give notice as soon as it realizes the layoffs will extend beyond six months. Additional notice is also required when the date for a planned plant closing or mass layoff is extended beyond the date announced in the original notice—regardless of how long the layoff will last. If the extension is 60 days or more, then this additional notice should be treated as a new notice. It is not acceptable to provide a rolling or routine periodic notice, whether or not a mass layoff or plant closing is coming.

Any notice should be precise enough to include the following (and meet the regular notice requirements under WARN):

• A statement about whether the planned action is expected to be permanent or temporary and, if the entire plant is to be closed, a statement to that effect.
• The notice may include additional information useful to the employees, such as information on available dislocated worker assistance, and, if the planned action is expected to be temporary, the estimated duration.

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Considerations Beyond the WARN Act

Be Mindful of Regular Termination Protocols

If employers terminate the employment of employees through a plant closing, temporary layoff, or otherwise during this public health emergency, employers should remember their usual protocols for terminating employees. 

What payments does an employer owe to employees if a layoff (mass or otherwise) or a plant closing occurs?

The employer must pay the employee’s final pay within the deadlines set by state law. State laws differ on timing, as well as whether unused accrued vacation or paid time off (PTO) must be cashed out upon termination. In some states, such as California, final pay is due on the day of termination for any involuntary termination. If employees are furloughed but not terminated, employers need not provide them with their final pay when the furlough goes into effect. However, if the furlough is intended to be lengthy, the employer may want to provide the employees’ final pay in accordance with state law governing final pay to preclude any potential claim that the furlough was actually a termination, and final wages were not timely paid. Employers may also want to voluntarily pay out or permit employees to use any accrued vacation or PTO during the furlough.

Must employers who were forced to close abruptly pay employees for time they were scheduled to work or through the end of the pay period?

No.

• Nonexempt (hourly) employees generally need only be paid for hours worked unless company policy, individual agreements, or collective bargaining agreements provide otherwise.
• Exempt (salaried) employees generally must be paid on a salary basis to maintain their exempt status, i.e., they are paid for the job they do and not the hours worked. Exempt employees must receive a set salary every week without deductions except in limited circumstances.
  
  • An exception to this rule exists where an employee’s employment terminates in the middle of a workweek. Employers may pro rate the salary for the workweek in which the employment terminates.   
  • Since furloughs do not result in an employment termination, this pro rata exception does not apply to temporarily furloughed employees. An exempt employee who is furloughed must be paid his or her full salary for the workweek in which the furlough begins if the employee works any part of the workweek.

What else should employers remember?

• Provide COBRA notices, where applicable, and information about unemployment insurance benefits.
• Where feasible, follow up with terminated employees on the return of company property and their obligations to maintain the confidentiality of confidential, proprietary and trade secret information.
• To the extent feasible, follow usual protocols for disabling network access of terminated employees.
• To the extent feasible, take any other steps the employer regularly takes in processing an employee termination.
• Prepare for an increase in 401(k) plan financial hardship withdrawals and loan requests by employees.
  
  • Prior to approving any hardship withdrawal requests, the terms of any underlying plan should be carefully reviewed to determine whether the plan allows for relief in this particular situation.

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For Employers in a Position to Do More for Employees

Can employers create a hardship fund for employees?

Generally, any amount provided by an employer to an employee is considered taxable compensation to the employee. However, the Internal Revenue Code provides an exception for certain amounts in the case of a federal “qualified disaster,” which President Trump declared on March 13, 2020. In the case of a federal “qualified disaster,” employers may make nontaxable “qualified disaster relief payments” to help employees with certain reasonable and necessary expenses. Typically, these payments will be limited to expenses that an employee incurs directly as a result of the COVID-19 pandemic and exclude any expense that is reimbursable by insurance or amounts that substitute for lost wages.

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Health Insurance Benefits

Can employers keep employees on their group health plan during a furlough?

It depends on the terms of the underlying plan documents.

• For example, eligibility under group health plans often depends on the number of weekly or monthly hours worked by an employee. A furlough can cause an employee to become ineligible for benefits if the employee fails to work the required number of hours.
• In some cases, however, an employer may amend the terms of their group health plan to permit coverage to continue during a furlough. In the case of both insured and self-insured plans, it is imperative that employers coordinate with any third-party insurer or third-party administrator when implementing any amendment. While employers with self-insured plans likely have flexibility to amend any hours-worked requirements, insured plans will need approval from their third-party insurer.
• When determining whether such an amendment is appropriate, an employer must also consider Affordable Care Act compliance issues (for example, the ACA’s definition of “full-time employee”).
• If the insurer or administrator cannot accommodate such an amendment, employers should avoid the temptation to do a “favor” for employees by allowing them to remain on the group plan after losing eligibility under the plan. If an insurer were to investigate and determine that claims were made by an ineligible employee, the claims could be denied, the policy revoked and/or the insurer could pursue fraud claims.

Can employers elect to subsidize the employee premium throughout the furlough period?

Yes, employers generally may waive or reduce employee premiums on behalf of furloughed employees who continue coverage under the employer’s group health plan subject to the Internal Revenue Code’s cafeteria plan rules, which prohibit certain mid-year changes to elections under a cafeteria plan but include exceptions for significant cost changes.

Absent a complete waiver of employee premiums, there may be no payroll from which to deduct the employee premiums. In this case, employers may continue to require furloughed employees to pay the employee premium by billing the employees directly or recouping the premiums once the furlough period ends.

If an employer’s group health plan cannot accommodate continued coverage during a furlough, will the employer be required to offer COBRA to employees who are furloughed?

Yes, if the group health plan is subject to COBRA (federal or state “mini-COBRA” such as Cal-COBRA), all covered employees (and their covered dependents) who experience both a reduction of hours and a loss of group health plan coverage due to the furlough are entitled to elect COBRA.

If furloughed employees are allowed to continue participation in the group health plan during the furlough period, then no COBRA election is required because there is no loss of coverage for furloughed employees.

• For example, under the terms of a group health plan, employees of Company X must work at least 30 hours per week in a given month. In April 2020, Employee Z, who is covered under the Plan, is furloughed, works fewer than 120 hours, and therefore loses coverage under the Plan. The furlough extends until the end of June. Employee Z starts work again in July 2020 and works sufficient hours to have his coverage under the Plan reinstated. Company X must offer Employee Z a COBRA election as a result of the April reduction of hours even if it is presumed that Employee Z will only elect and continue COBRA coverage for three months.

Note that the most recent draft legislation dealing with the COVID-19 pandemic does not provide for government-funded COBRA subsidies. However, employers may elect to subsidize all or a portion of COBRA premiums on behalf of any terminated employees.

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As we all know, the situation is developing rapidly, seemingly by the minute. Please keep checking our blog, the Employment Law Commentary for employment-related developments and our Coronavirus (COVID-19) Resource Center for continued advice on the numerous issues that we are following.

Morrison & Foerster Associate Erin Hamilton Jansen assisted in the preparation of this client alert.

[1] The New York State Worker Adjustment and Retraining Act typically applies to private businesses with 50 or more full time workers in New York State that are implementing relocations, closures, or mass layoffs affecting at least 25 fulltime workers (if the 25 or more workers make up at least 33% of the workforce at the site) or 250 full time workers. N.Y. Lab. Law §§ 860 to 861-I; 12 NYCRR § 921-1.0 to 921-9.1.

[2] https://www.labor.ny.gov/workforcenypartners/warn/warnportal.shtm, retrieved March 19, 2020.

[3] https://www.illinoisworknet.com/LayoffRecovery/Pages/WARNLayoff.aspx, retrieved March 19, 2020.