Friday Flash, 11.20.12

Comment of the Week  

Thanksgiving remains one of my favorite holidays.  A big turkey dinner served with NFL football (This Thursday I will be cheering for the New England Patriots!).  Over the years I have come to appreciate the thanks in Thanksgiving.   Thanks for my family and my friends.  Thanks for my home.  Thanks for my job—it is so much fun and so meaningful.

At this special time we must also give thanks for all those who go in harm’s way to protect us, our service men and women, civil servants and contractor personnel.  Please keep them in your thoughts and prayers.  Please also keep families of all our fallen in your prayers.

Although we live in challenging times, I am confident we will overcome our present difficulties.  We have done it before.  Indeed the Fiscal Cliff is nothing compared to the trails we have faced and overcome as a nation.  Establishing the tradition I began last year, I wanted to again share with you Abraham Lincoln’s famous Thanksgiving Day Proclamation.   The October 3, 1863 Presidential Proclamation called on the nation to observe the last Thursday in November as a day of Thanksgiving.  Issued at the height of our greatest crisis, the civil war, it still has meaning today.

A Proclamation.

The year that is drawing towards its close, has been filled with the blessings of fruitful fields and healthful skies. To these bounties, which are so constantly enjoyed that we are prone to forget the source from which they come, others have been added, which are of so extraordinary a nature that they cannot fail to penetrate and soften even the heart which is habitually insensible to the ever watchful providence of Almighty God.

In the midst of a civil war of unequaled magnitude and severity, which has sometimes seemed to foreign States to invite and to provoke their aggression, peace has been preserved with all nations, order has been maintained, the laws have been respected and obeyed, and harmony has prevailed everywhere except in the theatre of military conflict; while that theatre has been greatly contracted by the advancing armies and navies of the Union.

Needful diversions of wealth and of strength from the fields of peaceful industry to the national defense have not arrested the plough, the shuttle or the ship; the axe has enlarged the borders of our settlements, and the mines, as well of iron and coal as of the precious metals, have yielded even more abundantly than heretofore. Population has steadily increased, notwithstanding the waste that has been made in the camp, the siege and the battle-field; and the country, rejoicing in the consciousness of augmented strength and vigor, is permitted to expect continuance of years with large increase of freedom.

No human counsel hath devised nor hath any mortal hand worked out these great things. They are the gracious gifts of the Most High God, who, while dealing with us in anger for our sins, hath nevertheless remembered mercy.

It has seemed to me fit and proper that they should be solemnly, reverently and gratefully acknowledged as with one heart and one voice by the whole American People. I do therefore invite my fellow citizens in every part of the United States, and also those who are at sea and those who are sojourning in foreign lands, to set apart and observe the last Thursday of November next, as a day of Thanksgiving and Praise to our beneficent Father who dwelleth in the Heavens. And I recommend to them that while offering up the ascriptions justly due to Him for such singular deliverances and blessings, they do also, with humble penitence for our national perverseness and disobedience, commend to His tender care all those who have become widows, orphans, mourners or sufferers in the lamentable civil strife in which we are unavoidably engaged, and fervently implore the interposition of the Almighty Hand to heal the wounds of the nation and to restore it as soon as may be consistent with the Divine purposes to the full enjoyment of peace, harmony, tranquility and Union.

In testimony whereof, I have hereunto set my hand and caused the Seal of the United States to be affixed.

Done at the City of Washington, this Third day of October, in the year of our Lord one thousand eight hundred and sixty-three, and of the Independence of the United States the Eighty-eighth.

By the President: Abraham Lincoln

Happy Thanksgiving to all Friday Flash readers!

 

Roger Waldron

President

 

 

Legal Corner 

Budget Sequestration, the WARN Act and Compliance Costs—Implications for Contractors

Jim Schweiter, Partner, McKenna Long & Aldridge LLP

Last August, Congress passed the Budget Control Act of 2011 (Pub. L. 112-25). This law authorized raising the debt ceiling, established caps on discretionary spending, and put in place a process known as sequestration to implement a total of $1.2 trillion in automatic spending cuts through fiscal year 2021, unless Congress passes a bill which the president signs to avert such a result. Sequestration is a process of automatic, largely across-the-board spending reductions under which budgetary resources are permanently canceled in order to achieve compulsory deficit reduction.

Much has been written about the draconian effects sequestration will have on the programs, projects and activities of executive branch agencies.   Senior executive branch officials, members of Congress and industry leaders all predict catastrophe if sequestration is implemented.  In the case of government contractors, the decline in new government work caused by funding reductions, or the truncation of existing government work through contract terminations, changes, or other mechanisms, may cause employers to consider terminating or laying off employees.  As a result, it is important for employers to understand their rights and obligations under the Worker Adjustment and Retraining Notification (WARN) Act.[1]

Notification Requirements under the WARN Act

The primary purpose of the WARN Act is to require certain employers to provide at least 60 days advance notice to employees who are impacted by a “plant closing” or “mass layoff.” Each of these terms has a lengthy statutory and regulatory definition but, in brief, a “plant closing” refers to a shutdown of a site of employment resulting in an employment loss for at least 50 employees, while a “mass layoff” means a reduction in force at a single site of employment impacting at least (1) 50 employees and 33 percent of the active employees at that site, or (2) 500 employees.

As a general rule, whenever an employer foresees that 50 or more employees could lose employment at a site of employment within a 90-day period, that employer should carefully analyze whether the definition of a “plant closing” or “mass layoff” may have been met, and thus whether WARN notice requirements have been triggered.  If the WARN notice requirements are triggered, the employer must provide written notice of the anticipated employment loss to (1) the affected employees (or to their representative if unionized), (2) a designated state official, and (3) the chief elected official of the unit of local government within which the layoff or plant closing will occur.  If the employer provides less than 60 days’ notice before the employment action, it may be subject to paying wages and benefits to the affected employees for the portion of the 60-day period in which notice was not given, in addition to other potential penalties.

The WARN Act recognizes that plant closings and mass layoffs cannot always be anticipated months in advance, and certain exceptions to the 60-day notice requirement exist.  The “unforeseeable business circumstances” exception is the relevant exception that would be associated with layoffs or plant closings resulting from the January 2, 2013 onset of sequestration.  This exception encompasses a “sudden, dramatic, and unexpected action or condition outside the employer’s control.”[2]  The Labor Department’s interpretive guidance[3] noted that although budget sequestration can be seen months in advance, the actual impact on a particular contractor may be unknown until much later.  Therefore, an abrupt termination of a particular contract might qualify under the “unforeseeable business circumstances” exception.  If contractors must lay off or separate their employees in less than 60 days, such announcements would be sudden and dramatic and therefore consistent with the WARN Act.  According to the Labor Department, in such cases employers would not have to provide the full 60-day notice.

Contractor Costs and the WARN Act

The Office of Management and Budget (OMB) just issued new guidance that certain liability and litigation costs associated with WARN Act compliance will be allowable costs under government contracts.[4]  Under the OMB memorandum, if sequestration occurs and an agency terminates or modifies a contract which causes the contractor to order a plant closing or layoffs subject to the WARN Act’s notification requirements, and that contractor has followed the Labor Department’s guidance, then any resulting court-determined, WARN Act-based employee compensation costs, attorneys fees and other litigation costs would qualify as allowable costs which would be reimbursable by the contracting agency, regardless of the litigation outcome.  Such costs would also have to be both allocable to the contract in question and reasonable in accordance with existing FAR principles.

This new OMB memorandum has prompted several large defense contractors to announce that they will not issue WARN Act notices before January 2, 2013.[5]  However, the guidance has exacerbated partisan tensions.[6]  Senators Charles Grassley (R-IA) and Kelly Ayotte (R-NH) announced jointly that they had sent a letter of inquiry “asking under what authority the administration is using to say it is okay to disregard the law,” and then promise contractors “a taxpayer funded bailout for their legal expenses if they do so.”[7]

Regardless of the seemingly inevitable partisanship that accompanies the run up to a presidential election, there are several points about the most recent OMB memorandum for contractors to bear in mind.  First, the implementation of sequestration alone does not portend layoffs or plant closings triggering WARN Act notice requirements.  There must be some adverse contract action flowing from sequestration’s funding reductions which affects an employer.  In addition, the OMB guidance clearly contemplates a court determination of both employee compensation costs, as well as attorneys fees and other litigation costs.  However, employers may incur substantial costs associated with the publication and dissemination of WARN Act notices or employee negotiations and settlements not resulting in litigation.  Under the OMB guidance, these costs would not seem to be allowable.  Contractors who anticipate potential WARN Act liability should seek guidance from contracting officers about the extent to which their WARN Act-related costs will be allowable.  Awareness of the OMB memorandum by DCAA and DCMA personnel will almost certainly also take time, and ignorance of the OMB guidance could complicate audits.  Finally, before allowable costs may be reimbursed, the Government must have funds available to do so.  If sequestration occurs, agencies may not have sufficient funding to reimburse WARN Act-related costs.  Even if litigation resulted from a WARN Act dispute, the Judgment Fund[8] would not be available for such purposes because the litigation would not involve the United States.

Prudent employers should prepare for various scenarios and have contingency plans in place to provide appropriate notice as soon as it becomes clear that a particular contract action will cause a WARN-triggering employment loss. Some companies are considering “provisional notices,” which communicate to all employees that federal budgetary issues could result in an employment loss.  However, because they do not indicate which specific employees will be impacted and the specific date on which the employment loss will occur, such provisional notices may be “better than nothing” (and may show the employer’s good faith efforts to try to comply with WARN) but are still unlikely to fully satisfy the requirements of WARN.  Finally, employers should be aware that several states have their own plant closing laws (sometimes referred to as “mini-WARN” statutes), and some of these laws have more stringent requirements that the federal law. Employers should thus analyze relevant state laws in states in which a significant employment loss may occur.


[1] Pub. L. 100-379, codified at 29 USC 2101 et. seq.

[2] 20 C.F.R. 639.9(b)(1); see also, 29 USC 2102(b)(2).

[3] Department of Labor, Training and Employment Guidance Letter No. 3-12, July 30, 2012.

[4] Office of Management and Budget, Guidance on Allowable Contracting Costs Associated with the Worker Adjustment and Retraining Notification (WARN) Act, Memorandum for the Chief Financial Officers and Senior Procurement Executives of Executive Departments and Agencies, Sept. 28, 2012.

[5] Sara Sorcher, White House Moves to Head Off Sequester Layoffs, National Journal, Sept. 29, 2012, at http://www.nationaljournal.com/nationalsecurity/white-house-moves-to-head-off-sequester-layoffs-20120928.

[6] Senators John McCain, R-Ariz., and Lindsey Graham, R-S.C., called the guidance “politically motivated” and said they’d block any contractor payments by the Pentagon to cover failure of issuing WARN Act notices.  Joyce Tsai, Partisan Debate Deepens over Layoff Notices Before Sequestration, Stars and Stripes, Oct. 5, 2012, at http://www.stripes.com/partisan-debate-deepens-over-layoff-notices-before-sequestration-1.192039.

[7] Letter from Senators Charles Grassley and Kelly Ayotte to Jeffrey Zients, Acting Director, Office of Management and Budget, (Oct. 1, 2012), at http://www.grassley.senate.gov/about/upload/100220121.pdf.

[8] 31 USC 1304.