Employment Legal Pitfalls Loom: The Upcoming Sequestration and Debt Ceiling Deadlines

The Upcoming Sequestration and Debt Ceiling Deadlines

January 8, 2013

Unless Congress acts, the sequestration cuts set out in the American Taxpayer Relief Act of 2012 will go into effect on March 1, 2013. Many defense and other federal contractors will be severely impacted by the massive budget cuts that are proposed in the legislation, resulting in possible layoffs, furloughs or facility closures. Additionally, Congress has until approximately Feb. 15, 2013, to increase the country’s debt ceiling and avert a possible government shutdown. As the new deadlines approach, companies should determine whether their federal contracts remain at risk, review relevant policies and determine what, if any, communications should be made to employees in advance.

The following alert outlines a few of the critical areas that defense and federal contractors should review and consider in advance of Feb. 15 and March 1 to ensure that they are best positioned to respond to any congressional action (or inaction).

The WARN Act

The Worker Adjustment and Retraining Notification (WARN) Act requires employers with more than 100 employees to give written notice to the affected employees (and certain governmental offices) of a facility closing or mass layoff at least 60 days prior to the facility closing or layoff. Employees who have worked less than six months in the past 12 months and employees who work an average of less than 20 hours a week are excluded from the “more than 100 employees” calculation. A WARN Act notice must be specific, including such information as the employees who will be affected and the timing of the expected separation from employment. The notice may be given contingent on the occurrence of a future event, such as the potential but uncertain cancellation of a federal contract.

The WARN Act notice regarding a facility closing or layoff focuses on “loss of employment,” which is, among other things, termination that is not voluntary, is not retirement or is not based on “cause.” Whether or not a WARN Act notice is appropriate turns on the number of employees to be terminated and their employment or job site location. While there are a few exceptions, an employer who does not give the required 60-day advance notice is liable to each affected employee for an amount including up to 60 days of back pay and benefits, as well as civil penalties of up to $500 per day plus attorney’s fees.

Many federal contractors have elected not to give contingent WARN Act notices for contracts that may be terminated or reduced in the event of sequestration, relying in part on the Department of Labor’s announcement that it believes that WARN Act notices are not required. The White House subsequently confirmed the DOL’s opinion, stating that “it is neither necessary nor appropriate for federal contractors to provide WARN Act notice to employees 60 days in advance of the potential sequestration.”

Notwithstanding the announcement from DOL, several lawmakers and commentators remain skeptical about the DOL’s legal conclusions. There is also no guarantee that courts will give deference to the DOL’s guidance letter, leaving employers subject to a court’s individualized determination of whether the WARN Act applies to contracts terminated or reduced as a result of sequestration.

In addition, many states also have statutes equivalent to WARN, which also carry additional requirements. These so-called “mini-WARN” statutes must be considered as an employer decides whether to forgo providing a WARN Act notice in reliance on the federal unforeseeable business circumstances provisions. Importantly, some state WARN statutes do not expressly provide for shortened notices, such as in California, Illinois and New Jersey.

In light of the two additional months provided by the tax bill, federal contractors should: (1) consider the scope of any impact that sequestration would have on particular facilities; (2) determine the risk associated with not providing a contingent WARN notice to potentially impacted employees; and (3) conduct a review of possible state WARN obligations. Based on these action items, employers that have not previously provided contingent WARN notices may now wish to consider doing so, and those who gave contingent WARN notices in October, effective Jan. 2, should consider issuing new contingent notices.

Furloughs and Benefits

In the event of a federal government shutdown or decrease in contract funding, many companies consider furloughs or mandatory reduced hours as two measures to use to save on labor costs. Employers utilizing either furloughs or hours’ reduction should take proactive steps to ensure that they do not violate federal or state wage and hour laws in implementing either cost savings measure.

For hourly nonexempt employees, a short-term furlough is not a complicated payroll issue. Nonexempt employees need only be paid for work they actually perform. However, furloughs involving exempt (or salaried) employees present a more complicated set of problems for employers. Exempt employees under federal law and most state laws must be paid the same minimum salary for each pay period. With limited exceptions, if an exempt employee performs any work during a workweek, that exempt employee must receive his or her entire salary for that week. As stated by the FLSA’s governing regulations, the employer may not make deductions from an exempt employee’s predetermined salary for absences “occasioned by the employer” or caused by “the operating requirements of the business.” As such, when a furlough involves a partial week or a reduction in hours, employers need to ensure that their exempt employees receive their guaranteed weekly salary if they performed any work during a given workweek.

In addition to dealing with exemption and payroll-related issues discussed above, the prevalence of personal digital assistants, the ease of remote connections and the use of voicemail mean that it is likely that at least some exempt and nonexempt employees will — with the best intentions — check their voicemail, send an email or otherwise conduct “work” while on furlough. Since exempt employees are entitled to pay for any workweek in which he or she performs any work and nonexempt employees must be paid for any work performed, employers should inform employees that work is not authorized during the furlough period without advance written approval and should ensure management personnel are aware of this prohibition.

Furloughs can also trigger unemployment insurance for employees. While each state has its own set of eligibility requirements, employees subject to layoff or unpaid leave following sequestration may be eligible for unemployment insurance benefits. Assuming that the layoff or unpaid leave lasts longer than the common seven-day waiting period, employees in many states will be eligible for benefits, so long as the employees: (1) were working and being compensated prior to sequestration; (2) are no longer working and no longer being compensated as a result of the sequestration; and (3) otherwise qualify for unemployment insurance benefits. Triggering unemployment insurance generally leads to an increase in an employer’s unemployment insurance rates.

Lastly, when making determinations on which employees will be subject to furlough or hour reductions, employers should make sure that decisions are based upon consistent and articulable business reasons. If not, employers open themselves up to possible claims of unlawful discrimination and retaliation if the individuals impacted by the decisions belong in a protected class.

Given these complications, and others that can arise from furloughs and hours’ reductions based upon industry-specific requirements and realities, employers should think through which employees would be impacted by a furlough and develop a comprehensive plan involving payroll, benefits and management personnel to ensure employees are properly compensated and that the company obtains the necessary cost savings.

In addition to WARN notice requirements and wage and hour considerations, employers should also consider updating their leave policies. Many states allow employers to mandate how and when paid time off is used, including requiring employees to use any paid time off they have during a furlough, but some states permit this only if the requirements are specifically set forth in a policy that is shared in advance with employees. As state leave laws differ, employers should review their leave policies for each state in which they have employees.

Thinking through options in advance and planning ahead provide contractors with the most flexibility in dealing with the uncertainty and potential economic difficulties that could come if Congress fails to act in the next few months. Please contact the authors or another member of McGuireWoods’ Labor and Employment Department if you have any questions about the information contained in this client alert.