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Vocational school’s financial predicament foreseeable at time appropriations act passed, WARN Act notice requirement not excused

By Ronald Miller, J.D.

An operator of vocational training schools was denied a motion to dismiss the Worker Adjustment and Retraining Notification (WARN) Act claim brought by employees for failure to give 60-days’ notice prior to the closure of its schools, ruled a federal district court in Maryland (Smith v ABC Training Center of Maryland, Inc, August 1, 2013, Motz, J). The court determined that the schools’ financial predicament was foreseeable when Congress passed the Consolidated Appropriations Act of 2012 and rendered the majority of its students ineligible for financial assistance to pay for schooling. Thus, the court declined to find that the notice requirement was excused due to unforeseeable business circumstances.

Former employees of vocational schools alleged that they suffered damages when the schools shuttered their doors in January 2013 without prior notice. The employer operated post-secondary vocational schools. Until 2011, a student could matriculate at the vocational schools even if he or she had not received a high school diploma or GED certificate. Students lacking a diploma or GED certificate could take a general skills assessment test, and attend school upon achievement of a sufficient score. Those students could then obtain financial assistance from the federal government.

However, in December 2011, the 2012 appropriations bill was signed into law. Students who first enrolled in postsecondary education after July 1, 2012, and who lacked a high school diploma or GED certificate were no longer eligible for federal financial assistance. Without federal financial aid, these students could no longer enroll in the school. Because a significant number of the school’s students were admitted through the assessment program, the statute had a significant effect on the school’s finances.

Financial difficulty. The school had a “financially-difficult third quarter” in 2012, and in November of that year it asked its bank to increase its borrowing base. Around the same time, management furloughed themselves for five days, required non-management staff to take three furlough days, and planned to shutter the campus. The school also began to restructure and to implement various reforms that were intended to alleviate some of the financial pressure. On December 31, 2012, the bank notified the school that it froze its operating account, and would oversee the approval of all payments to third parties. The bank asked the school to prepare two alternative proposals: a 13-week “going forward” plan and a “wind-down” plan.

The plans were presented to the bank on January 8, 2013. When the school’s executives refused to personally guarantee the company’s obligations, the bank swept all available funds from its accounts. The next day the company notified employees that it would be shuttering its campuses immediately. The employees filed this suit alleging, among other claims, that the employer violated the WARN Act.

The WARN Act provides that “an employer shall not order a plant closing or mass layoff until the end of a 60-day period after the employer served written notice” of the closing or layoff to the affected employees or their representative. However, in this instance, the employer argued that it was exempt from the WARN Act’s requirements because the closure was due to “business circumstances that were not reasonably foreseeable as of the time that notice would have been required.”

Individual liability. The court first examined whether the individual owners of the company were liable under the WARN Act. The Act defines an employer as a “business enterprise” that employs 100 or more employees. Here, the court concluded that the individual defendants were not a business enterprise and therefore could not be liable for the employer’s alleged failure to comply with the WARN Act, even if they were executives and managers responsible for the abrupt closure. Accordingly, the WARN Act claim was dismissed with respect to the individual defendants.

Unforeseeable business circumstances. An employer that is otherwise liable for a WARN Act violation will be excused from the Act’s notice requirements if the business closure was attributable to “business circumstances that were not reasonably foreseeable as of the time that notice would have been required.” In this instance, the WARN Act required the employer to provide its employees with notice of its impending closure on November 10—60 days before it shuttered—or as soon thereafter as such notice became “practicable.” Therefore, the employer was entitled to summary judgment only if it established that no reasonable trier of fact could conclude that its inability to increase its borrowing was foreseeable prior to January 9.

Here, the employer failed to satisfy its burden. The court concluded that a reasonable fact finder could conclude that the employer’s financial predicament was foreseeable in December 2011 when Congress passed the Appropriations Act of 2012 that rendered future students without a high school diploma or GED certificate ineligible for federal financial aid. The employer had a “financially-difficult third quarter” in 2012 after the statutory reforms took effect. Although the employer continued to negotiate with its bank, a reasonable fact finder could nevertheless conclude that it was foreseeable in the third quarter of 2012 that its bank would refuse to increase its borrowing base. The “business circumstances” that caused the employer’s deteriorating financial condition were not tantamount to the “sudden, dramatic, and unexpected” termination of a major contract or abrupt government closure of an employment site. Thus, the employer’s motion for summary judgment on the WARN Act claim was denied.