Often times, when a company acquires another company, it does not wish to retain all of the other company’s employees. The employees who do not get brought on board often end up out of work. Under these circumstances, issues arise over how to handle the laid off employees. Federal law requires employers to provide at least 60-days’ written notice prior to terminating employees affected by such a merger. So who is required to provide the notice, the employees’ current employer or the new company that does not wish to retain them? Under federal law, if the employees remain employed as of the day of the sale, the purchasing company assumes responsibility for providing the required notice. According to the 8th Circuit, this remains true even where the purchasing company never intended to employ the laid off workers and expressly contracted away the notice obligation when completing the purchase agreement.
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On December 4, 2008, Celadon Trucking Services, Inc. (“Celadon”) entered into an asset purchase agreement (“APA”) to purchase certain assets and assume certain liabilities from Continental Express, Inc. (“Continental”), a trucking business that serviced customers throughout the United States. Among the assets Celadon purchased were its customer business and customer lists, vehicles, and use of the name Continental Express. Continental’s president and vice president also signed non-compete agreements providing that Celadon intends to merge Continental’s business into its own.
At the time of the sale, Continental employed 658 employees. Under the terms of the agreement, Celadon agreed that it would continue employing some of Continental’s employees. The APA provided that the employees who were not hired would not become Celadon’s employees for any reason, and that Continental would continue to employ them for 14 days after the sale. Under the APA, Continental also assumed all responsibility for providing employees with notice of termination under the federal Worker Adjustment and Retraining Notification (“WARN”) Act. The WARN act provides that “[a]n employer shall not order a plant closing or mass layoff until the end of a 60-day period after the employer serves written notice of such an order” to “the affected employees” and “the State.”
Celadon ultimately selected 201 Continental employees that it wished to continue employing. The remaining employees, 457 in total, were terminated between December 5 and 17, 2008.
On January 16, 2009, the terminated employees brought a class action lawsuit against Celadon, alleging that it violated the WARN Act by failing to provide them 60-days’ notice prior to terminating their employment. In defense, Celadon argued that it had no duty to provide the employees WARN Act notice because it never employed them, having only purchased certain assets from Continental rather than the business itself. After the district court found in favor of the employees, Celadon appealed.
The Eighth Circuit upheld the district court’s ruling. In rejecting Celadon’s argument that it only acquired Continental’s assets rather than the business itself (including the employees), the court first looked to the language of the WARN Act. The statute expressly provides that “[a]fter the effective date of the sale of part or all of an employer’s business, the purchaser shall be responsible for providing notice for any plant closing or mass layoff,” and “[n]otwithstanding any other provision of this chapter, any person who is an employee of the seller … as of the effective date of the sale shall be considered an employee of the purchaser immediately after the effective date of the sale.”
The court then turned to whether Celadon indeed intended to purchase Continental’s business, in which case the WARN Act obligations transferred to Celadon, or whether it merely acquired certain assets from Continental, in which case the WARN Act obligations remained with Continental. The court held that it was the former, notwithstanding that the sale agreement was styled as an Asset Purchase Agreement. The court found that the title of the document might be binding on the parties, but the WARN Act was passed to protect employees and is “not a technical labyrinth that sophisticated corporate lawyers can navigate to the disadvantage of employees.” Against that backdrop, the court looked to the substance of the sale rather than the title of the document. It found that Celadon purchased all of the required assets necessary to continue running Continental’s business, including customer lists, vehicles, and use of the name. The court also noted that the non-compete agreements Continental’s executives signed expressly stated Celadon’s desire to merge the businesses’ operations.
Because it found that Celadon intended to purchase Continental’s business, the court held that the terminated employees became Celadon’s employees on the date of the sale. And because they were terminated over the ensuing two weeks, Celadon was liable for not providing them 60 days’ WARN Act notice as required.
The Celadon case should provide clear warning to employers seeking to sell or purchase an ongoing business with employees. The WARN Act has teeth. Failure to comply with it can expose employers to back pay, civil penalties, and attorney fees. Further, because it is invoked during plant closings and mass layoffs, violations will almost always trigger class actions that will exponentially increase exposure.
Employers seeking to purchase business assets should consult legal counsel to ensure that they are not inadvertently deemed to have acquired the entire business and the resulting obligations to employees. Employers who do intend to purchase or sell an ongoing business should consult with counsel to ensure they understand and comply with their legal obligations with regard to the affected employees.