Worker Adjustment and Retraining Notification Act

Seyfarth Synopsis: With the recent partial shutdown of the federal government, many federal contractors have faced tough decisions balancing their reduced revenue with their desire to keep their workforce intact. One potential solution is to impose mandatory employee furloughs to reduce costs. This cost-saving measure has some risks peculiar to California that are worth a look.

The Partial Federal Government Shutdown

On December 22, 2018, key parts of the federal government shut down after politicians reached an impasse over budget spending. By some estimates, the shutdown, lasting until January 25, 2019, cost the economy over $10 billion. The shutdown affected not only 800,000 federal employees but several million government contractors. Shutdowns of this type—the third since January 2017—look to become a regular feature of American politics.

One obvious shutdown impact is reduced revenue for federal contractors. Companies that perform everything from janitorial services to complex Defense Department analysis are suddenly left with revenue that could be significantly lower than previous projections.

Employee Furloughs

So what do companies do when their biggest client shuts down for days, weeks, or even months? Some companies have turned to employee furloughs in an attempt to solve their revenue gap problem. Furloughs are mandatory time off work without pay. Furloughs can be seen as a good solution because the company reduces its payroll expenses while keeping its workforce in place.

Generally, furloughs fall into two categories, partial-week and full-week. We examine both types of furloughs below, as each raises peculiar issues under California law. Note that this discussion is limited to issues raised by furloughs of exempt employees. Because non-exempt employees are paid on a time-worked basis, furloughs of non-exempt employees do not raise the same legal issues as furloughs of salaried exempt employees.

Partial-Week Furloughs

Partial-week furloughs occur when the employer reduces an employee’s workweek. For example, some employers move employees to a four- or even three-day workweek. Under California law, partial-week furloughs are permissible, but care must be given to the arrangement. First, the salary reductions should be done in advance of the furlough to avoid being seen as a “deduction” from an exempt employee’s salary for missed work days. Advance reductions in salaried employee pay to reflect long-term business needs does not destroy the salary basis for an employee’s exemption. But day-to-day or short-term deductions from an employee’s salary would. Along those lines, employers should consider implementing the changes for a substantial period of time, making it look like more of an adjustment to medium or long-term economic forecasts than a short-term reaction to transitory business conditions. Second, companies must ensure that the reduced salary does not fall below the minimum monthly salary rate for exempt employees, which California currently sets at $4,160 for large employers.

Full-Week Furloughs

The California DLSE has determined that a properly executed week-long furlough of exempt employees will not result in those employee losing an exemption. To be done properly, the furlough must have the employee not performing any work during the defined workweek during the furlough. An employee who performs any work at all must be paid for the full week. Further, reasonable advance notice must be given to employees before the furlough begins. As with the partial-week furlough, the employee’s salary cannot dip below the minimum salary threshold for exempt employees.

Finally, employers should ensure that the furlough is not too long and has a clearly defined return-to-work date. If the furlough is too long or if no return date is designated, it may be deemed a termination, entitling the employee to all final wages, including vacation.

Other Issues Implicated By Furloughs

As if the wage and hour issues raised above were not enough, employee furloughs raise many other legal challenges as well. For example, do your executive contracts have severance provisions that may be triggered with salary reductions over a certain threshold? Does the company’s benefits plan include a definition of eligible employees that may be implicated by furloughs? Indeed, as we have previously discussed in this blog, employee furloughs might even inadvertently trigger California’s WARN notice requirements. All of this is to say employers are well-served by being careful and seeking experienced counsel in this area.

Seyfarth synopsis: Companies contemplating a mass layoff must comply with the federal Worker Adjustment and Retraining Notification Act. In California, alas, companies must also consider the even more stringent requirements of California’s own WARN act. That is the harsh lesson recently imparted by the California Court of Appeal in Boilermakers v. NASSCO Holdings Inc.  

As just reported in our management alert, a California shipyard sustained liability when it failed to notify 90 employees of a four- to five-week furlough occasioned by a lull in their production work. Under the federal WARN act, no notice was required, because fed-WARN requires notice only for a “plant closing” or a “mass layoff,” and the latter refers only to an “employment loss,” which is either a termination, a layoff exceeding six months, or a 50% reduction in work hours during six consecutive months.

Because the short furlough here did not trigger any of those conditions, fed-WARN did not apply.

But California is different. As NASSCO Holdings explains, California, as is its wont, has decided that federal worker protections are inadequate, and that California knows better: “the entire thrust of the legislative effort in enacting the California WARN Act was to provide greater protection to California workers than was afforded under the federal law.” Cal-WARN, like fed-WARN, applies to “mass layoffs,” but defines the term more broadly than fed-WARN does. Under Cal-WARN, a “mass layoff” includes a layoff of at least 50 employees during a 30-day period, with a “layoff” being any “separation” from a position for lack of funds or work, and with there being no requirement of a minimum duration (such as the six-month minimum duration stated in fed-WARN). So Cal-WARN can cover a short-term layoff that fed-WARN would not cover.

The employer in NASSCO Holdings pointed to absurdities resulting from a broad reading of Cal-WARN, such as Cal-WARN applying to long holiday weekends and totally unforeseen events. NASSCO Holdings responds that, under Cal-WARN, “California employers, not California employees, should bear the risk of surprise resulting from an unexpected layoff,” and that employers who do not like that result can always take their concerns to the California Legislature. (Good luck with that.)

NASSCO Holdings also sounds a warning that Cal-WARN’s extension to short-term layoffs is not its only Cal-peculiarity. Cal-WARN exceeds the reach of fed-WARN in other respects as well. For example, Cal-WARN, unlike fed-WARN,

  • provides employers no exemption for layoffs resulting from “unforeseeable events,”
  • permits an award of attorney fees only for prevailing plaintiffs (not prevailing defendants),
  • includes part-time employees as well as full-time employees in calculating whether enough employees have been affected to constitute a mass layoff,
  • requires direct notice to employees (not just to employee representatives), and
  • requires notice to more local officials and agencies.

This Cal-WARN saga is thus an apt exemplar of the more general peril that unsuspecting national employers—duly following national labor law—can encounter when they do business in the Golden State. Be WARNed: California is peculiar.

California Workplace Solution:  Laying off at least 50 employees can trigger a Cal-WARN concern even if the layoff, or furlough, will be short-term. So you may have to give employees at least 60 days’ notice of that event. Some administrative authority suggests that very short furloughs—lasting two weeks, or some shorter period—do not trigger Labor Code termination obligations, which arguably could mean that they escape the grasp of Cal-WARN. That authority is consistent with Cal-WARN language that creates liability only to employees who have “lost … employment,” and with the fact that a very short-term furlough is not a meaningful loss of employment. But the facts of each particular situation will matter. Our specialists at Seyfarth are here to WARN you of the risks and advise you on how best to handle your own situation.

Edited by David Kadue.