Employers are facing increasingly difficult business decisions as a result of COVID-19 and, in developing a plan of action, must take care to avoid the many risks for wage and hour litigation that may be asserted in the wake of those decisions, especially as they relate to the execution of temporary layoffs or furloughs. On March 17, 2020, Governor Newsom issued an unprecedented executive order significantly changing notice requirements for employers contemplating layoffs in California. This blog addresses two of the hidden risks that are potentially triggered at the outset of a furlough: (1) WARN notices under both Executive Order N-31-20 and federal WARN, and (2) the payment of wages, including accrued unused vacation or paid time off. Whether employers call it a furlough, a temporary layoff, or a shutdown, the legal analysis is largely the same.
Notification periods under WARN complicate furloughs, even with California’s executive order
In a mass layoff or plant closure situation, employers may be required to provide notice under the federal Worker Adjustment and Retraining Notification (WARN) Act and equivalent California WARN Act (collectively, the Acts). COVID-19 creates WARN compliance challenges for many employers. This is particularly true for employers who are required to quickly shut down operations by state or local mandate, such as bars and gyms in many California cities. These unique circumstances may create a tension with WARN obligations.
Both the federal WARN and California WARN require employers at a covered establishment to provide 60 days’ notice to covered employees prior to a closing or mass layoff, as defined in the Acts. The California WARN, modeled after the federal WARN, applies to a wider range of employees. There are a number of parameters, exceptions, and industry-specific guidelines under both the federal and California WARN. Of utmost importance here, however, is the fact that the California Court of Appeals has held in The International Brotherhood of Boilermakers v. NASSCO Holdings Inc. that California WARN applies to temporarily furloughed employees who have been furloughed for less than six months, even though the same furlough would not have triggered notice obligations under federal WARN which only applies to furloughs in excess of six months.
Executive Order N-31-20 suspends and modifies provisions of California WARN
On March 17, 2020, Governor Newsom issued an executive order that suspended the California WARN requirements (Labor Code sections 1401(a), 1402, and 1403) for an employer that orders a mass layoff, relocation, or termination at a “covered establishment” from March 4, 2020 through “the end of this emergency.” The suspension is not a wholesale elimination of California WARN, but should be viewed as a temporary modification given this public health crisis.
Employers who want to rely on the executive order will still need to provide employees and the appropriate agencies/officials a written notice as required by Labor Code 1401(a)-(b). They, however, still need to give as much notice “as is practicable,” instead of the standard 60-day notice. The notice must include a “brief statement of the basis for reducing the notification period,” and, for any notices provided after the issuance of the executive order, it must state, verbatim: “If you have lost your job or been laid off temporarily, you may be eligible for Unemployment Insurance (UI). More information on UI and other resources available for workers is available at labor.ca.gov/coronavirus2019.” Further, the layoff must still qualify under the federal WARN’s “unforeseen business circumstances” exception based on COVID-19 related circumstances, as discussed below.
The executive order promises more “guidance” by March 23, 2020 as to how the state plans to implement the executive order. While employers may be tempted to wait on providing WARN notices until obtaining this further guidance, doing so places employers at risk because the executive order still requires notice to be provided “as soon as practicable.”
California WARN already has another exception for “physical calamities” that employers may be able to rely on to the extent that they need an alternative argument. However, the term “physical calamities” has not been defined by statute or binding case law so reliance on this exception alone poses more legal risk. As such, employers will likely want to keep track of all government or official statements that refer to COVID-19 as a “calamity” or similar language with the hope that courts will, after the fact, agree that the fundamental nature of the pandemic qualifies as a physical calamity.
Federal WARN still applies and its exception has been adopted by the executive order
Setting aside the California executive order, federal WARN has not been abrogated and must be complied with until and unless federal action is taken to the contrary. federal WARN has a natural disaster exception and an unforeseen business circumstances exception. The US Department of Labor (DOL) has interpreted “natural disaster” to include “hurricane, floods, earthquake, drought, storm, tidal wave, or similar events caused by nature.” While there is an argument to be made that COVID-19 may amount to a natural disaster, it is the unforeseen business exception that may likely have the greatest chance of success here because it is a prerequisite for reliance on California’s executive order. In interpreting this exception, the DOL regulations state:
An important indicator of a business circumstance that is not reasonably foreseeable is that the circumstance is caused by some sudden, dramatic, and unexpected action or condition outside the employer’s control. A[n] unanticipated and dramatic major economic downturn might … be considered a business circumstance that is not reasonably foreseeable. A government-ordered closing of an employment site that occurs without prior notice also may be an unforeseeable business circumstance.
Courts also look to whether employers exercised “commercially reasonable business judgment” leading up to the conditions calling for the layoffs. Because of the fact-specific inquiry and uncertainty regarding the ability to invoke the unforeseen business exception, it is crucial for employers to evaluate each step taken over the next several days and weeks on a case-by-case basis to ensure compliance with WARN statutes.
Even if one or more of these exceptions to providing the full 60-day WARN notice applies, a WARN-compliant notice should still be provided “as soon as practicable,” even if it is retroactive, such as in the case of natural disasters. To the extent possible, employers should still give as much notice as they can to demonstrate their good faith attempt to comply with the spirit of the law.
Furloughs may trigger final pay obligations, including payment of accrued vacation/paid time off
Employers should keep in mind that under California law furloughs or temporary layoffs may trigger final pay obligations under the Labor Code. There is an unresolved question around whether or not certain wages become due at the outset of a furlough. Under Labor Code 201, “wages earned and unpaid at the time of discharge are due and payable immediately.” This provision applies not only to wages for hours worked, but also to the payment of accrued but unused vacation or paid time off. Whether a furlough is deemed a “discharge” triggering this obligation is unclear, especially in light of the unique circumstances created by COVID-19.
The Division of Labor Standards Enforcement (DLSE) has taken the position in their Enforcement Policies and Interpretations Manual and in two non-binding opinion letters from 1993 and 1996 that temporary layoffs are to be treated as a termination for the purpose of Labor Code 201 obligations unless (1) the layoff will not exceed ten days (and, as stated in the 1996 opinion letter, will not exceed the same pay period) and (2) there is a definite date of return. This interpretation has not yet been adopted by California courts and such an interpretation poses a real challenge for employers trying to navigate the challenges of the COVID-19 crisis. Employers should consult with legal counsel regarding their final pay obligations if they are contemplating a temporary layoff or furlough.
Employers can help mitigate the impact during furloughs on their employees by directing them to the Employment Development Department, which provides many bases for financial relief through government benefits within the context of COVID-19, as described online at https://www.edd.ca.gov/about_edd/coronavirus-2019.htm
The bottom line
Employers are in uncharted territory. In light of the difficult application and implications of Labor Code 201 and WARN requirements during this economic and social crisis, it is critical that employers plan for difficult business decisions and consult with legal counsel along the way.