A recent Fifth Circuit case highlights an employer’s obligation to give employees notice of mass layoff or plant closure under the Worker Adjustment and Retraining Notification Act. Fleming v. Bayou Steel BD Holdings, 83 F.4th 278 (5th Cir. 2023). The case also sets forth the test used to determine if a parent company may be held liable for the actions of a subsidiary or portfolio company under the WARN Act. Id.
The WARN ACT
The WARN Act is a federal law that applies to employers with more than 100 full-time employees. 29 U.S.C. § 2101(a)(1). Under the Act, employers must provide employees, their collective bargaining representatives, and the designated state entity with 60-day notice of a mass layoff or plant closing. 29 U.S.C. § 2102. In Virginia, notice must be provided to the Virginia Employment Commission.
Under the WARN Act, a mass layoff is defined as a layoff of (1) at least 500 employees, or (2) 50 or more employees that comprise 33% of employees at a single site of employment. Id. Similarly, a plant closing is defined as “the permanent or temporary shutdown of a single site of employment . . . if the shutdown results in an employment loss at the single site of employment during any 30-day period for 50 or more employees excluding any part-time employees.” Id. The Act creates a cause of action against employers who fail to comply with these requirements, and employers are liable for back pay, benefits, and attorney’s fees. Id. at §2102.
Bayou Steel was a steel manufacturer in Louisiana. In 2016 Black Diamond Capital Management (“BDCM”) acquired the company, through a holding company called Bayou Steel BD Holdings. BDCM installed a new management team and replaced the board of directors with three BDCM employees, and three independent directors. Beginning in 2017, Bayou Steel began experiencing financial difficulties, which required additional cash infusions from BDCM, and third-party loans. In 2019, BDCM stated that it would no longer provide funds to Bayou Steel and would accelerate the repayment of outstanding loans.
In September 2019, Bayou Steel’s board of directors voted to file for bankruptcy. That same day, Bayou Steel told employees it would be closing the plant and that all employees were terminated effective immediately. The employees filed suit against BDCM under the WARN Act, alleging that Bayou Steel ordered a “plant closing” without providing the required notice.
The District Court granted BDCM’s motion for summary judgment on the basis that Bayou Steel was the entity that failed to comply with the Act, and BDCM the private equity parent company was not liable as the “employer.” The employees appealed, arguing that BDCM was so intertwined with Bayou Steel as to constitute a “single employer” under 20 C.F.R. § 639.3(a)(2). Fleming, 83 F.4th at 294-95.
The Fifth Circuit Decision
Bayou Steel’s rapid closure of the Louisiana Plant failed to comply with the WARN Act’s notice requirement. The question was whether BDCM could be held liable as a “single employer.” Section 639.3(a)(2) sets forth five factors the court must balance to determine whether an entity is truly so intertwined as to constitute a “single employer” under the Act: (1) common ownership, (2) common directors and/or officers, (3) de facto exercise of control, (4) unity of personnel policies emanating from a common source, and (5) the dependency of the operations.
Common ownership: BDCM owned Bayou Steel through a complex set of holding companies. The Plaintiffs admitted that “BDCM did not technically ‘own’ BD Fund IV,” the ultimate owner of Bayou Steel.” Fleming, 83 F.4th at 295. Instead, the plaintiffs argued that the court should look to the financial control structure, rather than “the formal corporate structure.” The court rejected this argument for two reasons. First, ownership requires “possession not mere control.” Id. Second, considering financial control would collapse the element into the “de facto exercise of control” element, and the courts must avoid interpretations that would cause one provision to duplicate another, or otherwise have no consequence. Id. at 296. Therefore, to satisfy the common ownership prong, there must be either direct ownership or situations with fraudulent transfer of ownership. Therefore, this element weighed in favor of the defendants.
Common directors and/or officers: The parties agreed that Bayou Steel’s officers were not common with BDCM’s. Instead, the plaintiffs pointed to the board’s composition, which included three BDCM employees. The plaintiffs further argued that the other non-BDCM board members were not independent of BDCM. However, the court stated that this factor does not look to independence, but only to “shared membership of the formal management team.” Here, at no point did BDCM comprise a majority of the BDCM board. This coupled with the lack of shared officers, weighed in favor of the defendants.
De facto exercise of control: This factor considers whether the defendant directed the allegedly illegal employment practice giving rise to the lawsuit. The plaintiffs failed to provide conclusive evidence showing that BDCM was responsible for the WARN Act violation at the Bayou plant. However, the evidence was conflicting. For example, Bayou Steel’s officers and directors deny knowing who decided to close the plant. However, the CEO stated that he felt micromanaged by BDCM who were “going around [him] constantly.” Further, Bayou’s HR manager was working with lawyers on WARN Act notifications, which were never issued. The court stated that a reasonable factfinder could interpret this to suggest that BDCM went around Bayou Steel’s officers to close the plant without proper notice. Ultimately, the record was conflicting, and the facts were disputed, thus failing to meet the standard for summary judgment and weighing in favor of the plaintiffs.
Unity of personnel policies emanating from a common source: To determine whether there is a unity of personnel policies the court considers whether Bayou Steel and BDCM “had separate responsibilities regarding personnel issues.” Although BDCM prompted Bayou Steel to engage in cost-cutting measures that affected personnel policies, the court reasoned that this falls short of showing that the entities had unified personnel policies on a day-to-day basis. Therefore, this element weighed in favor of the defendants.
Dependency of the operations: BDCM was not dependent on Bayou Steel for the continuance of its own operations, and the entities did not commingle finances. The plaintiff-employees did not contest this factor on appeal.
The Fifth Circuit found four of the factors weighed in favor of the defendant’s BDCM. However, the “control” factor, which looks at who “specifically directed the allegedly illegal employment practice” was a disputed material fact precluding summary judgment. The Fifth Circuit adopted the reasoning of the Third Circuit in stating that the question of de facto control is of such importance that “liability might be warranted even in the absence of the other factors.” Fleming, 83 F.4th at 299.
Therefore, the court remanded to the district court, stating that “if BDCM ‘specifically directed’ the closing of the mill without proper notice, the company may be liable for Bayou Steel’s WARN Act violation even absent the other factors.” Id.
- Companies with more than 100 full-time employees are subject to the WARN Act which requires a company to give notice 60 days in advance of a mass layoff or plant closing.
- A parent or holding company may be liable for the actions of its subsidiary if the operations are so intertwined as to constitute a “single employer.”
- The court will engage in a five-factor balancing test to determine if the relationship constitutes a “single employer.” However, the plaintiffs may prevail in the case by proving the control factor alone. The control factor considers whether the defendant directed the allegedly illegal employment practice giving rise to the lawsuit.
- If your company directs its subsidiary to conduct a mass layoff or close a plant without notice you may still be liable under the WARN Act.
- Anytime you plan to fire multiple individuals, or close facilities leading to job loss, it is advisable to contact an employment attorney.
If you need more guidance or information, contact the employment law attorneys at General Counsel, P.C. today at 703-556-0411, firstname.lastname@example.org, or use this Contact Us Form. Attorneys at General Counsel, P.C. specialize in labor and employment law and have experience working with businesses, non-profits, and individuals throughout the DC Metropolitan area and across Virginia, specifically in Fairfax County, Arlington, and Loudoun County.