With the 2012 presidential election next month, contractors for the Department of Defense ("DOD") are likely concerned about the sequestration of funds set to begin on January 2, 2013. Sequestration will mean automatic cuts to the defense budget if Congress is unable to reach agreement with regard to budget issues. If sequestration occurs, defense and other federal contractors could be forced to significantly reduce personnel in response to reduced government demand for goods and services.

Generally, the WARN Act requires employers with 100 or more employees to provide 60 days advance written notice to employees prior to the closing of a work site resulting in the loss of 50 or more employees, or mass company layoffs resulting in employment loss for 500 or more employees (or less if accounting for at least 33% of the total workforce). The WARN Act and its regulations do not contain clear exceptions to notice requirements based on changes in available funding for DOD procurement contracts for goods or services.

Earlier this year, however, the Department of Labor announced that "contractors of the DOD whose contracts may be terminated or reduced in the event of sequestration on January 2, 2013," are not required to give the 60-day WARN Act notice to employees working under such contracts because efforts were being made to avoid sequestration and potential closing and layoffs resulting from DOD contract terminations or cutbacks were speculative. This guidance was reinforced most recently by a September 28, 2012 Executive Memorandum from the White House stating that "it is neither necessary nor appropriate for federal contractors to provide WARN Act notice to employees 60 days in advance of the potential sequestration." The Memorandum also states that if a DOD contractor follows the DOL guidance letter, "any resulting compensation costs for WARN Act liability as determined by a court, as well as attorneys' fees and other litigation costs (irrespective of litigation outcome)," which the contractor incurs "would qualify as allowable costs and be covered by the contracting agency, if otherwise reasonable and allocable."

These publications are not binding legal decisions, regulations or amendments to the WARN Act. As such, there is significant uncertainty in this area. Affected contractors should proceed with caution and explore potential ramifications before making a decision about whether to delay providing notice, or take the more conservative approach of providing notice in accordance with the WARN Act. Furthermore, many states have their own mini-WARN Acts, most of which have more stringent requirements than the federal law. Because the government is highly unlikely to cover liability and litigation costs incurred in connection with these state laws, contractors should also consider potential liability in determining whether they will follow this guidance.