In a typical corporate transaction, the parties structure the deal as an asset purchase, whereby the buyer purchases essentially all of the company’s property, equipment, goodwill, customer lists, etc. If the asset purchase results in all or substantially all of the seller’s employees being offered immediate employment by the buyer, no employment loss occurs and no notice of the transaction is required under the Worker Adjustment and Retraining Notification Act (WARN). However, as pointed out by the Eighth Circuit Court of Appeals last month, if the buyer does not hire a sufficient number of the seller’s employees to avoid WARN thresholds, and if the seller fails to provide the required notice, the buyer can be held liable under WARN even in an asset purchase context.
In Day v. Celadon Trucking Servs., Inc., the buyer bought most of the company’s assets, including leases, contracts, databases, customer lists, vehicles, mechanical equipment and the right to use the seller’s name going forward. However, within fourteen days of the sale, the buyer decided not to hire about two-thirds of the seller’s employees. The asset purchase agreement required the seller to provide WARN notice to its employees prior to closing, advising them of the possibility that they would not be hired by the buyer. However, the seller failed to provide this notice, and its terminated employees filed a class action lawsuit against the buyer for its independent failure to provide WARN notice.
The Eighth Circuit affirmed a grant of partial summary judgment for the plaintiffs on the WARN claim. The buyer argued that as an asset purchaser, it was not an employer responsible for providing notice under WARN. The court rejected this position, citing a provision under WARN that makes the buyer responsible for providing notice of layoffs if the transaction involved the “sale of an employer’s business.” The Eighth Circuit stated that this general term was used under WARN to avoid a situation where the structure of the transaction determines whether notice is required. Even in an asset purchase scenario, if the deal involves the buyer essentially continuing the seller’s business, it falls under this sale of business provision.
In this case, the court pointed to the list of purchased assets, as well as non-competition agreements signed with several of the seller’s executives that made it clear that the buyer would continue the seller’s business after the sale. Therefore, the buyer was legally responsible for providing 60 days advance notice of its intent not to hire a substantial portion of the seller’s employees.
How can asset purchasers avoid this legal result? First, the seller’s obligation to provide WARN notice can be strengthened. In this case, the seller indemnified the buyer for its errors, but ran out of money during litigation. In many transactions, the parties escrow a portion of the purchase amount to cover these types of post-sale liabilities. Next, the buyer should have required that the seller terminate all of its employees before the date of the sale. The purchase agreement here stated that all of the seller’s employees would remain employed by the seller for up to fourteen days after the sale to assist with the transition. In a sale of business context, for WARN purposes these employees were considered to have moved to the buyer as of the date of sale even if they were never actually employed by the buyer. Because the employment loss occurred after the date of sale, the buyer assumed liability for WARN notice.
Asset purchase agreements typically spell out responsibilities between the parties for WARN compliance. Companies involved these transactions should carefully determine WARN’s applicability to their circumstances, and take appropriate precautions to assure that required notices are sent, and that the deal structure protects them from the other party’s failure to fulfill these legal responsibilities.