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Private Equity Firm's De Facto Control Over Employer May Lead to Liability Over Termination Notices

    Client Alerts
  • October 13, 2023

As with many federal labor laws, the Worker Adjustment and Retraining Notification (WARN) Act imposes obligations on employers. In most situations, the employer is the entity listed on the employees’ W-2. However, in some cases, federal courts define employer more broadly to include affiliated entities.

Last week, the Fifth Circuit Court of Appeals reversed a grant of summary judgment in a WARN lawsuit filed against a private equity firm and associated investment fund.

In Fleming v. Bayou Steel BD Holdings II LLC, the plaintiffs’ W-2 employer, a steel mill, shut down and terminated all workers without advance notice. The employees filed a lawsuit against the mill, the investment fund that owned the mill, and the private equity group that advised the fund, alleging failure to provide advance notice of the closure under WARN. The district court dismissed the fund and the private equity firm from the suit on the grounds that they did not meet the definition of employers under WARN.

In reversing this decision, the Fifth Circuit concluded that the plaintiffs had raised material questions of fact as to whether the two dismissed entities exercised de facto control over the day-to day operations of the mill.

The court noted that the private equity firm was deeply involved in oversight and management of the mill. The court also noted that some of the mill’s directors were associated with that firm. The Fifth Circuit cited Department of Labor rules issued under WARN that allow multiple companies to be grouped as a single entity for purposes of WARN liability.

The court also rejected the private equity firm’s argument that it could not be held responsible for WARN notice because it acted only as an advisor to the mill and investment fund, not in an ownership role. The Fifth Circuit concluded that based on the plaintiffs’ arguments, the private equity group and mill operated as a single entity, with the advisory firm exercising control over personnel matters.

This case should serve as a reminder to companies affiliated with businesses undergoing facility closures or mass layoffs. Under WARN, they can be found responsible for providing notice of such action, even if they do not have a direct ownership interest in the business. If that entity controls the decision to close or downsize the business, it may be found responsible for giving affected workers notice of the action.

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