Warning Employees About the Fiscal Cliff

At the iconic ending of the 1991 film “Thelma & Louise,” Geena Davis’s character Thelma says “Let’s not get caught. Let’s keep going!” And with a smile, Louise (Susan Sarandon) steps on the gas pedal of their convertible and they go careening off the cliff to their doom.

If the Federal government’s spendthrift ways keep going full-throttle like Thelma & Louise’s car, then on Jan. 2, 2013, a sequestration order could take effect that would potentially send the nation off the “fiscal cliff.”

The fiscal cliff refers to the automatic enactment of tax and spending provisions at the beginning of 2013 if Congress does nothing. They include the expiration of the Bush tax cuts and the FICA payroll tax holiday, plus the automatic spending reductions (known as sequestration) included in last summer’s debt ceiling deal, the Budget Control Act of 2011. 

The Congressional Budget Office has estimated that sequestration would automatically cut about 10 percent of discretionary defense spending, and almost 8 percent of non-defense discretionary spending. Analysts say that such cuts to military spending could lead to the loss of over a million private sector jobs and another 350,000 active-duty military and Department of Defense (DoD) jobs. It is plausible there would be thousands more layoffs for non-defense federal contractors.

If sequestration happens, many of these mass layoffs will occur at employers with 100 or more full-time employees. Because of the anticipated magnitude of the layoffs, many employers would be required by the WARN (Worker Adjustment and Retraining Notification) Act of 1988 to provide employees with 60 days written advance notification of plant closings and mass layoffs.

Maybe not. The Obama Administration recently announced that federal contractors are not required to provide WARN Act notices 60 days before that date to their workers employed under government contracts funded from accounts that may be sequestered on Jan. 2.

Why should the WARN Act be disregarded in this case? The Department of Labor’s (DoL) guidance stated: “in the context of prospective across-the-board budget cuts under the (Budget Control Act of 2011), WARN Act notice to employees of federal contractors, including in the defense industry, is not required 60 days in advance of Jan. 2, 2013, and would be inappropriate, given the lack of certainty about how the budget cuts will be implemented and the possibility that the sequester will be avoided before January.”

Fair enough. It is true that Congress is grappling with how to avoid sequestration’s automatic cuts. However, you’ll note that 60 days prior to Jan. 2 is Nov. 3 – the Saturday prior to Election Day 2012. The last thing an incumbent administration wants is for hundreds of thousands of voters to be warned of imminent pink slips only days before the election.

The WARN Act provides three exceptions for which notice may be given fewer than 60 days before a plant closing or mass layoff: 1) faltering company, 2) unforeseeable business circumstances, and 3) natural disaster exceptions. The DoL cites the unforeseeable business exception as the reason why WARN Act notices would be inappropriate for sequestration-related reductions in force. But it is confusing, especially when you note that an earlier DoL fact sheet on the WARN Act noted that “the Department of Labor…has no administrative or enforcement responsibility under WARN.” Rather, employees or their unions file actions in U.S. district courts to enforce the WARN Act seeking back pay and other damages.

So what are HR professionals at federal contractors supposed to do? Consult with employment counsel, to be sure. Stephen Woods, Shareholder with Ogletree Deakins in Greenville, S.C. says the bottom line is employers have to follow the law of the land.

“With no definitive information on when budget cuts and associated employment reductions-in-force will occur and while not perfect from a practical perspective, a conditional WARN notice – conditioned on sequestration occurring, an individual’s federal government program being impacted, and the employee being RIF’ed – is the smart move for federal contractor employers,” Woods said.

“The DoL says sequestration isn’t foreseeable, that several elected officials have said they don’t want it, and that the Office of Management and Budget hasn’t even begun to determine how the cuts would be applied across DoD programs. But the DoL doesn’t file WARN class actions seeking significant monetary damages; classes of employees do.  And sequestration is the law, until and unless Congress acts to amend it – which, everyone seems to agree, is far from certain.  Conditional notice is the best available option for a contractor to reduce the litigation risk.”

There’s likely to be more news on this issue throughout the fall, so stay tuned. After all, no one wants any SHRM members to get so frustrated they end up driving off a cliff.