THIRD CIRCUIT RULES THAT WARN ACT OBLIGATIONS ARISE WHEN LAYOFFS ARE PROBABLE – NOT MERELY POSSIBLE
In AE Liquidation (“Eclipse Aviation”), the Third Circuit considered the question of what standard to use when an employer is claiming the unforeseeable business circumstances exception under the federal Worker Adjustment and Retraining Notification (WARN) Act. The Third Circuit agreed with five other circuit courts that have considered the issue that it should apply the “probability” test.
Essentially, the test is whether layoffs were probable under the circumstances as opposed to merely a possibility. The court will examine how an employer exercising commercially reasonable business judgment in predicting the demands of the particular market would have reacted. In doing so, the court also will consider the facts and circumstances that led to the closing in light of the history of the business and of the industry in which that business operated.
The WARN Act requires that employers with more than 100 employees who are undergoing a mass layoff or plant closing must give sixty (60) days notice to the employees, their union (if any), as well as local and state officials, that the layoff or plant closing is going to occur. Failure to do so can result in a finding of liability that the employer owes each employee 60 days wages and benefits.
There are a few exceptions to WARN Act obligations that employers can claim to reduce or eliminate the 60 days notice requirement. The three exceptions are: 1) faltering company (actively seeking financing/investment); 2) unforeseeable business circumstances; or 3) a natural disaster.
In the Eclipse Aviation case, Eclipse entered into contract with an entity that was its largest shareholder, the European Technology and Investment Research Center (ETIRC) to sell it airplane kits that would be assembled in Russia. A Russian bank was supposed to provide financing for the deal. In June 2008, the Russian airplane deal was not working out as well as expected and Eclipse was beginning to run out of working capital. By early November 2008, Eclipse was in default on several loans and filed for bankruptcy protection under chapter 11 of the bankruptcy code. It also entered into an agreement of sale with ETIRC to sell it essentially all of the company’s assets. The agreement provided that Eclipse’s employees would be retained at least through the closing of the sale.
Unfortunately, the deal fell apart because of lack of financing and, after several months, Eclipse filed for chapter 7 liquidation on February 24, 2009 — and laid off all the employees. The court held that Eclipse met its burden of demonstrating that its eventual shut down and lay off was not probable prior to February 24, 2009, and, therefore, it was entitled to invoke the unforeseeable business circumstances exception. Applying the probability standard, Eclipse demonstrated that ETIRC’s failure to obtain financing was not probable prior to Eclipse’s decision to lay off its employees on February 24, 2009.
Although the probability test is a higher standard than the possibility test – meaning an employer may not have to give notice under similar circumstances — employers must still be conscious of WARN Act obligations and the potential for layoff or shutdown at least 60 days before such an occurrence. Too often employers are focused on other aspects of saving the business and fail to remember the requirements of the WARN Act.
THE THIRD CIRCUIT REITERATES THAT THE AGE DISCRIMINATION IN EMPLOYMENT ACT PROSCRIBES AGE DISCRIMINATION, NOT MERELY FORTY-AND-OVER DISCRIMINATION
The Age Discrimination in Employment Act (ADEA) protects employees who are 40 years or older from intentional discrimination because of their age and from the effect of facially neutral policies that disparately impact employees in an age-protected class. In a recent disparate impact case, Karlo v. Pittsburgh Glass Works, the Third Circuit held that a subgroup of employees over the age of 40 can state a disparate impact age discrimination claim even if the employment practice at issue did not disparately impact younger “40 and over” employees.
To state a prima facie case for disparate impact under the ADEA, a plaintiff is required to identify the specific, facially neutral policy and provide statistical evidence that the policy caused a material disparity based on age. In Karlo, the plaintiffs were a subgroup of employees 50 years and older who claimed that they were disproportionately impacted by a reduction in force (RIF) when compared to younger employees protected by the ADEA. Defendant moved to dismiss the claim on the ground that subgroups are not cognizable under the ADEA. In other words, according to defendant, the prima facie case should be limited to evidence comparing only employees under 40 with those employees over 40. This was an important point in Karlo because, if defendant were correct, the statistical evidence concerning the 50 and over employees would be washed out by the inclusion of the more favorably treated 40-49 year olds.
The Third Circuit rejected defendant’s argument, relying on the Supreme Court’s unanimous opinion in O’Connor v. Consolidated Coin Caterers Corp. In O’Connor, the Court made it clear that the ADEA “proscribes age discrimination, not forty-and-over discrimination.” Indeed, the O’Connor Court explained, “The fact that one person in the protected class has lost out to another person in the protected class is . . . irrelevant, so long as he has lost out because of his age.” The Karlo court held that the same principal applies to disparate impact claims.
The Third Circuit also relied on Connecticut v. Teal, which focused on the rights of individuals being protected by the ADEA, rather than the rights of a class. In Teal, the plaintiffs challenged a two-step process to determine the eligibility of promotions. The first step required applicants to pass a test, which blacks disproportionately failed when compared to whites. The defendant – a Connecticut state agency – however, argued that, in the second step of the process, the agency gave blacks preferential treatment through an affirmative action program. Thus, the second step “counterbalance[ed]” the adverse impact on blacks as a class. The Supreme Court rejected this “bottom line” defense, holding that the ADEA protects individuals from discrimination, not classes of individuals. To the Third Circuit in Karlo, recognizing subgroups under the ADEA similarly would preclude this “bottom line” defense. In recognizing subgroups under the ADEA, the Third Circuit has split from the Second, Sixth, and Eighth Circuits that do not recognize the validity of claims from subgroups.
Bottom Line: When considering the impact that employment practices may have on a person protected by the ADEA, employers in the Third Circuit (New Jersey, Pennsylvania, Delaware, and the Virgin Islands) must compare the treatment of that person to anyone materially younger than the person, even if those younger are themselves protected by the ADEA.
THE WRONG OUNCE OF PREVENTION CAN COST A POUND TO CURE
A recent federal court decision in Pennsylvania highlights the need to carefully review hiring practices and screening procedures to ensure compliance with the law. Many employers are aware of a growing trend restricting the questions that an employer may ask a prospective employee. Such bans include inquiries concerning prior compensation and criminal records in, among other places, Philadelphia, Delaware and New York City. Employers may not be aware, however, that they face liability for uniformly enforcing screening practices that not only appear legal, but are required by statute.
In Kaite v. Altoona Student Transportation, a bus driver, Bonnie Kaite, alleged that her former employer required her to undergo a background check to comply with a new state law. Ms. Kaite purportedly refused to comply with her employer’s request because of her religious beliefs. Specifically, she alleged that it was her sincerely held religious belief that fingerprints would constitute “the mark of the devil” and she would be unable to go to heaven if she submitted to fingerprinting. Ms. Kaite’s employer, Altoona Student Transportation (“AST”), responded by terminating her employment.
Ms. Kaite subsequently initiated claims under both state and federal laws for religious discrimination. AST moved to dismiss the claims because, among other grounds, it was compelled to perform the background check by the Pennsylvania Child Protective Services Law. Indeed, AST contended it faced criminal penalties if it failed to require the background check.
Judge Gibson rejected AST’s motion to dismiss and allowed the case to proceed. The court found, among other holdings, that AST may have been able to accommodate Ms. Kaite with an alternative type of background check that did not require fingerprinting. Further, the decision rejected the premise that the statutory requirement automatically excused the employer’s refusal to accommodate the bus driver.
Judge Gibson’s decision to reject AST’s motion to dismiss serves as a reminder to carefully consult with an appropriate professional before dogmatically applying a policy, terminating an employee, or otherwise taking adverse employment actions. Even when an employer appears compelled to act by law, the wrong ounce of prevention may sometimes cost a pound to cure.