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Ninth Circuit Court Applies Single Employer Test to Hold Company Liable Under the WARN Act

Volume 3, Issue 4
April 15, 2004

Upholding a grant of summary judgment in favor of a group of former employees, the U.S. Court of Appeals for the Ninth Circuit found that two nominally separate employers, Darby Lumber and Bob Russell Construction, were properly found to be a "single employer" and thus covered by the Worker Adjustment and Retraining Notification Act ("WARN Act").

Darby Lumber operated a lumber mill and manufactured finished lumber. Bob Russell Construction built logging roads, hauled timber, and managed the log yard for Darby Lumber. Bob Russell Construction was also a wholly owned subsidiary of Darby Lumber. Robert Russell owned forty-nine percent (49%) of Darby Lumber and was the trustee for the other fifty-one percent (51%) of the shares.

With only one day's notice, Darby Lumber advised employees of the company's financial difficulties and a major layoff. The next day all eighty-eight (88) employees were laid off. The eighteen (18) employees of Bob Russell Construction were laid off over the next several months. The employees of both companies filed suit contending they were entitled to the sixty (60) days' notice required under the WARN Act. The two companies contended that neither had the requisite one-hundred (100) full-time employees for WARN Act coverage and that even if they were, they were excused from giving such notice based on the affirmative defenses of "faltering company", "unforeseeable business circumstances", and "good faith".

The Ninth Circuit Court agreed with the district court's application of a WARN Act regulation setting out the test for single employer status, 20 C.F.R. § 639.3(a)(2). The regulation identifies the factors to be considered in assessing the degree of independence between two or more companies, including common ownership, common directors and/or officers, de facto exercise of control, unity of personnel policies emanating from a common source, and dependency of operations. While there were significant differences in their respective personnel policies, two companies had common directors and officers. Additionally, Darby Lumber's manager was given daily reports on the activities of both companies and at times directed the activities of the construction company. This manager also decided to move lumber yard employees to the payroll of the construction company and to have employees of the construction company work in the log yard. Furthermore the decision to shut down both companies was made by Robert Russell. Based on these facts, the court concluded that Darby Lumber exercised de facto control over Bob Russell Construction, and thus the two were a single employer for purposes of the WARN Act. The court also ruled that the companies failed to produce any evidence sufficient to let a jury decide whether they had any valid affirmative defenses to providing less than the required sixty (60) day notice. Thus, the two companies were found liable to its former employees for $60,345.45 in damages and $123,033.44 in attorney's fees.

This case is an important reminder for small employers that have other subsidiary or related business entities to consider the possible implications of single employer status under the WARN Act before shutting down operations or engaging in a mass layoff.

Childress v. Darby Lumber, Inc., 357 F.3d 1000 (9th Cir. 2004).

KZA Employer Report articles are for general information only; they are not intended and should not be construed to be legal advice. Reading or replying to such articles does not establish an attorney-client relationship. In addition, because the subject matters and applicable laws discussed in Employer Report articles are often in a state of change and not always applicable to every type of business entity or organization, readers should consult with counsel before making decisions based on the same.