‘Faltering Business Defense Under WARN Act

On February 20, 2002, hundreds of nonunion employees of APA Transportation Corp. were terminated when the trucking company closed its 24 terminals. Affected employees were given six days’ notice of the layoffs.

The Teamsters Local 560 filed a class action against APA alleging that it violated the Worker Adjustment and Retraining Notification Act by failing to give employees 60 days’ advanced written notice before a closing or mass layoff. APA defended against the class action by claiming that it was “actively seeking capital” and, therefore, was exempted from the WARN Act pursuant to the “faltering business” exception. To qualify for the exception, the employer must prove it had taken specific steps to secure financing to avoid layoffs at or shortly before the time notice was required.

The U.S. District Court for the District of New Jersey granted summary judgment to APA, finding that it fell within the “faltering business” exception to the notice provisions because it demonstrated that it was “actively seeking” financing when it met with its lender on October 24, 2001, and January 2, 2002, to discuss the company’s finances.

The Philadelphia-based U.S. Court of Appeals for the 3rd Circuit reversed the district court’s holding. It concluded that APA’s initial discussions with its lender did not satisfy the “actively seeking” element of the defense because APA did not take any formal steps after the meetings to obtain additional financing or an extension of its loan agreement until after the required 60-day notice period. Although the company eventually sought financing, it did not do so until after the clock started ticking on the 60-day notice period required under WARN.

On March 30, 2009, the U.S. Supreme Court denied review of the 3rd Circuit’s ruling that APA had failed to show it qualified for the “faltering business” defense under the WARN Act. APA Transp. Corp. v. Teamsters Local Union No. 560, U.S., No. 08-812, cert. denied 3/30/09.

Impact: Employers are advised that to qualify for the “faltering business” exception, employers are required to actively seek financing prior to the 60-day written notice period required by the WARN Act.