New York labor and employment partner Jerry Hathaway authored an article for the New York Law Journal titled, “When a Portfolio Company Fails: WARN and Upstream Liability Risk for Private Equity Funds and Sponsors.”
The Worker Adjustment and Retraining Notification Act, 29 U.S.C. §2101 et seq. (1988) (WARN or the Act), requires advance notice of large layoffs and awards damages when the required notice is not given. In a WARN situation, there is always a company in financial difficulty, and plaintiffs seeking damages under the Act have become increasingly aggressive in seeking an entity with greater asset liquidity than what the failed company has to offer. Sometimes these plaintiffs target the financial institution that stopped lending money to the failed company prior to the layoffs. Hathaway writes that when the failed company is a portfolio company of a private equity fund, the plaintiffs may go after the private equity fund, asserting that together, the fund and the failed portfolio company constitute a single employer.
In his article, Hathaway reviews several private equity cases involving WARN liability and offers three main takeaways for private equity funds and sponsors.