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The plant closing law: worker protection or government interference?

The Plant Closing Law: Worker Protection Or Government Interference?

Downsizing, demassing, delayering, outplacement, reduction-in-force, resizing, right-sizing, reorganizing, restructuring-all management buzzwords that frequently result in mass layoffs and/or plant closings. While such activity had previously been a painful symptom of unfavorable economic conditions, they continue to exist during these times of relative economic growth and low unemployment.

The American workplace is changing in a number of ways which cause workers to be displaced: Plants are closing; outmoded factories are being replaced with high tech facilities; the restructuring of the economy has resulted in fewer jobs that produce goods and more that provide services; and competition, both at home and abroad, is forcing restructuring, mergers, and acquisitions.

From 1983 to 1988, 9.7 million workers were laid off; 4.7 million of them had more than three years of service with their employers. Unfortunately, these layoffs took many of the workers by surprise. A study of 1,192 firms by the American Management Association showed that 48,000 of 173,800 (28 percent) employees involved in plant closings or layoffs received more than 60 days notice. The average warning, however, for unionized workers is seven days, and for nonunionized workers is two days.

Needless to say, the impact of closings and mass layoffs without notice on workers, their families, and their communities can be substantial. To avoid or minimize these problems, the Congress in 1988 enacted a controversial law-the Workers Adjustment Retraining Notification Act (WARN), also known as the "plant closing law." It went into effect on February 4, 1989.

The controversy surrounding WARN is broad. At issue are the impact on re-employment, unemployment, the mental, physical and fiscal health of displaced workers when advance notice is not given; and the impact on the community when advance notice is not given. It is important to understand selected components of WARN, and to look at the perspectives of WARN's critics, as well as areas of anticipated implementation conflict.

The impact of job loss through layoffs and plant closings has been succinctly examined. As the affect displaced workers:

* They get new jobs with less status and income.

* Family income is significantly reduced, sometimes resulting in mortgage foreclosures.

* Minorities, women, older workers, and lower-level employees experience longer-than-average periods of unemployment following a closing.

* Job loss has been linked to increased alcohol and drug use, divorce, and spouse and child abuse.

* A one-percent rise in unemployment has been linked to an increase of 4.1 percent in suicides, 5.7 percent in homicides, 1.9 percent in stress-related illnesses, and 4.3 percent in admissions to mental hospitals.

The AFL-CIO reports that the suicide rate among laid-off workers is estimated at 30 times the national average. Specific cases also illustrate the magnitude of this dire consequence. At one plant closing where 6,000 workers were laid off, ten committed suicide. In another situation involving 4,700 layoffs, there were six suicides; there were eight in 2,000 at a third.

An interesting observation was made concerning two plant closings in California. General Motors closed its Fremont plant in 1982 and gave three weeks' notice to about 4,000 workers. In 1983, Ford closed its San Jose plant and laid off 2,300 workers. Ford gave its employees six months advance notice and conducted a program to counsel and assist employees in obtaining new employment. GM experienced eight suicides, Ford had none.

A counselor, following 18 months of working with displaced workers from a steel company, summed up the problem:

"The day a man walks out of our plant, a part of him dies. We do a lot of death counseling here, because losing a job is a little like losing a loved one. A man who loses his job through no fault of his own feels he has no control over his own destiny."

Unquestionably, people are hit hard by job loss, and unfortunately employers have not accepted much responsibility for it. Employers were asked "What is the extent of your responsibility for preparing displaced workers for future work?" They responded that the responsibility for assisting workers to prepare for new jobs lay first with the individual; second, with the educational system; and third, with the new employer. On a much lesser scale, they felt that the former employer and the government were the responsible parties.

Jobs are found by displaced workers more quickly when they have advance notice. The average worker is, with notice, unemployed one and one-half weeks fewer than workers who receive no notice. A displaced worker who had advance notice finds work in an average of about 6.29 weeks, while a worker who received no notice took an average of 7.80 weeks to find new work.

Displaced workers do not generally find work at the same wage level as they were accustomed. Marie Howland of the Upjohn Institute for Employment Research found that the extent of financial loss of displaced workers after five years (1979-1984) averaged differently by industry based on whether the job loss occurred in a growing or a declining labor market. For example, displaced workers in metal machinery manufacturing in a growing labor market averaged a loss of $1,173, while similarly displaced workers in a declining labor market averaged a loss of $14,182. Similarly, for a displaced worker in transportation manufacturing, the financial loss in a growing labor market was $6,130, but $45,942 in a declining market (table 1).

Given the impact on an individual's financial and emotional stability, and the reluctance of employers to consistently take appropriate action to cushion the impact, the Congress took action and enacted WARN.

Legislative interest in prenotification is grounded in the premise that adjustment problems are particularly acute when workers and communities cannot plan for a period of personal or fiscal stringency. When workers are displaced, the community is often required to absorb the shock of job loss. Failure to give notice increases the duration and cost of unemployment insurance. Reduced employment spurs in the community a decline in demand for products and services of smaller businesses. Indeed, a study in Maine indicated that the multiplier effect of a job loss in a base industry means one and one-third additional jobs lost.

It is estimated that 60 days advance notice will save $300-400 million annually in unemployment insurance costs and will reduce joblessness by an average of nearly four weeks. Additionally, since local governments are highly dependent on tax revenues, they suffer from the loss of both the firm's and worker's taxable income when a plant closes.

Community health, medical, and social service agencies experience an increase in demand as a result of the situations reflected in the previous section.

Some companies have given notice to workers, but the number is small. The General Accounting Office reported that 30 percent of employers gave no notice to bluecollar workers, but 34 percent gave 1-14 days notice. White-collar workers tended to get notice more often than blue-collar workers, but they tended to get less notice (table 2).

Federal legislators have studied the effect of plant closings and layoffs on individuals and communities. Routinely since 1973, bills had been drafted to regulate this area with strong support from labor and equally strong opposition from business. Congressional support, however, was not strengthened until 1985 when the bill (then called the Labor-Management Notification Act, HR 1616) was defeated by a mere 208-203 margin. It was defeated again in 1987 primarily because it required employers to consult with employees concerning alternatives prior to a decision to shutdown a plant or a mass layoff. In 1988, the WARN Act was included with an omnibus trade bill designed to give the president authority to negotiate with and retaliate against countries that resist U.S. imports. It was passed by the House and the Senate, but did not win enough votes to override former President Reagan's veto.

Increased attention from the public prompted the Congress to separate the trade bill from the plant closing bill. It subsequently became law due to President Reagan's failure to veto or sign it within the allowable time frame.

WARN generally requires employers to give 60 days advance notice of plant closings and mass layoffs. WARN applies to any "business enterprise" (see sidebar, this page) that employs 100 or more full-time employees who work a total of at least 4,000 hours per week, not counting overtime.

Notice to employees and local governments is required for "plant closings," and "mass layoffs" that result in "employment losses." An employment loss is:

* an employment termination other than a discharge for cause, voluntary departure or retirement,

* a layoff exceeding 6 months, or

* a 50 percent reduction of hours for each month in a six-month period.

WARN's notice does not apply to the closing of a temporary facility or the completion of a project when the employees were hired with the understanding that their employment was limited. Exemptions also exist for strikes and lockouts, including situations where economic strikers are permanently replaced.

Employment losses for two or more groups in a single site during any 90-day period which, in the aggregate, exceed the minimum numbers for a plant closing or mass layoff, are subject to WARN's provisions. However, such a situation is exempt if the employer can demonstrate that the employment losses resulted from separate and distinct actions and causes, and were not attempts to avoid compliance.

Layoffs that are announced as lasting less than six months but extend beyond six months will generally be treated as employment losses. An employer many not incur liability in such circumstances, however, if the layoff extension is caused by business circumstances not reasonably foreseeable at the time of the initial layoff. Also, notice must be given when it becomes reasonably foreseeable that the layoff will extend beyond six months.

No employment loss will be deemed to have occurred if the closing or layoff is the result of relocation or consolidation and the employer provides employees with specified reemployment opportunities. For example, if within six months of the layoff, the employee is either offered a transfer to a different site within a reasonable commuting distance, or accepts a transfer, regardless of the distance, an employment loss is deemed to not have occurred.

Special rules for notice apply to the sale of part or all of an employer's business. In such cases, the seller is responsible for providing notice of any plant closing or mass lay-off up to the date of the sale, after which the purchaser is responsible for providing notice.

The 60-day written notice must be given to the representative of the affected employees, to each affected employee who is not represented, to the State Dislocated Worker Unit, and to the Chief elected official of the local government where such closing or layoff is to occur. The notice may be mailed to the employee's last known address or inserted in an envelope with the employee's paycheck.

Employers may delay the order of the shutdown if they are actively seeking capital or business, which if obtained would avoid or postpone the shutdown. It may be felt that giving notice in such cases may impede getting the needed capital or business.

Sixty days notice may also be exempted if the closing or layoff was caused either by unforeseeable business circumstances not known at the time notice, or by a natural disaster. In either case, the employer is required to give as much notice as practicable with an explanation.

Employers who order a plant closing or layoff in violation of the law are subject to several penalties. For each day of violation, the employer can be directed by a federal court to provide back pay and employee benefits that would have been otherwise paid. Liability may be offset by wages paid by the employer to the employee during the period of violation, any voluntary unconditional payments not legally required (e.g. severance pay), and any payment by the employer to a third party on behalf of the employee (e.g., health plans, pension plan benefit payments, etc.).

Furthermore, if an employer fails to make the proper notification to local government, it is subject to a civil penalty of not more than $500 for each day of such violation. However, the penalty is waived if the employer pays to each displaced employee, within three weeks of the shutdown, all amounts for which the employer is liable.

Suits may be brought by a displaced employee, groups of employees, an employee representative, or an aggrieved unit of local government. The prevailing party may be awarded reasonable attorneys fees and costs. Civil actions in federal court are the exclusive means of enforcing the act. However, courts cannot enjoin a closing or layoff.

Critics of WARN have concerns about government intervention, the rigidity of the law, its effect on negotiating business alternatives and on employment increases during growth periods, and the indirect costs of the law.

Critics argue that the law simply is a "foot in the door" for further unnecessary and intrusive regulation of business by government.

Critics point to the European experience to illustrate inflexibility that prenotification causes. Because of the strict regulations in Europe, businesses are slower to react to competitive, consumer, and technological demands. By contrast, countries that restructure quickly to meet market demands, such as Hong Kong, Taiwan, and Korea, do not have plant-closing regulations.

Signaling to competitors and the financial community is another fault of advance notice. Critics argue that advance notice makes it difficult to negotiate to secure business or capital to sustain the business. Also, they assert that customers will discontinue to patronize a business that has announced a closing or a mass layoff, and that creditors will not extend funds to a dying business.

The behavior and performance of workers is also a concern of critics. They say that turnover will increase and productivity will drop. They fear that the most productive and most mobile workers will quit to secure more stable employment, leaving the less productive and less mobile with lower morale. Employers worry that the low morale may result in absenteeism, pilferage, destruction of property and other negative behaviors.

There is also a suggestion that a mandatory notification to workers will decrease employment opportunity during periods of economic growth and expansion. Critics are

Table : Financial Losses of Displaced Workers in Selected Industries from 1979-1984 in Growing and Declining Labor Markets Table 1
Industry In a growing market In a declining market
Metalworking $1,173 $17,182

Machinery Manufacturing

Manufacturing $6,130 $45,942
All Manufacturing $19,758 $31,298

Source: "Plant Closings and Worker Displacement" by Marie Howland, Kalamazoo, MI: W.E. Upjohn Institute for Employment Research, 1988, p. 160.

Table : Advance Notice by Type of Worker Table 2
 Percentage of Establishments
Days White-Collar Blue-Collar
0 26 30
1-14 28 34
15-30 19 16
31-90 17 13
91-180 7 5
181 or more 3 2

Source: U.S. Congress,General Accounting Office, "GAP's Preliminary Analysis of UU.S. Business Closures and Permanent Layoffs During 1983 and 1984," cited in U.S. Congress, Office if Technology Assessment, "Plant Closing: Advance Notice and Rapid Response," Washington, DC: U.S. Government Printing Office, 1986, p. 8.

Table : Advance Worker Notice of Plant Closing in Selected Countries Table 3
Canada 1-16 weeks, depending on
Germany 30 days after notifying
Britain Up to 90 days, depending
 on case
France 2 to 14 weeks, depending
 on case
Sweden Varies, depending on case
Japan "Sufficient" advance notice

Source: Secretary of Labor's Task Force on Economic Adjustment and Worker Dislocation, December, 1986. concerned with the cost of dismissing workers as business subsides. After comparing employment growth in countries that require advance notice with those that do notrequiresuch notice, critics claim that if WARN was in effect from 1982 to 1986, the United States would have employed nearly one-half million fewer people.

Finally, critics argue that WARN will result in higher prices. They are concerned about the other indirect costs that come with new regulation - first, the cost of modifying management information systems to track and adequately report to ensure compliance; and second, the cost to defend against lawsuits. One study indicated that these various costs, which could total between $1 billion and $2 billion per year, would be passed on to the consumer.

There are three aspects of WARN that are likely to be subject to litigation: employee definitions, alternative employment, and unforeseen business circumstances.

Employers may redefine their hiring practices in order to avoid triggering WARN during periods of decline. Rather than hire regular full-time employees, there will be a tendency to hire more part-time and temporary workers with a fixed term of employment. Therefore, if employers fail to make employment conditions clear at the time of hire, displaced workers will challenge the basis under which they were hired.

WARN exempts employers that fail to give notice if they fear it will harm and interfere with efforts to secure business or capital that may solve the problem that is leading to layoffs or plant closings. There will be occasions when new business or capital efforts fail, and employers will have to substantiate to workers and a federal court that its delay was not simply to avoid compliance.

If an employer offers workers another position within reasonable commuting distance, there are two issues that may be raised if there are occasions for litigation. First, is the offer within reasonable commuting distance in accordance with IRS regulations; and second, is the alternative position comparable to the first? In a Congressional letter to the Secretary of Labor, the bill's major sponsors explained their intent that the transfer must be made to a "substantially equivalent position" in order to be exempt.

The law also exempts closings or layoffs prompted by unforeseen circumstances. Since this would mean no notice or a shorter notice to workers and to the community, many such instances will be challenged by displaced workers and displeased local governments.

WARN is good public policy. It reduces the negative impact of jobs loss on individuals, families, and communities. Research indicates that two to three months of advance notice of closing outweighs the cost.

Many advanced industrialized societies provide for advance notice (see table 3), and although there is no empirical counter to the critics' assertion concerning Europe's inability to adjust to market conditions, there is evidence to counter many other positions of critics to WARN.

One study found little evidence that most productive workers quit after being given advance notice. There is some evidence, however, that nine percent of prenotified workers do leave before they are laid off, and they tend to experience the smallest financial losses.

Another recent study indicated that productivity actually improved in the last two to three months before a closing. In examining the European experience with advance notice, there is no evidence that notice causes extensive employee problems.

Prenotification also provides opportunity for workers and communities to seek alternatives to keep the plant operating, such as finding a new owner, and providing local government time to establish retraining and counseling programs. Also, workers may want to explore a buyout. The Center for Employee Ownership estimates that, since 1971, there have been 65 buyouts by workers.

The actual impact of WARN is not yet known. But, given the available evidence concerning individuals and communities, the effects of not having such a law are known and predictable. The reasons for opposition are speculative since there is little historical or empirical basis for their negative projections.

The actual number of companies that will be affected will be small. Most employers, because they have less than 100 employees, are exempt from WARN. In fact, WARN will affect only a very small percentage of private employers - about two percent. But, if we look at the number of employees that will be affected, the picture changes radically - that two percent employs almost half of the nation's 120 million workers.
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Author:Nowlin, William A.; Sullivan, George M.
Publication:Industrial Management
Date:Nov 1, 1989
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