With Federal Layoffs Coming, It's Time to WARN Workers

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Congress has left town for President's Day recess, the President decided that it was good time to have a Florida golf weekend, and the sequestration is due to take place on March 1. It is hard to find anyone in Washington who thinks the sequestration will not take effect. Yet contractors have not yet sent out required notices to employees notifying them of potential layoffs.

Much of the federal government will have substantial spending reductions. The Pentagon's spending alone will decline by $500 billion over ten years, about $43 billion in fiscal 2013. Many government contractors can foresee the layoffs that will be necessary, and this predictability triggers a legal requirement that they send out notices to their employees 60 days in advance.

The requirement that firms expecting mass layoffs, plant closings, or certain other employment losses inform their employees 60 days in advance comes from the Worker Adjustment and Retraining Notification Act of August 1988. The WARN Act is meant to allow workers to prepare themselves for the risk of layoff, temporary or permanent.

Sending out WARN notices is routine. Firms that sent out recent WARN notices include American Airlines, Pfizer, and Sodexo. In 2011 Qimonda AG, an electronic memory products manufacturer, reached a $35 million settlement for not sending out notices in time.

Why require notices? Informed workers might look for other jobs, skip a planned vacation, or delay the purchase of a house or car. Or, another member of the family might start looking for a job.

WARN notices serve a purpose, because laid-off workers generally see a decline in earnings. It is particularly hard to find a job in today's economy. In January the economy created only 157,000 jobs, and the unemployment rate rose to 7.9 percent.

The economy has 3.2 million fewer jobs than at the start of the recession, in December 2007. Last week the Bureau of Labor Statistics issued its Job Openings and Labor Turnover Survey results for December 2012. It showed that rates of employer hiring and job openings declined in December by two-tenths of a percentage point.

Last year the Labor Department and the White House asked federal contractors not to send out required WARN notices. Many contractors were expecting layoffs on January 2, and notices would have been sent on November 1, shortly before the election. That's a likely reason the administration asked defense firms to desist.

But the election is over, and with the sequestration due to take place on March 1, there's no reason for firms to withhold the notices. Some have already reduced hiring in anticipation of future spending cuts.

The Labor Department, which supposedly has employees' best interests at heart, issued a guidance notice on July 30, 2012 discouraging firms from issuing WARN notices.

The July guidance letter was followed by a Memorandum for Chief Financial Officers and Senior Procurement Executives of Executive Departments and Agencies from the White House Office of Management and Budget. Dated September 28, 2012, the memo counseled defense employers not to issue layoff notices on November 1. It is the first time in history that the White House has asked firms not to file layoff notices.

The reason for the memo was that "Despite DOL's guidance, some contractors have indicated they are still considering issuing WARN Act notices, and some have inquired about whether Federal contracting agencies would cover WARN Act-related costs in connection with the potential sequestration."

Daniel Werfel, Controller of OMB's Office of Federal Financial Management, and Joseph Jordan, Administrator for Federal Procurement Policy, assured employers that if they did not send out layoff notices and layoffs occurred, the "contracting agency," such as the Pentagon, would absorb the penalties and attorneys' fees the employers would have to pay, a significant cost to taxpayers.

However, OMB's memo states that if sequestration occurs and the contractor has followed Labor Department guidelines, "any resulting employee compensation costs for WARN Act liability as determined by a court, as well as attorneys' fees and other litigation costs (irrespective of litigation outcome), would qualify as allowable costs and be covered by the contracting agency, if reasonable and allocable."

If firms don't file WARN notices and certain levels of plant closings or layoffs occur on March 1 or within the 60-day window of notification, employers are liable for penalties of 60 days back pay and benefits paid to workers.

What could that cost?

Lockheed Martin has stated that it expects to lay off 10,000 employees if a sequester occurs. Given other firms' current payrolls, if they laid off 10 percent of their workers, I estimate that Boeing would lose 17,000 employees; General Dynamics, 9,500 employees; Northrop Grumman, 7,000; and Raytheon, 6,800, and SAIC 4,000. This adds up to 54,300 employees.

Using BLS's average weekly earnings in the industry of $951, I calculate that the wage bill would come to about $76 million for Lockheed Martin for its 10,000 workers. Boeing would owe around $129 million; General Dynamics, $72 million; Northrop Grumman, $53 million; Raytheon, $52 million; and SAIC $30 million.

These contractors and the Defense Department would be liable for $412 million in back pay, plus benefits. If 20 percent of employees were laid off, the bill would run to $825 million plus benefits.

Benefits liabilities would be significant. A 2012 CBO study noted that 30 percent of a private-sector employee's total compensation cost was tied to benefits. Using even a conservative version of that ratio, benefits owed could top $100 million in a 10 percent layoff scenario.

These amounts do not account for court costs and attorney fees, which might run into additional tens of millions.

This means that failure to send out WARN notices could lead to a bill for Uncle Sam of $500 million to $1 billion, depending on the number of layoffs.

There's a real question as to whether OMB is allowed to spend this sum without congressional approval. Lawyers can argue over whether this is a true "reasonable and allocable" cost.

But with the election over, and the sequestration ten days away, there's no reason why firms shouldn't issue required WARN notices to their employees and avoid the penalties. Why the wait?

Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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