Obama Asks Big Business to Break the Law

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The White House has initiated an effort, possibly extra-legal, to head off required layoff notices to employees of defense contractors on the cusp of Election Day. Worse, without congressional approval, it has offered to pay firms' penalties and court costs, potentially $500 million or more, out of the Pentagon budget.

This puts defense contractors in an untenable position, creating additional economic uncertainty. They can break the law and keep the White House happy, or follow the law and annoy their major customer.

If this were Venezuela, no one would think twice. But in America, if we're not shocked, something is very wrong.

Layoff notices are required by November 1, according to the 1988 Workers Adjustment and Notification Act (WARN),because deep cuts in military spending, known as sequestration, are currently scheduled to take effect on January 1. If cuts occur, they will lead to mass layoffs.

The Obama administration is concerned that layoff notices could cost the Obama-Biden ticket votes, especially in Ohio and Virginia, swing states with a strong defense presence.

It is the first time in history that the White House has asked firms not to file layoff notices.

However, with Republicans and Democrats in Congress eager to take post-election action to avert sequestration, the scheduled cuts may be avoided.

In a memorandum dated September 28, the White House Office of Management and Budget counseled defense employers not to issue layoff notices on November 1.

OMB assured employers that if they did not send out layoff notices and layoffs occurred, the "contracting agency," namely the Pentagon, would absorb the penalties and attorneys' fees the employers would have to pay, a significant cost to taxpayers.

It's not clear that the White House has the authority to offer to pay the costs. Moreover, a new administration could rescind the offer. Hence, the net effect is an offer to pay firms only if Obama is reelected. The benefit will disappear if the president loses the election. And some senators, such as Republican Senators John McCain (AZ) and Lindsay Graham (SC), have said that they will not allow government funds to be spent on penalties and costs.

Nevertheless, defense companies, such as Lockheed Martin and Boeing, which were planning to send out notices to tens of thousands of workers, have announced that they will refrain.

Under current law, according to a White House September 14 report on details of the sequester, the sequester will cut the Pentagon's spending by $500 billion over ten years.

The Republican-controlled House of Representatives has passed a bill that would avoid the sequester, but President Obama has not endorsed it nor suggested an alternative. The Democratic-controlled Senate has not passed any budget (for the third year in a row). If OMB believes that a sequester can be avoided, why doesn't the White House take the lead on another plan?

The requirement that firms which are expecting mass layoffs, plant closings, or certain other employment losses inform their employees 60 days in advance was passed in the 1988 bill by a Democratic Congress, over a veto from President Reagan. Curiously, it is a Democratic administration that is encouraging employers to ignore the Act.

The WARN Act is meant to allow workers to prepare themselves in the event of layoffs and to allow states to help with job-search activities. Alerted workers would look for other jobs, or delay discretionary expenditures.

Congress was so adamant on the necessity of the WARN Act that it did not permit waivers. No government agency can exempt firms from issuing the notice of potential job loss.

That did not stop the Labor Department in a July 30 guidance letter from discouraging firms from issuing WARN notices.

The Labor Department letter stated, "WARN Act notice to employees of Federal contractors, including in the defense industry, is not required 60 days in advance of January 2, 2013, and would be inappropriate, given the lack of certainty about how the budget cuts will be implemented and the possibility that the sequester will be avoided before January."

But the Labor Department letter did not have the desired effect. Defense contractors still planned to send out WARN notices.

Hence the OMB memorandum. It stated that "Despite DOL's guidance, some contractors have indicated that 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."

In other words, companies were concerned that by following the Labor Department's guidance not to send out the layoff notices, they would be liable for penalties.

No problem, says OMB in the memo, the contracting agency will pay the costs. It specified 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 allowable."

If firms don't file WARN notices and plant closings or layoffs of more than 500 workers occur, employers are liable for penalties of 60 days back pay and benefits paid to workers.

What could that cost? Using BLS's average weekly earnings in the industry of $971, I calculate that if the sequester resulted in a 10 percent reduction in employment at the top five defense contractors, namely Boeing, Lockheed Martin, General Dynamics, Northrup Grumman, and Raytheon, the Defense Department would be liable for $400 million in back pay, plus benefits. If 20 percent of employees were laid off, the bill would run to $800 million plus benefits.

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

Since firms have stated they will not issue the WARN notices, their potential liability in penalties should be declared on their next quarterly SEC filings. Otherwise, they might be liable for additional millions from shareholder suits.

The White House has told some of the largest corporations in America to break the law, in the interests of the re-election of President Obama, and offered to pick up the penalties and court costs. But don't look for this major campaign donation to President Obama on any disclosure forms.


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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