Disclosing Plant Closings and Layoffs to Reduce Community Disruptions

Concerned over the economic impacts of intensifying global competition in the manufacturing sector and facing political fallout from a growing number of high-profile plant closings and mass layoffs, Congress debated a variety of proposals in the late 1970s and early 1980s. Policy options ranged from restrictions on employer rights to close major facilities to industry-based policies to improve competitiveness and major modifications of the unemployment insurance system.

 

In 1988, political compromise led to a more modest targeted transparency approach: the Worker Adjustment and Retraining Notification Act (WARN). This law sought to protect affected parties from the effects of major employment loss by requiring covered employers to provide advance notice of plant closings or large-scale layoffs to affected workers and local communities. The aim of the new disclosure requirement was to improve post-layoff and plant closing outcomes for displaced workers as well as to provide communities facing significant economic impacts with time to find alternative solutions or make adjustments for the impending closings.

 

Even this modest, disclosure-based response to economic restructuring involved significant political compromises. Opponents of advance notice argued that it would restrict the capital mobility that was increasingly important given international competition from countries like Japan and South Korea. In so doing, it would further widen labor productivity gaps with the rest of the world, making U.S. companies less competitive. Further, critics of advance notice argued that it would lead customers, suppliers, and capital markets to overreact, making already weakened companies less able to recover and expand. If advance notice was to be required, they argued, it should be provided a relatively short time before plant closing. It should also exempt wide classes of employers whose decisions to reduce employment reflected the normal ebb and flow of production, rather than more profound, long-term reductions in employment.

 

The resulting disclosure requirements reflected these concerns. Covered employers were required to provide affected employees with only sixty days notice of a closing. Although virtually all workers at covered employers—hourly, salaried, and managerial workers – were entitled to notice, employer coverage was quite restricted. Private and not-for-profit employers were covered if they had one hundred or more workers, but employees were excluded from that count if they had worked for fewer than six months in the past year or fewer than twenty hours per week on average). That meant that a large number of small businesses were not required to provide advance notice of layoffs or closings.

 

The definition of plant closing and mass layoff also left many potential company decisions involving large employment cuts outside the targeted transparency system’s disclosure requirement. A covered employer was required to provide advance notice if an impending shutdown would lead to a loss of 50 or more workers in a thirty-day period. Mass layoff was defined narrowly as reducing employment at any site of 500 or more workers or laying off 50–499 workers if that number represented at least a third of the workforce. The regulation further refines these definitions relating to simultaneous employment reductions in multiple units of a company as well as to the length of the employment reductions. In addition, covered employers were not required to provide advance notice for a variety of “unforeseeable” business reasons, for natural disasters, or where it could be shown that even the sixty-day disclosure would cause irreparable harm to the business’s viability, as well as exemptions in cases relating to employee transfer or reassignment, business sale, or strikes and lockouts.

 

The law did not provide an extensive apparatus for implementation. Unlike most federal workplace policies, the advance notice requirement did not vest a particular division of the U.S. Department of Labor with authority to investigate or enforce the law. Enforcement was provided instead through lawsuits lodged in federal courts by workers, their representatives (if any), and/or local governments. An employer found in violation of the disclosure requirement could be required to pay the affected workers back pay and benefits for the period when notice was not provided (up to sixty days). Employers were also subject to civil penalties of up to five hundred dollars for each day of violation. Companies were left with considerable discretion concerning the means by which they would notify workers and communities. The law did not provide a notification format or indicate through whom (union officers or other representatives) workers would be contacted or the “local community” informed.

 

The combination of restrictive employer coverage and the rather narrow definition of plant closings and mass layoffs has meant that a relatively small percentage of layoffs has been covered by the disclosure policy’s requirements. In an early study of the requirement’s impact, Ehrenburg and Jakubson concluded that although compliance with the policy was high, “WARN does not affect a substantial proportion of permanently laid off workers.” That conclusion was still valid in 2006, given the large percentage of the workforce employed in workplaces with fewer than a hundred workers and the fact that the vast majority of employment reductions (even in large workplaces) do not fall within the narrow definitions of employment loss described in the regulation.

 

Disclosure provisions for plant closings and layoffs have not changed substantially since their initial approval, although several recent events have led Congress to consider expanding or modifying disclosure. Following the terrorist attacks on the United States in 2001, Congress held hearings about the significant employment dislocations associated with those attacks, directly or indirectly involving 430 "extended mass layoffs" and more than 125,000 worders—particularly in the hotel and hospitality industries—which led some in Congress to call for expanding the reach of the disclosure policy. In 2004, high-profile instances of “offshoring” work to India and China led the Senate to consider expanding the transparency rules’ definition of employment loss, introducing a WARN amendment that included offshoring in its definition of major employment events. As of 2006, however, neither of these efforts had led to changes in the law.

 

This case study is drawn from Full Disclosure, Fung, Graham and Weil, 2007.