In a case that may have wider legal repercussions for the buyout industry, Los Angeles headquartered private equity firm OpenGate Capital is being sued in two separate federal courts for violations of the Worker Adjustment and Retraining Notification (WARN) Act after abruptly shuttering a portfolio company in March, according to documents filed in the US District Court of Western Texas.
The WARN Act requires that companies with 100 or more employees provide 60 days advance notice of mass layoffs or plant closings. Failure to do so can make an employer liable for lost wages, benefits and other damages.
Former employees of laboratory equipment company Hamilton Scientific’s Texas and Wisconsin locations have filed two separate complaints – one in Western Texas and one in Delaware – claiming they were terminated without notice when all plants were ordered to close on March 6. The workers allege that Hamilton and OpenGate failed to pay them for the required 60 working days thereafter.
The employees claim that OpenGate is responsible under the “single employer” theory of liability, as OpenGate owned 100 percent of Hamilton and Hamilton CEO Jack Roberts was paid by OpenGate to run the company for the GP’s sole benefit.
OpenGate and Hamilton are denying the allegations and claiming two exceptions to the required 60-day notice period: the “faltering company” exception, applicable when the employer has sought new capital or business in order to stay open and where giving notice would ruin the opportunity; and the “unforeseeable business circumstances” exception, which applies to closings caused by business circumstances that were not reasonably foreseeable at the time.
Last October, private equity firm Sun Capital won a similar case against Jevic Transportation employees who were laid off without notice. The workers also claimed that Sun Capital was responsible as a “single employer,” but the final Delaware court ruling suggested that the courts are not going to find WARN act liabilities at the shareholder level based on the control that private equity firms have over their portfolio companies.
The court determined Sun Capital was not a single employer because the GP was able to specify that the fund itself was not actually directing the business decisions of Jevic, and carefully documented a separate legal status between the fund and portfolio company. The court also ruled the hiring and firing decisions were made with input from experts, rather than solely by Sun Capital.
Other GPs should take note of this practice, corporate partner at Debevoise & Plimpton Richard Hahn told pfm. “Be careful to respect the separateness of portfolio companies and act through positions on the board and not directly,” he added. “There’s value, particularly when a company is in trouble, in retaining independent advisors and experts to advise on decisions of downsizing or terminating employees.”