A Delaware federal judge has ruled that Sun Capital Partners did not violate the Worker Adjustment and Retraining Notification (WARN) Act when employees at one if its portfolio companies, Jevic Transportation, were laid off without notice. The decision, which upholds a bankruptcy court ruling from May 2013, is good news for private equity firms, according to legal sources.
“It’s a district court decision, which is a higher level than the bankruptcy court and has precedential affect within the district of Delaware,” Richard Hahn, corporate partner at Debevoise & Plimpton, told pfm. “While it’s not binding on the rest of the country, Delaware is a very important jurisdiction for large corporate bankruptcy filings. What happens in Delaware is crucial for corporations nationally.”
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. Sun Capital was taken to the Delaware bankruptcy court when staff at Jevic, a carrier and delivery service company, claimed they were owed compensation for violations of the act. The staff received just one day’s notice before the company's bankruptcy filing.
Jevic claimed that Sun Capital should be liable for damages using a “single employer” theory of liability. The latest ruling suggests 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, according to Hahn.
In the bankruptcy court case, US Bankruptcy Judge Brendan Linehan Shannon 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 that a management services agreement between Sun Capital and Jevic for specified consulting services did not establish operational dependency.
In a 15-page opinion, US District Judge Sue L. Robinson concurred with Judge Shannon’s ruling, also citing that 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, noted Hahn. “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.”