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Focus on Regulation

OMB Releases Guidance on Cost Allowability of WARN Act Liability Relating to Possible Sequestration

On September 28, 2012, the Office of Management and Budget issued Memorandum M-12-19 to all Federal executive agencies entitled Guidance on Allowable Contracting Costs Associated with the Worker Adjustment and Retraining Notification (WARN) Act. The memorandum advises agencies that Federal contractors are not required to issue WARN Act notices to workers based solely on the threat of looming sequestration. It also advises that agencies should consider as an allowable cost any liability a Federal contractor faces in a court of law that is incurred in reliance on the guidance contained in the OMB Memorandum and previous guidance issued by the Department of Labor.

As background, the Worker Adjustment and Retraining Notification (WARN) Act, 29 U.S.C. §§ 2101-2109, requires certain employers to provide written notice to employees 60 days before ordering plant closings or mass layoffs if the job losses are reasonably foreseeable. Severe penalties and damages are possible if required notices are not made. Prominent government contractors have made public their view that the looming Federal budget sequestration would force them to issue mass WARN Act notices to hundreds of thousands of employees based on the indiscriminate and widespread nature of sequestration funding cuts, which would go into effect on January 2, 2013 absent further Congressional action.

On July 30, 2012, the Department of Labor issued Training and Employment Guidance Letter No. 3-12, which concluded that WARN Act notices 60 days in advance of sequestration were unnecessary and ”would waste States’ resources in undertaking employment assistance activities where none are needed.” Despite this guidance, contractors have still expressed concern that they could face liability if they did not provide the 60-day WARN Act notices.

This memorandum should provide contractors with some additional legal cover to avoid issuing WARN Act notices to their employees. However, some questions remain which are not answered by this memorandum. For example, it is unclear the extent to which an agency, notwithstanding the OMB Memorandum, could independently determine that WARN Act liability caused by sequestration-directed contract modifications is an unallowable cost based on FAR 31.205-6(h).  Under that provision, backpay liability is an allowable cost only if related to underpaid work actually performed, and presumably not some other liability such as improper discharge.