Legal Definitions - faltering-company exception

The faltering-company exception is a specific provision within the Worker Adjustment and Retraining Notification Act (commonly known as the WARN Act). This exception allows an employer to avoid giving the standard 60-day advance notice to employees before a plant closing or mass layoff, but only under very strict and limited circumstances.

An employer can invoke this exception if, at the precise time they would normally be required to give the 60-day notice:

• The company was actively seeking money or other vital resources that, if successfully obtained, would have allowed them to avoid the shutdown or layoff; and
• The employer had a reasonable belief that publicly announcing the impending shutdown or layoff (by giving the 60-day notice) would have made it impossible to secure those crucial funds or resources.

Essentially, this exception is a narrow allowance for companies on the brink of financial collapse to attempt a last-ditch effort to save the business and jobs, without scaring away potential investors or lenders who might otherwise provide the necessary lifeline.

Examples:

• Tech Startup Seeking Venture Capital: Imagine "InnovateTech," a promising but cash-strapped technology startup. The company is rapidly running out of operating funds and is in advanced, confidential negotiations with a major venture capital firm for a significant investment. This investment is crucial to keep the company afloat and continue developing its product, thereby avoiding a mass layoff of its engineering team. InnovateTech believes that if they issue a WARN notice announcing potential layoffs, the venture capital firm would immediately view the company as too unstable and risky, withdrawing their offer. In this scenario, InnovateTech might qualify for the faltering-company exception because they were actively seeking capital to avoid layoffs, and they reasonably believed that giving notice would have directly sabotaged their efforts to secure that capital.

• Manufacturing Plant Securing a Bridge Loan: Consider "Midwest Metals," a long-standing manufacturing plant facing a temporary but severe cash flow crisis due to a large, unexpected delay in payment from a key client. To cover payroll and operational costs until the client's payment arrives, Midwest Metals is in final discussions with its bank for a short-term "bridge loan." If successful, this loan would prevent a temporary shutdown of the plant and layoffs. The company's leadership reasonably believes that issuing a WARN notice would signal severe financial distress to the bank, causing them to refuse the loan and thus guaranteeing the very shutdown the loan was meant to prevent. Here, Midwest Metals could potentially use the faltering-company exception as they were actively seeking a resource (the loan) to avoid a shutdown, and believed notice would preclude obtaining it.

• Retail Chain Negotiating an Acquisition: Picture "Fashion Forward," a struggling retail chain with multiple stores facing imminent closure. The company is engaged in highly confidential negotiations with a larger competitor, "Global Retail Group," for an acquisition that would save most of its stores and preserve a significant number of jobs. Fashion Forward's management reasonably believes that if they issue WARN notices for potential store closures, the news would leak, potentially causing Global Retail Group to either withdraw its acquisition offer or demand a drastically reduced price, effectively collapsing the deal and leading to the widespread closures they were trying to avert. In this case, Fashion Forward might be able to invoke the faltering-company exception, as they were actively seeking an acquisition (a resource) to prevent closures, and believed that giving notice would jeopardize that critical deal.