David Mazer doesn't think he should be cast as a villain. The former CEO of Mazer Corp. had been scrambling to keep his Dayton education publishing firm alive when his bank abruptly halted negotiations for much-needed financing on Dec. 30. Unable to pay wages and mounting bills at the company his father founded 44 years ago, Mazer immediately laid off employees without any severance or notice. He says he had no choice. Mazer sent e-mails to his 296 employees around 5 p.m., telling them it was their last day and adding that "we are sorry for the short notice, but we chose to fight until the very last minute to keep the doors open."
Scott Bent, a 26-year-old editor, was too stunned to pack up his belongings. But when he came back the next morning, he was prepared to fight. Bent organized a suit seeking class-action status against Mazer Corp., demanding severance, vacation pay, and other benefits. Says Bent: "I still have not received my final paycheck." Mazer responds that his hands are tied about the sudden closure, noting "we're angry, too." A spokeswoman for lender KeyBank, now fighting to seize Mazer Corp.'s assets in court, says the bank "exercised its rights under applicable law" in halting funds.
Managers dealing with the trauma of mass layoffs increasingly have something else to worry about: the law. A growing number of jettisoned employees are filing lawsuits for severance pay under the federal Worker Adjustment & Retraining Notification (WARN) Act, and politicians are stiffening rules to protect workers. On Feb. 1 the state of New York lengthened the amount of notice employers must give workers under the WARN Act to 90 days from 60. It also made the law applicable to companies that lay off as few as 25 employees, vs. the previous minimum of 50. Congress is now mulling ways to strengthen the act, and states such as New Jersey and Illinois have beefed up employee protection laws.
Desperate to save money and often struggling to keep their companies solvent, many employers are giving in to the temptation to skimp on severance when downsizing. A surprisingly large number aren't giving employees the 60 days' notice or severance pay that's required under the WARN Act. "Companies used to throw their hands up and say, 'Just pay it,' " notes Gerald T. Hathaway, a partner in New York of employment law firm Littler Mendelson. Now, he adds, they're "looking for more certainty that they really have to [pay out], because it's not cheap." Elaine Koch, an employment lawyer at St. Louis-based Bryan Cave, thinks inexperience is a factor: "Some are not fully aware of the laws," she says.
One reason may be the two-decade-old WARN Act has rarely been enforced. WARN also exempts companies that are hit with "unforeseeable circumstances." And the perils of running afoul of the act have not been significant, since employers aren't hit with penalties—only 60 days in back pay, benefits, and possibly lawyers' fees. Even WARN class actions typically have settled for far less than cases involving gender and discrimination claims. Last July one suit filed by 930 displaced workers at Quaker Fabric was settled for $1 million.
While alleged breaches of the WARN Act and related laws aren't tracked on a national level, employment lawyers across the country say they've seen a marked jump in complaints. Over the past six months, laid-off employees have filed lawsuits over violations of the WARN Act against companies as varied as Lehman Brothers, San Francisco law firm Heller Ehrman, retailer Goody's, electronics chain Tweeter (TWTRQ), and USA Jet Airlines. Even if a company files for bankruptcy, it still needs to give notice in the event of mass layoffs and plant closings—which means the trustee or debtor in possession may need to pay out those obligations.
For his part, David Mazer says he thought he could obtain financing right up until the bank abruptly ended negotiations. "We can do nothing more now than to offer our apology," he said in a statement to BusinessWeek. That's not good enough for laid-off editor Bent. He has moved in with his in-laws and is picking up freelance jobs while chasing down two months' pay. In August Bent plans to go to law school, where he may major in employment law. "I see it as a way to fight for the cause."
For more on the WARN Act and the challenges companies face complying with it, watch a video report at businessweek.com/go/09/warn.