OMB Announces That the Federal Government Will Pay Contractors’ Litigation Costs Related to WARN Suits

On September 28, 2012, the Office of Management and Budget (“OMB”) released a memorandum announcing that the federal government would allow federal contractors’ litigation costs related to suits under the Worker Adjustment and Retraining Notification (“WARN”) Act due to employee layoffs caused by  sequestration determinations.  As we previously reported, DOL issued a memorandum on July 30, 2012 advising contractors that they did not need to provide WARN Act notices to their employees due to layoffs and closings resulting from the across-the-board budget cuts that could occur in the event of sequestration. 

Many contractors having been hesitant to follow DOL’s guidance because, among other reasons, it is not binding on courts or state administrative agencies.  In its memorandum, OMB tried to allay these fears, explaining to contractors that it would allow contracting costs for “certain liability and litigation costs associated with WARN Act compliance” if the contractor adhered to DOL’s guidance.  OMB specifically stated that:

if (1) sequestration occurs and an agency terminates or modifies a contract that necessitates that the contractor order a plant closing or mass layoff of a type subject to WARN Act requirements, and (2) that contractor has followed a course of action consistent with DOL guidance; then any resulting employee compensation costs for WARN Act liability as determined by a court, as well as attorneys’ fees and other litigation costs (irrespective of litigation outcome), would qualify as allowable costs and be covered by the contracting agency, if otherwise reasonable and allocable.

In addition, OMB noted that agencies may “treat as allowable other costs potentially associated with sequestration, including WARN Act-related costs arising under circumstances not specified in this guidance.”

Despite OMB’s attempt to minimize risk contractors face for failing to provide the WARN Act notices, its guidance leaves unanswered whether the federal government will pay litigation costs arising under State WARN Acts.  As we previously reported, many states have their own mini-WARN Acts, several of which have more stringent requirements than the federal WARN Act.  Because it is unlikely that the government will cover liability and litigation costs incurred in connection with these state WARN Acts, contractors will need to consider their potential liability under state and local law in determining whether and where it will follow the DOL’s guidance.

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