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Diana Furchtgott-Roth: Government contractors fail to warn employees of layoffs

With sequestration due March 1, here's the big question: Why haven't contractors sent out required notices to employees notifying them of potential layoffs?

Much of the federal government faces substantial spending reductions. The Pentagon's spending alone will decline by $500 billion over 10 years, about $43 billion in fiscal 2013. Many government contractors can foresee the layoffs that will be necessary, and this predictability triggers a legal requirement that they send out notices to their employees 60 days in advance.

The requirement that firms expecting mass layoffs, plant closings or certain other employment losses inform their employees 60 days in advance comes from the Worker Adjustment and Retraining Notification Act of August 1988. The WARN Act is meant to allow workers to prepare themselves for the risk of being laid off, temporary or permanent.

WARN notices are routine. Firms that sent out recent WARN notices include American Airlines, Pfizer and Sodexo. In 2011, Qimonda AG, an electronic memory products manufacturer, was forced to pay a $35 million settlement because it failed to send out such notices in time.

Informed workers might start looking for other jobs, skip planned vacations, or delay the purchase of a house or car. They might even get another member of the family to start looking for a job. The advance notice is especially valuable in hard times like these. In January, the economy created only 157,000 jobs, and the unemployment rate rose to 7.9 percent.

Last year, the Labor Department and the White House asked defense contractors not to send out required WARN notices. The Labor Department, which supposedly has employees' best interests at heart, issued a guidance notice on July 30, 2012, discouraging firms from issuing WARN notices. The July guidance letter was followed by an Office of Management and Budget memo dated September 28, 2012, counseling defense employers not to issue layoff notices on Nov. 1, and saying that the contracting government agencies would pay any penalties or court costs they incurred as a result.

Many contractors were expecting layoffs on Jan. 2, so notices would have been sent on Nov. 1, shortly before the election. That's the likely reason the administration asked defense firms to desist.

But the election is now over. With the sequestration due to take effect on March 1, there's no reason for firms to withhold the notices. Some have already reduced hiring in anticipation of future spending cuts.

If firms don't file WARN notices and plant closings or layoffs occur on March 1 or within the 60-day window of notification, employers are liable for penalties of 60 days back pay and benefits paid to workers. What could that cost? If major defense firms laid off 10 percent of their employees, I calculate that the wage bill would come to about $76 million for Lockheed Martin, were it to lay off 10,000 workers. Boeing would owe about $129 million; General Dynamics, $72 million; Northrop Grumman, $53 million; Raytheon, $52 million; and SAIC $30 million.

These contractors and the Defense Department would be liable for $412 million in back pay, plus benefits. If 20 percent of employees were laid off, the bill would run to $825 million plus benefits.

These amounts do not account for court costs and attorney fees, which might run into additional tens of millions.

This means that failure to send out WARN notices could lead to a bill for Uncle Sam of $500 million to $1 billion, depending on the number of layoffs.

Lawyers can argue over whether the OMB is allowed to promise or spend this sum without congressional approval. But with the election over and sequestration days away, there's no reason why firms shouldn't issue required WARN notices to their employees and avoid the penalties. Why wait?

Examiner Columnist Diana Furchtgott-Roth (dfr@manhattan-institute.org), former chief economist at the U.S. Department of Labor, is a senior fellow at the Manhattan Institute for Policy Research.