Bloomberg Law
Free Newsletter Sign Up
Bloomberg Law
Advanced Search Go
Free Newsletter Sign Up

Toys ‘R’ Us Layoff Warnings Showcase Trend for Store Closures

March 26, 2018, 3:08 PM

Toys “R” Us Inc. tucked an expensive pledge to all 30,000 of its workers inside a 124-page bankruptcy brief last week: No matter how big the store, each worker has a job for at least the next 60 days while the company prepares to shutter.

Employment and bankruptcy attorneys called the toy giant’s nationwide commitment remarkable because unknown dozens of the retailer’s 735 stores are likely too small to meet the 50-employee requirement for notices under the Worker Adjustment and Retraining Notification (WARN) Act. Violating the WARN Act could create immense liability, with the company on the hook for back pay and benefits of workers at locations not properly notified.

State notices indicate that thousands of Toys “R” Us workers likely could have been laid off without notice. For example, a company filing of its notices in Wisconsin, which has stricter warning requirements than federal law, says none of the state’s locations have 50 or more full-time permanent staff, and the average workforce in those stores was only 36 employees. Other states like Indiana post when employers are firing more than 50 employees under the WARN Act, but the state told Bloomberg Law it hasn’t received a single notice that 50 employees will be terminated at any of the Toy"R” Us stores in 11 Indiana cities.

Nationwide warnings are becoming more common among giant retailers seeking an orderly liquidation and attempting to meet federal worker protection laws, class action attorneys told Bloomberg Law. And despite no legal mandate, all-employee WARN notices are being used with increasing frequency as bankruptcies ripple through brick-and-mortar retailers succumbing to ascendant e-commerce competition.

“In general, the legitimate retail chains, the blue chip ones that have been going down over the last few years, have complied with the WARN Act,” Jack Raisner, a partner at Outten Golden’s New York office, told Bloomberg Law March 19. “That’s part of this trend of retail chains biting the dust—the stores have been on the up and up because they don’t relish being sued.”

‘Out of Respect’

In a March 15 bankruptcy motion announcing it will close all its stores, Toys “R” Us said it would hand or over-night mail 60-day notices to all of its employees. The company also said it developed a “budget that ensures that all employees will continue to be paid in the ordinary course for no fewer than 60 days.”

Toys “R” Us declined to comment on the thought process behind the universal notices.

“As you know in some states, a WARN notice is required but we chose to send a WARN notice or similar to each of our employees to formally notify them of the wind down of the U.S. business out of respect for them,” Amy Von Walter, company spokesperson told Bloomberg Law in a March 19 email.

Retailers will also consider broad WARN notices as a way to combat the uncertainty inherent in winding down their businesses, David Froiland, employment attorney and shareholder in Ogletree Deakins’ Milwaukee office, told Bloomberg Law March 22.

“There’s lots of other cases where employers take risks, but I can’t overstate just how much uncertainty there is when you’re winding down a going concern like this,” he said. “So sending out the notices sooner rather than later preserves the flexibility to close the stores in the sequence that makes the most sense.”

Predicting how quickly inventory will sell from each location and how long employees are needed is impossible. But the notices protect employees at stores a company decides to close before 60 days, while also allowing a company to extend notices if it chooses to keep a location open.

An all-employee notice strategy can also prove the most administratively easy route, Froiland said. Several states have stricter notice requirements than the federal WARN Act, so an employer can choose to follow the law of the strictest state in which it operates and apply that notice to all employees without the fear of making mistakes.

To Warn or Not to Warn

Froiland said the WARN Act can be “inexpensive to comply with, but expensive to violate.” The only thing a company has to do is send letters, but without warning employees of layoffs a company could be on the hook for back pay while the employee isn’t working.

However, broad WARN Act notices could also come with negative consequences to companies like Toys R Us trying to sell all or part of a business through Chapter 11 bankruptcy, Scott Gautier, bankruptcy attorney and partner in Robins Kaplan’s Los Angeles office, told Bloomberg Law in a March 20 email.

The retailer’s Chapter 11 reorganization filings show the company believes it could sell off its Canadian stores, and possibly 200 of its highest-performing U.S. locations.

But while it’s smart to ward off costly WARN Act litigation, notices might “spook” key employees to leaving even if their firing is unlikely, Bautier said. “Key employees of chapter 11 debtors are important assets that likely have other employment prospects. The debtor needs to keep these employees focused and working hard on helping to reorganize the company or to assist in the sale of the company.”

Fear of litigation expense also isn’t likely to be a main driver for failing retailers’ WARN notices, Gary Mason, an class action lawyer and founding partner of D.C.-based Whitfield Bryson & Mason, told Bloomberg Law March 22.

“On the cost-benefit analysis there, they’re paying a lot more money than it would cost to defend against WARN cases,” he said. “The cost of litigation I’m sure is a factor, or just not getting distracted with it, but I’m not sure about the economics of it. They’re going to have to pay that money anyways in employee salaries.”

Mason, who was part of the team who brought a WARN Act class action against Circuit City in America’s largest retail bankruptcy case, said that he doesn’t anticipate a large amount of litigation because recent retailer bankruptcies seem to be organized. “The bigger WARN Act cases are going to be those where a company abruptly folded because they were bleeding money,” he said.