Friday, October 26, 2012

Sequestration Looming (Part II)

In a prior post, I wrote about the pending impact of sequestration on the defense industry. Since then, sequestration has drawn increased attention, including some confusing references during the third presidential debate. The potentially devastating effect of sequestration is now becoming apparent.
As I mentioned in my earlier post, October 1 was the deadline for the 90-day notice some states require under circumstances covered by the federal Worker Adjustment Retraining Notification Act (“WARN”) Act.  The WARN Act requires companies with more than 100 employees to give 60 days’ advance notice of mass layoffs or plant closures. Many defense contractors, however, have ended up backing off from issuing such notices because of uncertainty as to what the sequestration bill passed earlier this year actually requires. 

Following passage of this bill, the White House issued a memo directing contractors to follow the guidance of the Labor Department, which, in a July letter, said the WARN Act does not require contractors facing sequestration to send layoff notices to their workers. And the Office of Management and Budget stated in September that the government would pay for related legal costs incurred by companies that follow the Labor Department’s advice.

Based on this, many of the largest federal contractors have concluded that they will not send out WARN Act notices “unless they get more details about how sequestration—the dramatic cuts that will take effect in January if lawmakers don’t agree on an alternative long-term budget plan—would affect them.”   

The net result? No one seems to be sure, but one thing is clear. If Congress does not act, sequestration, as currently contemplated, will take effect as soon as 2013 rolls around, and the WARN Act notice requirement will also kick in for many companies based on known and immediate cuts that will result in layoffs. What is also likely is that companies subject to these requirements that have followed Labor Department guidance but nonetheless find themselves to be noncompliant with WARN Act requirements will be looking to the government (read: taxpayers) to cover their costs of noncompliance.

Where does this leave the second tier of government contractors—vendors and service providers? Even further in the dark and possibly facing sudden project cancellations (and the ripple effect of that is potentially huge). Stay tuned.

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