Spirit Airlines’ bankruptcy has become a high-profile example of the legal hurdles terminated employees face, even as they argue the mass layoffs were done without the legally required notice.
When the low-cost carrier abruptly suspended operations and laid off thousands of employees in May, it told workers that it couldn’t provide the required advance notice under federal law because doing so would have “adversely impacted” its ability to secure the capital needed to continue operations.
A proposed class representing around 17,000 terminated employees is now asserting claims under the Worker Adjustment and Retraining Notification Act, which requires employers to provide 60 days’ notice before mass layoffs.
The suit comes as the WARN Act has emerged in more than a dozen bankruptcy suits since last spring, pitting workers against their financially strained former employers.
Spirit had been trying to secure funding from existing lenders and a $500 million government bailout, which ultimately didn’t materialize. The company also pointed to the war in the Middle East and subsequent spike in fuel prices as unforeseeable.
The airline is now winding down. Employees say the company continued to issue “positive misleading statements” to staff up to the final hours before its collapse.
“Spirit is going to have a tougher time, based upon what I’m seeing, arguing that the unforeseeable business circumstances exception drops to a no notice,” said Aaron Solomon, a partner at Kaufman Dolowich & Voluck LLP focusing on labor law.
Companies may attempt to limit their WARN exposure by citing unforeseeable business circumstances, such as sudden market dislocations, as well as the faltering company exception, which applies when a company is actively seeking capital. Although Spirit has negotiated with unions on proposed wind-down procedures, it said it would oppose class certification—a key step for employees looking to litigate.
Spirit’s attorney, Marshall S. Huebner of Davis Polk & Wardwell, said during a June bankruptcy court hearing that the company had “either zero or virtually no WARN Act liability.”
“We actually think that we’re the textbook case for the faltering company exception,” he said.
Bankrupt companies often settle WARN claims, which practitioners said can sometimes be more beneficial for workers than risking litigation. Under federal law, affected employees are entitled to 60 days of pay plus benefits, though settlements are typically negotiated down.
Renewable energy companies such as PosiGen, Powin, and Sunnova Energy have faced WARN suits in the past year. Powin settled for $3.5 million, but Sunnova continues to fight WARN claims.
Setting Up Defenses
Spirit’s May communication signaled the unforeseeable business circumstances and faltering company defenses, according to Michael C. Duff, a professor specializing in workers’ compensation at Saint Louis University School of Law.
“The language comes straight from the statute, so they were setting up the defense,” he said.
A company might refrain from issuing notices to avoid mass departures amid concerns about closures, said Jack A. Raisner, founding partner at Raisner Roupinian LLP, which has a WARN practice. Retaining workers also helps preserve assets and generate revenue.
“That’s one of the most painful things,” he said. “When the motivations of the timing of WARN are controlled by the company acting in its own best interest.”
Spirit’s layoffs occurred during a sudden shutdown as the company attempted to emerge from its second bankruptcy. Jet fuel price hikes, driven by the Iran war, and stalled rescue financing talks with the US government ultimately delivered a final blow.
“In the case of Spirit, you do have a war that I don’t think wears too many badges of foreseeability,” Raisner said. “And then you have a White House expressing a willingness to fund the airline.”
If parties move to litigate, an employer must show that the circumstances were outside its control. It must also prove, if it cites a faltering company exception, that it had a good-faith belief that notice would’ve prevented it from obtaining financing. For instance, it could show that creditors insisted on nondisclosure of the capital disbursement details, Duff said.
“If they can establish that they needed to keep this secret because they had a reasonable prospect of losing the capital, that’s going to be a good defense,” he said. “But they have to prove it.”
The International Association of Machinists and Aerospace Workers said in court papers that employees learned of Spirit’s shutdown and immediate layoffs at the same time as the public.
The Air Line Pilots Association said the collapse was an “unmitigated financial disaster” for nearly 2,000 Spirit pilots and their families, leaving them without income and medical coverage.
WARN in Bankruptcy
If job reductions occur before a bankruptcy begins, laid-off employees can assert priority claims up to a cap. If they occur after, employee payouts are deemed administrative expenses, which are typically paid out before other debts.
While workers should theoretically be paid in full, they face challenges when the bankrupt employer lacks sufficient liquidity to fully satisfy administrative claims.
“Courts have lately been asked to allow Chapter 11 cases to go forward and even be resolved, even when the administrative claims won’t be paid in full,” Raisner said. “And the employees, of course, are left holding the bag.”
There’s a risk that ex-Spirit employees won’t receive their outstanding pay, benefits, or WARN Act damages if Spirit is administratively insolvent, unions said in a June filing.
Employers can issue conditional notices, which caution workers that unless a problem is averted terminations will occur and helps them avoid large expenses, Raisner said. Despite concerns over resignations or employees not showing up for work, workers in the current job market need more than 60 days to find a new job, he said.
“In our economy, it takes an average of at least three to four months to find other employment,” Raisner said. “A person who gets a WARN notice isn’t leaving the next day.”