OMB Memorandum Doesn’t Fully Clarify Worker Notification Requirements

Last week, the Office of Management and Budget (OMB) issued memorandum M-12-19 regarding defense-contractor responsibilities under the Worker Adjustment and Retraining Notification (WARN) Act. OMB has concluded WARN notices are unnecessary precautions against potential sequestration layoffs that defense contractors do not have to take. Because sequestration is still uncertain, and the exact effects are unpredictable, the memorandum states that WARN notices under these circumstances would waste resources.

OMB memorandum M-12-19 goes on to provide guidelines for the allowability of costs associated with WARN Act compliance. According to the document, 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 [Department of Labor] guidelines,” then the resulting employee compensation costs for WARN Act liability and other litigation costs would be eligible for coverage by the contracting agency.

While these guidelines may appear to be a safety net for defense employers, the reality is that because potential sequestration would go into effect on January 2, 2013, none of the sequestered 2013 funds or 2012 unobligated funds would be under contract. This means that the sequestered 2013 funds and the 2012 unobligated funds would not be eligible for coverage by the contracting agency under memorandum M-12-19. However, the memorandum does leave room for agencies to determine the allowability of “other costs potentially associated with sequestration,” using the guidelines of allocability, allowability, and reasonableness outlined in the Federal Acquisition Regulation (FAR).

Despite the guidelines set forth in the recent memorandum, some defense contractors are still planning to issue WARN notices because the OMB guidelines do not provide clear protection. If WARN notices are issued in the coming weeks, it’s possible that the president’s chance of reelection will take a hit. If no WARN notices are issued, sequestration is unlikely to have a significant impact on the election.

Kimberly Suttle, Research Analyst