Total and Partial Unemployment TPU 460.37

Lieu of Notice Pay/WARN Act

This minor category discusses the impact upon unemployment insurance eligibility when the claimant receives In-Lieu-of-Notice or Worker Adjustment Retraining and Notification (WARN) Act payments.

  1. In Lieu of Notice Pay

    In-lieu-of-notice pay is wages. A payment should not be viewed as in lieu of notice unless the employer has a collective bargaining agreement, a written plan or a clearly established policy that employees are entitled to advance notice in the event of a layoff, or are entitled to payment in the event no notice if given.

    In Shand v. California Employment Stability Commission, and again in Powell and Byrd v. California Unemployment Insurance Appeals Board, the California Supreme Court held that in-lieu-of-notice payments were wages. Therefore, a claimant is not eligible to receive unemployment compensation for the particular period following the termination of employment for which payments were intended. The payments are subject to the provisions of Section 1279 of the UI Code.

    A close analysis of the employer's policy, plan, or agreement will be required to distinguish between in-lieu-of-notice payments which are wages and dismissal or severance payments which are not wages. The mere labeling of the payment will not be controlling.

    In Precedent Benefit Decision 43, the Board considered the case of a claimant who was employed for 34 months and at the time of separation received three weeks' pay which the employer stated was "severance pay in lieu of advance notice of layoff." The employer had a personnel policy that provided any employee who had been employed in excess of two years but less than five years, would receive three weeks' notice or severance pay. The Board in holding that the pay was in lieu of notice, stated:

    "The amount of pay in-lieu-of-notice that is paid upon termination of employment is based upon length of service and the amount the person is being paid by the employer. The purpose of the pay is to compensate the employee for the employer's failure to give the employee any (or only partial) advance notice of the termination of the employment relationship.

    We must determine the substance or purpose of the payment involved herein in light of the above principles. Under these principles the pay involved herein is pay in-lieu-of-advance notice of layoff. The fact that the words 'severance' are used is not controlling."

    A payment is not to be considered as in-lieu-of-notice pay, when the payment was contingent upon the recommendation of his supervisor and approval of the manager. For example, an employer elects to terminate one of his employees. There is no company policy or other agreement that obligates the employer to pay any termination allowances. Because of the employee's past satisfactory work performance, the employer decides to pay an allowance to this employee. Even though the employer may refer to this allowance as in-lieu-of-notice pay, it would not be considered wages as there was no policy or other agreement obligating the employer to pay nor did the employee have any established right to the allowance.

    Sometimes payments will be made even though the required notice was given. In such cases, the payments would not be considered as wages, but would fall under Section 1265 of the Code as a supplement to UI benefits.

    In certain cases, an employer may not have a written or clearly established policy, but may nevertheless make payments to terminated employees. In this regard a distinction between in-lieu-of-notice payments, and payments which fall within the meaning of Code Section 1265 must be made.

    Section 1265 of the Code states:

    ". . . payments to an individual under a plan or system established by an employer which makes provisions for his employees generally, or for a class or group of his employees, for the purpose of supplementing unemployment compensation benefits shall not be construed to be wages or compensation for personal services under this division, and benefits payable under this division shall not be denied or reduced because of the receipt of payments under such arrangements or plans."

    Employer policy does not have to have been established prior to the termination. The employer's action at termination may establish new policy for the future. This occurred in Benefit Decision 6780.

    In Benefit Decision 6780, while the employer had no established policy to give notice or payment in-lieu-of-notice, the employer did encourage its employees to give two weeks' notice and would, out of consideration to its employees, have given two weeks' to a month's notice of termination. In no instance, however, did it appear that the employer had made any regular practice of giving pay in-lieu-of-notice.

    The employer informed all of its employees at its branch office in Fresno on June 10, 1965 that it was closing this office on June 18, 1965. The employer contended that because the payments were made to the claimants in part because of the short notice of termination, the payments were in-lieu-of-notice. The Board, in holding the payments did not meet the standards for in-lieu-of-notice pay, stated:

    "In the present case, the payments to claimants were not made under any collective bargaining agreement nor is there any evidence that they were made for the purpose of supplementing unemployment compensation benefits. Nevertheless, at the time the employer decided to close its Fresno branch, it did establish a plan or system of severance or dismissal for the affected employees. It is our opinion that the payments were not wages but were payments made under a plan or system for a class or group of employees within the meaning of Section 1265 of the Code . . . Therefore, the claimants are not ineligible for benefits."

  2. WARN ACT

    The Worker Adjustment and Retraining Notification Act (WARN Act) of 1986 was effective February 4, 1989. The WARN Act requires employers which meet certain size requirements to give 60 days' advance notice of closure or mass layoff. The employers are required to give the advance notice to:

    • the representative of the employees or to each affected employee if there is no employee representative,
    • the State dislocated worker unit of the Job Training Partnership Act (for EDD this is the Rapid Response Team) and
    • the chief elected official of the unit of local government within which such closing or layoff is to occur.

    The WARN Act provides that if an employer fails to provide the 60 days' notice as required, the employer is liable to each aggrieved employee for back pay for each day of the violation and for benefits provided under an employee benefit plan. The employer is liable for up to 60 days' back pay maximum, but not more than one-half the number of days the employee was employed by the employer.

    The WARN Act does not provide for any administrative penalties for failure to give the required notice. An employer who violates the provisions of the WARN Act is subject to civil penalties. Thus, if an employer fails to give the required notice of closure or mass layoff, an employee would have to file suit in court to request the back pay.

    The amount of notice an employer is required to give can be reduced under certain circumstances, e.g.:

    • sale of the business;
    • natural disaster.

    There are circumstances that exempt employers from having to provide the notice. For example:

    • the company is closing a temporary facility
    • a project is completed and employees were hired with the understanding that the employment was of a limited duration
    • there is a strike or lockout

    In enacting the law, the Congress inserted a statement encouraging employers to provide notice to employees of any proposed closure or mass layoff even though they are not required by the WARN Act to give notice.

    Section 1265.1 of the UI Code was enacted January 1, 2002, with the passage of Senate Bill 40 (SB 40). Section 1265.1 reads as follows:

    "Notwithstanding any other provision of this division, payments to an individual by an employer who has failed to provide the advance notice of facility closure required by the federal Worker Adjustment Renotification and Training [sic: the actual name is Worker Adjustment Retraining and Notification] (WARN) Act (290 U.S.C. Sec. 1201 et seq.) shall not be construed to be wages or compensation for personal services under this division, and benefits payable under this division shall not be denied or reduced because of the receipt of payments related in any way to an employer’s violation of the WARN Act."

    Section 1265.1 of the Code specifically states WARN Act pay will not be construed to be wages. However, prior to the passage of Section 1265.1 of the Code, if an employer failed to give the required 60-days' notice and paid employees for the lack of notice, the WARN Act pay would constitute in-lieu-of-notice pay and was considered wages for unemployment insurance purposes. The wages were allocable to the period immediately following the last day of work through the number of days paid for the lack of notice.

    Due to the passage of Section 1265.1 of the Code, effective the week in which the bill was passed, which begins December 30, 2001, in-lieu-of-notice pay will no longer be considered wages.

    The department interviewer does not have to determine whether an employer is subject to the provisions of the WARN Act. If the claimant reports he/she is receiving WARN pay or the employer reports making payments to the claimant in compliance with the WARN Act, the payment will be treated as follows:

    • WARN Act Payments allocable to any period prior to December 30, 2001, will be considered wages.
    • WARN Act Payments that begin prior to December 30, 2001, and extend beyond that date, will only be considered wages for the period through December 29, 2001. Therefore, all disqualifications for receipt of WARN Act Payments will end on December 29, 2001.
    • WARN Act Payments allocated to the period beginning December 30, 2001, and continuing will meet the provisions of UI Code Section 1265.1 and will not be considered wages for unemployment insurance purposes.

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Benefit Determination Guide