Severance Pay Law, First in US, Protects Workers in Mass Layoffs

Companies with more than 100 employees in NJ will soon have to meet new requirements when laying off half their workforce
Credit: watts_photo via Creative Commons (CC PDM 1.0)
The legislation was first introduced in 2018 in the wake of the mass closure of Toys ‘R’ Us stores throughout the state.

New Jersey is set to become the first state in the country to require companies with a large number of employees to pay their workers severance whenever there is a mass layoff.

The new severance requirement for companies with more than 100 workers will go into effect across the state in less than six months under a new law Democratic Gov. Phil Murphy enacted last week.

Advocates for workers have hailed the mandatory severance requirement and other provisions of the new law as necessary protections in an era when large companies can undergo major cutbacks and even bankruptcies that decimate employee rolls, while pay and bonuses for executives are preserved.

But others have suggested it goes too far and could make companies think twice about establishing a presence in New Jersey, or expanding operations that are already located here. They also note New Jersey already has a reputation for levying high taxes and onerous regulations.

The legislation (S-3170) proposing a strong severance requirement in New Jersey was first introduced in 2018 in the wake of the mass closure of Toys ‘R’ Us stores throughout the state as the Wayne-based retailer tumbled into bankruptcy.

More than 1,000 workers lost their jobs in New Jersey, with little to no severance, and a group of them complained in-person in 2018 about how they were treated during testimony before the New Jersey State Investment Council. The council oversees the public-worker pension system, and the pension funds own stakes in a hedge fund that had ties to the company’s liquidation. (In the wake of the company’s liquidation, two new Toys ‘R’ Us stores have opened in Paramus and Houston, Texas, in recent weeks under a new corporate owner, New York-based Tru Kids.)

The severance requirement crafted by lawmakers and enacted by Murphy in response to Toys ‘R’ Us’ mass closures will apply to companies with more than 100 employees when a mass layoff impacts 50 or more employees. It will require that workers be given severance pay equal to one week’s compensation for every year of service with the company.

Bankruptcy protection, 90 days’ notice

The new law also attempts to offer new protections against a company’s bankruptcy by labeling severance as “compensation” that would be “earned in full” by an employee at the time of their termination. And in addition to mandating severance, the law establishes new requirements for “successor employers” who may take on a company, including protections against employees’ future pay cuts.

The law also will extend the amount of time that companies must give their workers prior to a mass layoff beyond the current requirement of 60 days’ notice. In 2007, the Worker Adjustment and Retraining Notification Act, or WARN Act, created that requirement.

When the law goes into effect, which take place 180 days from Jan. 21, the WARN Act’s advanced-notice window will expand to 90 days in New Jersey. The law will also slap a penalty of additional severance for companies that run afoul of the advanced-warning requirement.

Worker advocates praised the beefed-up protections as the Democratic-sponsored measure made it through both houses of the Legislature in the final days of the last legislative session, which ended earlier this month.

Cesar de la Peña from the Make the Road New Jersey worker- and immigrant-advocacy group said the law would “set the severance pay standard for the rest of the country.”

Assemblywoman Annette Quijano (D-20th), a prime sponsor, said it would also “ease the burden on workers by ensuring they receive severance compensation and appropriate notice of layoffs.”

“Employees deserve to be treated fairly, especially when they are forced to leave a job due to circumstances beyond their control,” Quijano said.

A ‘burden’ to employers

But even as the new law has been hailed by worker advocates and bill sponsors, business groups have warned that it could bring on unintended consequences, such as making companies reluctant to expand above the 100-employee threshold.

Kathleen Connelly, a partner at Westfield-based Lindabury, McCormick, Estabrook & Cooper who has practiced employment law for more than 25 years, said the new requirements are also being added at a time when existing major concerns about taxes and regulations are already forcing many businesses to locate elsewhere.

“This is just another obligation that’s being thrust upon employers that could be a significant burden,” she said.

Connelly also suggested the law could lead companies struggling with financial problems to go directly into bankruptcy, where federal law typically prevails over any state provisions. And she said the law’s attempt to protect severance in bankruptcy proceedings may not survive if challenged in court.