As ‘fiscal cliff’ looms, debate over pre- Election Day layoff notices heats up

The deep federal spending cuts scheduled to take effect at the start of next year may trigger dismissal notices for tens of thousands of employees of government contractors, companies and analysts say, and the warnings may start going out at a particularly sensitive time:

Days before the presidential election.

By law, all but the smallest companies must notify their workforce at least 60 days in advance when they know of specific job cuts that are likely to happen.

Obama administration officials say that the threat of layoffs is overblown and that Republicans are playing up the possibility rather than trying to head it off. The Labor Department said Monday that it would be “inappropriate” for contractors to send out large-scale dismissal notices, because it is unclear whether the federal cuts will occur and how they would be carried out.

Republicans reacted with fury, saying it is the White House that is playing politics.

“The president is focused on preventing advance notice to American workers that their jobs are at risk and on perpetuating uncertainty,” said Rep. Howard P. “Buck” McKeon (R-Calif.), chairman of the House Armed Services Committee.

The prospect of widespread layoff notices before Election Day — potentially hitting the swing state of Virginia hardest — underlines how the looming “fiscal cliff” at the end of the year is shaping the economy and politics many months in advance.

Economists say the threat of deep cuts in domestic and defense spending, coupled with automatic increases in taxes, is already a drag on economic growth and a source of enormous uncertainty for businesses, which are holding back on hiring and helping to keep the nation’s unemployment rate above 8 percent.

Republicans have seized an opportunity to attack President Obama over the planned cuts to defense spending, while Obama is pointing at the GOP, saying he will not roll back the spending reduction without Republicans agreeing to higher taxes on the wealthy to help tame the nation’s debt.

The far-reaching reductions in domestic and defense spending, along with the sharp tax increases, will take effect automatically at the start of the new year unless Obama and Congress act.

Although both sides want to stop the spending cuts, a deal seems unlikely until after the election.

A key defense industry group representing some of the largest contractors said it is reviewing the Labor Department’s new guidance, but the group said it still considers it possible that layoff notices will be sent to a large number of employees.

The giant defense contractor Lockheed Martin, which has more than 20,000 workers in the Washington area, has said it may notify more than 100,000 employees of potential layoffs ahead of the election. Lockheed said Monday that it is reviewing the new guidance. EADS, a major European defense contractor with U.S. operations, also has said it may notify employees of layoffs.

Spokesmen for Northrop Grumman and General Dynamics said last week they have not decided whether to do so, while a Boeing representative would say only that the company is planning for a worst-case scenario where the spending cuts occur. Two other large local contractors, Computer Sciences Corp. and SAIC, declined to comment.

Some employment lawyers and analysts are accusing businesses of threatening to issue layoff notices as a way to pressure lawmakers to roll back cuts that could reduce profitability.

“If it’s truly the intent of the defense industry to want to send out the mass notices, I think that is being triggered by their frustration over the uncertainty about the budget,” said Jack Raisner, a specialist in employment law. “They’re manufacturing a hysteria about being forced to do it.”

Others argue that companies will conclude that the law compels them to send out notices.

“Whether it’s bluster or serious, unfortunately the contractors have to take it seriously,” Michael Hordell, a contracting lawyer in Washington, said in an interview before the Labor Department guidance. “What’s sad about this is they’re not sure what programs are going to be cut if there are automatic cuts, so they have to do broad general notification.”

Behind the potential layoff notices is the 1988 Worker Adjustment and Retraining Notification, or WARN, Act.

The law requires companies with more than 100 employees to alert workers that they may be laid off if there is a foreseeable event in the next 60 days that is likely to require the dismissals.

Some states, such as New York and California, require notifications as early as 90 days in advance. Failure to do so can lead to hundreds of dollars in penalties, per employee per day, but there are a number of caveats in the statute. The statute says companies are not to issue “blanket” notices.

Shai Akabas, a senior policy analyst at the Bipartisan Policy Center who has studied the issue, said the Labor Department’s advisory — that there’s no need for dismissal notices — would not be definitive. The WARN Act can be adjudicated in court only.

“Contractors’ legal representatives have stated they need to issue notices to comply with the act,” he said. “They may not feel comfortable failing to issue the notices simply in light of this guidance.”

Akabas and other analysts wrote in a recent research note that millions of employees could receive such notices in the most dramatic case.

“Businesses will want to maintain flexibility by issuing to all their employees who could get laid off, and the precise decisions may depend on which contracts are affected by the spending cuts,” they wrote. “Employers wishing to pressure policymakers to overturn the [cuts] have an incentive to exaggerate the impact by including as many workers as possible.”

Economists say the looming cuts and tax hikes are already making businesses uneasy.

“If I’m being warned about my job, then I’m going to start acting as though there’s a real chance that I won’t be employed coming forward,” said Bank of America economist Ethan Harris. “It’s fear. It’ll have a freezing-up effect.”

Republicans, led by presidential contender Mitt Romney, have called for delaying the automatic cuts, which were put in place last year to close the nation’s budget gap. He also wants to stop the tax increases, which would occur when tax cuts adopted under President George W. Bush expire.

Democrats, including Obama, insist that they will postpone the spending cuts only if Republicans agree to increase taxes on the wealthy to help reduce federal borrowing.

The issue is also a dividing line in Virginia, which is reliant on the federal government’s largesse more than any other state.

Republican Senate candidate George Allen says the reductions could be devastating.

Though he does not want deep cuts to occur, Democrat Senate candidate Timothy M. Kaine said the deal that led to the proposed cuts — forged last summer by Republicans and Democrats to force budget savings — was the right thing to do.

“If pieces of the economy or people’s jobs start going over the cliff before the election, and the Republicans are responsible for that because they were defending tax cuts for millionaires, that’s a bad place for them to be politically,” said Craig Varoga, a Democratic political strategist.

Terry Holt, a Republican strategist, said the administration is acting to protect itself by releasing guidance to companies not to issue notices.

“President Obama is willing to use all the powers of the incumbency to defend his reelection,” Holt said. “People associate job loss and economic stagnation with the president far more than their individual member of Congress.”

Zachary A. Goldfarb is a staff writer covering the White House, focusing on President Obama’s economic, financial and fiscal policy.
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