How Crumbs was able to lay off all its workers in one fell swoop

July 17, 2014, 6:10 PM UTC
Store Operations At Crumbs, Largest U.S. Retailer Of Cupcakes
Traci Lewin, a Crumbs employee, right, bags cupcakes purchased by customer Katy Carlson, at a Crumbs cupcake store in New York, U.S., on Thursday, Jan. 13, 2011. Crumbs Holdings LLC, the largest U.S.-based retailer of gourmet cupcakes, operates 34 company stores in six states and Washington, D.C. Photographer: JB Reed/Bloomberg via Getty Images
Photograph by JB Reed — Bloomberg/Getty Images

When Crumbs Bake Shop announced it was closing all of its stores last week, its employees found out that day that they would be out of a job the next.

“I come into work today, I’m happy, I’m skipping to work, and suddenly I don’t have a job,” Kareem Wegman, a Crumbs store manager in Brooklyn, told The Wall Street Journal.

On the day it closed its stores, Crumbs employed 455 people. When it filed for bankruptcy four days later, it had just nine employees.

In theory, mass layoffs aren’t supposed to work that way. That’s thanks to the Worker Adjustment and Retraining Notification Act that Congress passed in 1988. The so-called “plant-closing bill” requires companies that are laying workers off en masse to give affected employees at least 60 days notice. If proper notice isn’t given, companies must provide each aggrieved employee with back pay and benefits for up to 60 days. The statute was “oriented toward industrial towns … where a company would shut down a facility and it would have a severe economic effect on the community and families,” says Matthew George, an employment lawyer at Girard Gibbs in San Francisco. The two months notice was intended to give communities and individuals time to adjust.

For all its good intentions, the law that was passed without President Ronald Reagan’s signature 25 years ago comes with a big caveat: it only applies to a company in two instances: when the firm lays off 500-plus employees in a 30-day period or when it lays off at least 50 employees who constitute more than 33% of the total workforce in that same time frame.

If that wasn’t restrictive enough, there’s one more giant limitation: those layoff thresholds must be met at a single company location.

Because the more than 400 Crumbs workers who were laid off were scattered among multiple locations, the now-jobless workers got no official notice and have no way to recoup benefits

A Crumbs spokeswoman told Fortune that “each retail stores is considered a separate site and therefore WARN is not applicable.” Plus, “these were emergent circumstances,” she said. (Companies often use unforeseen circumstances as a defense against the WARN Act.)

Those “separate site” circumstances, which are typical in the food service and retail industries, leave workers in those fields with the short end of the WARN stick. In 2011, for instance, the Friendly’s restaurant chain laid off 1,260 employees at 63 restaurants with no heads up. The same thing happened when Charlie Brown’s Steakhouse let go of 1,900 New Jersey employees at 47 restaurants in 2010.

These episodes reveal the huge downside to the WARN Act. It’s supposed to provide a mass-layoff victim with time to find a new job, but the application of that universally helpful benefit is based on an arbitrary standard that’s totally out of an employee’s control.

Some states have passed their own laws that have lowered the bar for triggering layoff warnings. Iowa, Illinois, New York, and New Hampshire, for instance, have a minimum layoff warning threshold of 25 employees at any given location in certain circumstances. In Maryland, companies must give notice for any layoff or closing that reduces the number of employees by 25% or 15 employees—whichever is greater—in a three-month period.

But even taking those state laws into account, none of the Crumbs’ store closings met the requirements for prior notification since the 49 stores in the 10 states and District of Columbia that the cupcake chain shuttered employed too few people, says WARN Act lawyer René Roupinian of Outten & Golden, who last week fielded calls from former Crumbs employees seeking advice on their rights.

That’s the unfortunate thing about the WARN Act, Roupinian said. Hundreds of people can lose their jobs, but they’ll only receive notice or additional benefits if they all happen to be huddled in the same place.