Maine's Severance Pay Law was enacted in 1975 and has been the subject of lawsuits, including one case that went to the U.S. Supreme Court, ever since. The basic requirement of the law, subject to certain limitations, is that an employer who relocates or terminates a covered establishment must pay severance pay to each terminated employee of that establishment at the rate of one week's pay per year of employment. Of course, the law's requirements often end up "facing into the economic wind." If an employer is closing a facility, the employer is probably doing so because it has already lost and is continuing to lose money at the facility, which means that the Severance Pay Law tends to "kick in" with a potentially big monetary obligation for an employer at precisely the point in time when the employer has no money with which to pay that obligation! It's no wonder then that the law has been unpopular with the employers to which it has been applied and somewhat difficult for displaced workers and the State to enforce.

     The 1975 Maine Legislature suspected that collecting severance pay from financially distressed employers might be difficult, so the Legislature sought to broaden the potential sources of severance pay funds by placing the statute's severance pay liability on the "employer" and "any person who directly or indirectly owns and operates a covered establishment." In so broadening the potential severance pay liability, the Maine Legislature followed a long and somewhat populist tradition in employment law of trying to place employment law liabilities on the owners and officers of corporate employers.

     In the 1980's it became apparent that the "directly or indirectly owns and operates" language was vague and difficult to enforce, so in 1989 the Legislature amended the statute to provide that "For purposes of this definition [of employer], a parent corporation is considered the indirect owner and operator of any covered establishment that is directly owned and operated by its corporate subsidiary." Under the statute, then, a parent corporation is liable for the severance pay obligations of a covered establishment that is directly owned and operated by its corporate subsidiary.

     The obvious next question is: What is "a parent corporation" within the meaning of Maine's Severance Pay Law? The Maine Law Court partially answered this question in its decision in State v. L.V.I. Group, -- A.2d -- (Me. February 18, 1997). In that case the State of Maine sued one corporation, LVI, for the severance pay obligations of another corporation, Dori Shoe. The facts were as follows: LVI owned 100% of the stock of HMD, a "holding company" that in turn owned 100% of Dori Shoe up until about a month and a half before Dori Shoe closed its plant, at which time HMD sold 50% of the Dori Shoe stock to another company. Dori Shoe had started laying off employees in anticipation of the shutdown prior to HMD's sale of Dori Shoe stock. LVI "largely controlled all financial matters related to Dori Shoe" and otherwise controlled Dori Shoe. The Law Court held by a 4-3 vote that the 1989 amendment to the Maine Severance Pay Law was constitutional and that LVI was properly found to be the "parent corporation" of Dori Shoe within the meaning of the Severance Pay Law, even though LVI itself did not own any Dori Shoe stock and HMD only owned 50% of the Dori Shoe stock at the time of the actual shutdown. LVI was held liable for Dori Shoe's severance pay obligations of about $260,000.00.

     The decision in this case raises as many questions as it answers. On the basis of this decision, a firm pronouncement of what is and is not a "parent corporation" under the Maine Severance Pay Law cannot be made. It can be said only that direct ownership of a corporation which is implementing the closing of a covered establishment is not necessary for statutory liability in all circumstances. Similarly, the application of the law to other forms of business organizations not specifically mentioned in the law, such as Limited Liability Companies and Limited Partnerships, is very unclear. Also, does the law apply to individual corporate officers who own stock in the corporate employer? This uncertainty is, perhaps, an inherent consequence of the populist desire to "look behind the formalities to the realities" and the Legislature's attempt to regulate very complicated, dynamic, variable, and financially-distressed economic behavior with a simple law.

     The only general advice that can be given is this: The owners and operators of an employer considering the closing of a covered establishment will simply have to very carefully assess the potential application of the Maine Severance Pay Law to that activity.

DISCLAIMER: All information is provided for educational or promotional purposes only and not as legal advice on a particular matter. The information is provided AS IS with no warranties of accuracy, completeness, merchantability, or fitness for a particular purpose. Providing this information DOES NOT create an attorney-client relationship between Lawrence C. Winger, Esq. and the reader. All information is Copyright (c) Lawrence C. Winger, Esq. 2000 All Rights Reserved.

Dated: January, 2000
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