By Jeremy Herb - 09/09/12 10:00 AM EDT
The major defense contractors are keeping their cards close to the vest on whether to issue mass layoff notices prior to the November elections.
The threat of sequestration, an issue that has morphed from a pressure campaign on Congress into a political fistfight, has the defense industry and its observers in suspense. But sources close to the industry say that when the chips fall, Lockheed Martin may be the only company that sends out layoff notices en masse before Election Day because of potential cuts to the defense budget under sequestration.
Some other companies may still issue notices to a smaller, more targeted group of employees, while yet others may not send out any, particularly after the Labor Department said it would be “inappropriate” for defense contractors to do so in a guidance in July.
“They seem to be looking for reasons not to do it,” said one top defense industry source. “Many will not, and they’ll use that Labor memo as cover so they won’t have to do it.”
Lockheed CEO Bob Stevens first raised the prospect of mass layoff notices in June, when he said the lack of guidance from the Obama administration could compel the company to issue layoff notices to all 123,000 employees because it was unknown where the cuts would fall.
The next month, the Labor Department issued its guidance to defense contractors calling the need for mass layoff notices “inappropriate” under the Worker Adjustment and Retraining Notification (WARN) Act.
While the defense industry is united in its opposition to sequestration, there has been some division behind the scenes over just how dangerous the cuts would be, which has played into the layoff-notice debate.
Lockheed is still evaluating the Labor guidance and WARN Act with its legal team and hadn’t made a determination yet, said Chris Kubasik in an interview with The Hill. Kubasik, who will replace Stevens as CEO of Lockheed in January, also made clear that the company wasn’t about to back off.
“Philosophically, we follow the law. My understanding is that sequestration is the law,” Kubasik said. “Until the law is changed I think it would be irresponsible for us to do anything other than comply with it. And that’s what we’re doing.”
Loren Thompson, a defense analyst at the Lexington Institute, an industry consultant, said that Lockheed still appeared to be planning to send the notices based on advice from its legal department. The company learned after the presidential helicopter program was terminated in 2009 that lack of formal notification did not absolve it from issuing the notices, Thompson said.
“However, many of its competitors feel that they lack sufficient understanding of how sequestration will play out, and thus are reluctant to issue large numbers of warning notices,” Thompson told The Hill.
Several contractors, including Lockheed, say they need more guidance from the Obama administration on the cuts, which could come in the form of the report the White House will issue next week on implementing sequestration.
But that will leave just a few weeks before the first deadline hits for the WARN Act notices tied to sequestration, as some states have a 90-day requirement.
Besides Lockheed, BAE Systems has also suggested it might issue mass layoff notices.
Linda Hudson, BAE's top U.S. executive, told Reuters this week that all employees could receive the notices if everything winds up getting cut across the board, as the sequester law is currently written.
BAE spokesman Brian Roehrkasse told The Hill that the company is seeking further guidance about the impact of sequestration on specific programs. He said initial estimates show that up to 10 percent of its workforce in the United States could be lost, which is about 4,000 employees.
“We hope not to issue WARN notices, but may have no choice without further guidance,” Roehrkasse said.
Others are less willing to tip their hands publicly.
A General Dynamics spokesman said the company cannot determine employment levels yet, “given that there is very little information available about how the Defense Dept. will implement sequestration at the program level.”
Boeing said it “will not comment or speculate” on potential WARN Act notices until more guidance is given. Northrop Grumman said it’s making no public comments about the WARN Act, while Pratt & Whitney said it continues to monitor the situation but hasn’t made any decisions.
The way the sequestration law was written, which would eventually reduce the Pentagon’s budget by $492 billion over 9 years, the cuts are across-the-board, hitting every program approximately 10 percent, according to a study from the Center on Strategic and Budgetary Assessments (CSBA).
While the CSBA study found that the Pentagon would likely have to renegotiate many contracts under sequestration, it also predicted that the companies would see little impact on Jan. 2 when the law took effect, and that it would take several years before the cuts were fully felt.
While sequestration is already a politically charged issue, as it’s been wrapped up into the fight over taxes in Congress, the Labor Department’s guidance added another layer of politics to the defense cuts.
Republicans accused the White House of trying to hide potential job losses before the election, and Sen. Lindsey Graham (R-S.C.) declared that the defense companies should immediately issue the layoff notices to force Congress to solve the problem.
The industry source said that the political pressure has added to the difficulty for the companies, many of which aren’t eager to “rock the boat.”
“They’re feeling political pressure from both sides. Republicans want those notices out and the Democrats don’t,” said the industry source. “So it really puts them in a quandary.”