Numerous issues arise when an employer files for bankruptcy. Some of the most crucial issues relate to: (i) priorities for claims of employees; (ii) notices pursuant to the Worker Adjustment and Retraining Notification (WARN) Act; and (iii) the automatic stay’s effects on pending employment claims and EEOC complaints.
Bankruptcy Priorities for Certain Employee Wages and Benefits Claims
A bankrupt employer’s debts fall within several general categories. Some creditors hold claims that are secured by property. These “secured creditors” are generally in a better bankruptcy position than unsecured creditors, because unsecured creditors do not possess any legal rights that are enforceable against particular assets of the debtor. Some unsecured creditors, however, are treated more favorably than others. Among those entitled to favorable treatment are employees with claims for unpaid wages and benefits.
Under Bankruptcy Code sections 507(a)(4) and (a)(5), employees with unpaid wages, salaries, commissions, severance pay, and contributions to employee benefit plans earned or due within 180 days before the date an employer files for bankruptcy—or the date of the cessation of the employer’s business—are entitled to priority payment for up to $15,150.00 of the amounts owing. These employee claims are entitled to payment before most other unsecured creditors in the case, including taxes and amounts owing to customers and vendors. Further, in a chapter 11 case, to confirm a bankruptcy plan, the employer must provide for payment of these priority employee wage and benefit claims in full, providing another layer of protection to employees.
Because of the special priority for employee wage and benefit claims and to ensure the retention of key employees, employers looking at bankruptcy should consider three options. First, if the timing works, the employer should consider filing its bankruptcy immediately after making payroll. This can avoid involving the employees in the bankruptcy process and any delay in paychecks. Second, if any emergency bankruptcy is needed and any employer has sufficient cash available, the employer should consider issuing a special payroll the day before entering bankruptcy for all unpaid wages as of the date. This can likewise minimize the impact on employees. Finally, if payment prior to bankruptcy is not an option, the employer can file an emergency “first day” motion to seek authority to pay past-due wages and continuing employee benefits, including health insurance premiums and payroll taxes subject to some limitations. However, an employer cannot use a first day motion to pay bonuses for employees. These motions are routinely granted by bankruptcy courts but could result in some delay in payment depending on the timing of payroll and the court’s availability.
WARN Act Compliance
Federal and state WARN Acts exist to provide pre-closure notices to employees in certain circumstances. WARN began as a federal law requiring certain larger employers to provide 60 days advance written notice prior to a mass layoff or plant closure. The intent of the advance notice is to allow workers and their families time to find replacement employment or pursue retraining or other opportunities.
The federal WARN Act generally applies to employers with 100 or more full-time employees, excluding those working part-time or for less than six months. However, the federal WARN Act also applies to employers with 100 or more employees working a combined 4,000 hours or more per week. The federal WARN Act applies to for-profit, nonprofit, and quasi-governmental entities.
The federal WARN Act applies to “plant closures,” which includes the employer’s closure of a facility or discontinuation of an operating unit either permanently or temporarily, provided it affects at least 50 full-time employees at a single employment site. A “plant closure” may also exist if an employer closes an operating unit that has fewer than 50 workers, but the closure also involves making 50 or more layoffs.
The federal WARN Act also applies to “mass layoffs,” meaning (a) layoff of 500 or more employees at a single site of employment in a 30-day period, or (b) layoff of 50-499 workers at a single site of employment if it constitutes 33 percent or more of the employer’s workforce. This may apply to temporary or permanent layoffs. Additionally, a “mass layoff” includes situations in which an employer reduces the hours of work for 50 or more workers by 50 percent or more for each month in any six-month period.
There are exceptions to the federal WARN Act notice requirements for faltering companies, natural disasters, and unforeseeable business circumstances, although these are narrowly construed. Federal WARN Act notices also must be given if the employer is involved in an asset sale or other business reorganization. Federal WARN Act notices must contain certain information, including the expected date of the plant closure or mass layoff, a statement whether the action is expected to be temporary or permanent, a disclosure regarding bumping rights, and the name and contact information for the employer’s representative for questions. Notices may also include contact information for the Department of Labor Rapid Response Team or other available resources for employees. Employers are required to provide additional notice and information to the Department of Labor’s Rapid Response Team Dislocated Worker Unit and a union representative if employees are unionized.
Penalties for WARN Act violations may include daily fines and attorney fees. Employers should be aware that various state WARN Acts may also apply different criteria, and both the state and federal WARN Act requirements must be met.
Employers should reach out to the local U.S. Department of Labor Rapid Response Team to coordinate the layoff or plant closure—regardless the employer’s size. The Rapid Response Team can provide assistance to the employer with notice requirements as well as provide job placement, resume writing, unemployment insurance benefits assistance, and other assistance to affected workers. The service is free for all participants.
Bankruptcy Automatic Stay Effects on Pending or Threatened Employment Claims and EEOC Complaints
Employers should consider bankruptcy’s effects on threatened or pending litigation brought on behalf of current or former employees before seeking bankruptcy protection.
An employer’s filing for bankruptcy triggers an automatic stay of all litigation against the debtor-employer. This means that an employee or their attorney cannot make any demand for payment or start or continue litigation that was (or could have been) initiated before the bankruptcy. If a judgment in an employment case has already been entered by a court, the stay prevents the plaintiff-employee from making any efforts to enforce the judgment or collect against the employer. However, employees may request relief from stay or file a separate lawsuit in the bankruptcy case, known as an adversary proceeding, to pursue or continue their claims.
Notably, the automatic stay may not stay proceedings brought by the U.S. Equal Employment Opportunity Commission (EEOC) on behalf of a current or former employee. Employees have the opportunity to file a Charge of Discrimination with the EEOC against their employers for discrimination or retaliation against their employer. This provision likely applies to state agency counterparts to the EEOC as well, although there is little guidance on this point. Normally, the automatic stay would halt any judicial proceedings against the debtor. However, federal courts in the third, fourth, and eighth circuits have held that the automatic stay is not absolute. These courts have held that where the EEOC has begun litigation to effectuate a public purpose, such as eliminating workplace discrimination, the EEOC’s broad powers fall within the governmental or police and regulatory exception to the stay provided by section 362(b)(4). Thus, there is a potential for the EEOC to continue their proceedings during the bankruptcy, as it is a governmental unit.
Conclusion
Although all bankruptcy filings present unique circumstances for the debtor, employers filing for bankruptcy have special considerations. Employers considering bankruptcy as an option for reorganization or liquidation should discuss the foregoing issues with their bankruptcy counsel prior to filing for bankruptcy.
This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.
