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How Chapter 11 Affects Employment at a Company

California bankruptcy attorney advises companies on workers’ rights

If you are an owner of a business that is going into Chapter 11 bankruptcy, the effect on your employees must be considered. Because you want to continue to operate during your Chapter 11 reorganization, you need the loyalty of those employees who provide the stability necessary to weather the storm. Low morale, hard feelings and attrition can complicate your efforts to reverse your company’s fortunes. At Law Offices of Michael Jay Berger, we counsel business owners on prudent steps they can take to promote success in Chapter 11 and afterwards. We draw on decades of experience to advise owners on a wide range of employment issues, so they can comply with the law and maintain a core group of essential workers during this crucial time.

Reorganizing terms and conditions of employment

Often, a reorganization plan calls for changes in the company’s employment profile. Reducing labor costs can mean laying off workers and/or reducing compensation. How you proceed depends on the specific terms of employment. These are the principal types:

  • At will employment — This means that the employer can terminate the relationship at any time and for any reason. You can change the employment conditions of at-will workers without negotiation, as long as your decisions are not illegally discriminatory.
  • Employment contracts — If you have employees currently under contract, you can assume or reject the contracts with bankruptcy court approval. Rejecting the contracts can free you from obligations you cannot hope to meet, but also frees the employees to look elsewhere. Rejection also gives employees an unsecured claim against the company’s bankruptcy estate.
  • Collective bargaining agreements (CBA) — A business owner can assume or reject a contract with a union or other collective bargaining unit. Assuming a CBA means the business has to pay wages and benefits during bankruptcy. Rejecting a CBA means complying with stringent requirements. Furthermore, rejecting the CBA does not invalidate the union’s status, under the National Labor Relations Act, as the exclusive representative of the workers.

When considering how to lower labor costs, you must avoid tactics that would alienate the workers that you need to retain to make your reorganization work. A little transparency can go a long way towards maintaining trust and confidence in the company’s future.

How the WARN Act influences labor decisions

The federal Worker Adjustment and Retraining Notification Act (WARN) requires covered employers to give at least 60 days written notice in advance of plant closings and mass layoffs. California also has its own version of the WARN Act. Failure to provide notice can result in steep fines. Companies that file for business bankruptcy in hopes of skirting the WARN Act’s requirements may find themselves liable. However, if you enter bankruptcy and then find you need to close a plant, you might only be required to give reasonable notice under the act.

Employee claims under Chapter 11

Controversies often arise over various claims that current and former employees have against the company. These include the following:

  • Disputes over unpaid wages and benefits
  • Claims presented to the Equal Employment Opportunity Commission, National Labor Relations Board or other government entity
  • Employment claims in civil court
  • CBA grievances

The automatic stay covers actions in court (or through alternative dispute resolution processes) against the company for alleged violations prior to the bankruptcy filing. Claims filed with government agencies prior to the start of the Chapter 11 case can move forward, but those agencies cannot enforce awards for nonpayment of wages or penalties for the debtor’s violation of labor and employment laws. Such claims must be addressed through the debtor’s Chapter 11 plan.

Contact an accomplished California lawyer to employment issues in bankruptcy

Based in Beverly Hills, the Law Offices of Michael Jay Berger represents businesses and workers throughout Southern California in employment disputes during Chapter 11 bankruptcy. Call 310-271-6223 or contact us online. We have a dozen offices from San Diego to San Francisco to serve you.


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