Employment Considerations in Filing a Chapter 11

When a company files for bankruptcy under Chapter 11, its employees often face a turbulent and uncertain environment. The process of reorganization introduces a host of employment-related issues, and the choices made by the company’s leadership can have a significant impact on staff morale, productivity, and retention.

The news of a bankruptcy filing is unsettling for most employees. Uncertainty about the future of their jobs, compensation, and benefits naturally leads to anxiety throughout the workforce. As rumors and speculation circulate within the company, morale can nose-dive, resulting in diminished productivity, a distracted workforce, and, in some cases, the departure of valued employees seeking more secure opportunities elsewhere. Maintaining business continuity, however, is critical during bankruptcy, so companies often need to strike a delicate balance: reducing costs while retaining enough skilled workers to keep the business running.

These are the areas in which a Chapter 11 can impact employees at a company:

• Workforce reductions and employment contracts — A major part of the reorganization process frequently involves reevaluating staffing levels. Most employees are hired on an at-will basis, which means the company can terminate their employment to reduce operating expenses, provided the dismissals don’t violate anti-discrimination laws. Employees who work under individual employment contracts are in a different category. These contracts do not automatically end with a bankruptcy filing. Instead, the company must obtain court permission to either assume (continue) or reject the contract. If a contract is rejected, the affected employee becomes an unsecured creditor, eligible to file a claim for damages but with no guarantee of full payment.
• Status of current employees — For workers who remain with the company after the filing, their roles become essential to upholding daily business functions. Their regular salaries and wages are categorized as necessary expenses and should continue to be paid as usual. Employers may, however, seek to alter benefit programs to cut costs, which may involve reducing the company’s contributions or even discontinuing certain benefits. Any substantial modifications typically require bankruptcy court approval to ensure fairness and legality.
• Obligations to former employees — Employees who are let go prior to or during the bankruptcy process are entitled to receive compensation for wages and benefits they earned before the Chapter 11 filing. These debts are unsecured, which means ex-employees might need to wait for payment and may ultimately receive less than the full amount owed. There are exceptions—federal law gives former employees “priority claim” status for up to $13,650 of wages earned within 180 days before the bankruptcy, meaning they get paid ahead of most other creditors.
• Unionized workers and collective bargaining agreements — Employees covered by collective bargaining agreements (CBAs) receive extra protections. The company has the option to assume or reject a CBA, but cannot do so unilaterally. Even if a CBA is rejected, the employer is required to bargain with the union in good faith if they wish to make changes to wages or benefits, and a bankruptcy judge must determine if the rejection meets strict legal criteria.
• Pension and retirement plans — Retirement benefits are another major concern during bankruptcy. Pension plans are generally treated as protected assets, but ongoing funding issues may compromise future payments. The Pension Benefit Guaranty Corporation (PBGC) insures certain types of pensions and will step in if the plan is terminated, ensuring participants receive at least a portion of their promised benefits. Any proposed modification or cancellation of pension plans also needs court approval.
• Employment-related claims — Finally, bankruptcy can affect pending or potential claims for violations of labor laws. Employee damage claims or regulatory fines are subject to the same priority and payment rules as other unsecured claims.

Navigating the employment complexities during bankruptcy is challenging, and the company’s actions during this period can have lasting repercussions. An experienced Chapter 11 attorney can be instrumental in protecting both the company’s and employees’ interests during reorganization.

The Law Offices of Michael Jay Berger in Beverly Hills represents businesses and workers throughout California in employment disputes during Chapter 11 bankruptcy. Call 310-271-6223 or contact us online to arrange a free consultation.