The Impact of Chapter 11 Bankruptcy on Employees’ Wages and Benefits

The goal of a Chapter 11 bankruptcy is to keep an insolvent company in business and by securing protection from creditors and reorganizing debt. This means creating a plan that allows the company to meet its expenses, including overhead costs like wages and benefits for employees.

The decisions made during a Chapter 11 can fall hard on the company’s staff. Uncertainty about the company’s future can negatively impact employee morale. Concerns about job security and potential benefit reductions can lead to decreased productivity and potential loss of key staffers. There may be a need to downsize, yet it’s vital to maintain a core group of workers to carry on business operations.

Here are the main employment considerations involved in a Chapter 11:

• Downsizing of staff — Most employees of the company have likely been hired on an at-will basis, which means they can be terminated to save costs as long as no illegal discrimination is involved. Employees under contract are subject to different strictures. The contracts may be assumed or rejected with court approval. Rejection of a contract makes the worker an unsecured creditor.
• Current employees — Retained workers should continue receiving their regular paychecks. These are considered necessary costs for business operations. As for employee benefits, the company might seek to modify plans to reduce costs. Common changes include reducing or eliminating employee contributions, reducing coverage or even discontinuing certain benefits. Significant changes to plans require bankruptcy court approval.

• Former employees — Terminated workers are owed their wages earned and benefits accrued before the Chapter 11 filing. These are unsecured debts, meaning the former employees may have to wait longer or receive less than their full owed wages. However, up to $13,650 of wages earned within 180 days of the filing are considered priority claims, payable before most other debts.
• Union employees — Unionized employees have additional protections through their collective bargaining agreement. A Chapter 11 plan allows the company to assume or reject a CBA, but rejection can be complicated, because the company still must negotiate the union to make changes to wages and benefits.
• Pension plans — Although pension plans are protected assets in Chapter 11, the company may not be able to pay pension benefits in full going forward. Any change to a plan requires court approval. The Pension Benefit Guaranty Corporation (PBGC) will step in to ensure participants receive benefits earned prior to a pension plan being altered or cancelled or changed.

The Chapter 11 filing also affects employees’ complaints of violations of state or local labor and employment laws. Damages awards or administrative penalties are treated as claims in the bankruptcy case. An experienced Chapter 11 attorney can advise you how to deal with all aspects of employee relations during the 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.