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When employees learn their employer has filed for Chapter 11 bankruptcy, they rightfully worry about the future of their jobs. Complex provisions of the United States Bankruptcy Code that govern Chapter 11 proceedings address employee compensation and benefits. To a great extent, what happens to employees in a specific company depends on the unique circumstances of the business.
To understand what happens to employees during and after Chapter 11 bankruptcy, it is important to first understand what happens to the business.
Chapter 11, known as reorganization bankruptcy, is the most complex type of bankruptcy. Under this particular chapter of the Bankruptcy Code, a business may obtain bankruptcy court protection while remaining in possession of assets and continuing business operations. The complex Chapter 11 process enables a business to stay in business and reorganize, restructure, and reduce debt over time.
Unlike other types of bankruptcy — such as Chapter 7 liquidation bankruptcy — a company that files for business bankruptcy under Chapter 11 or for small business bankruptcy under Subchapter V of Chapter 11 may continue to do business, operating under the supervision of the bankruptcy court during the Chapter 11 case, which may take a year or more to complete. In a successful Chapter 11 bankruptcy case, the business then operates for a specified period of time under a reorganization plan confirmed by the bankruptcy court. Ultimately, the goal is for the business to emerge from bankruptcy with streamlined and improved finances and operations.
Since business operations may continue during and after a Chapter 11 bankruptcy, the filing does not necessarily mean that all employees will lose their jobs. However, the company must reorganize operations, including debt, as part of the bankruptcy process. With labor expenses typically constituting one of the primary costs of many businesses, reduction of the labor force and labor expenses is not unusual in a Chapter 11 bankruptcy. Additionally, a sale of the business or its assets may result in a reduction of the work force or transition of employees to a potential purchaser.
Layoffs are fairly common in a Chapter 11 bankruptcy, but any layoffs and other job actions to cut costs must be conducted in full compliance with federal and state laws and regulations — such as The Worker Adjustment and Retraining Notification (WARN) Act, which applies to certain employers and job actions. In addition, employees who lose their jobs on account of bankruptcy generally have the right to file unemployment claims.
The employer likely will ask the bankruptcy court for permission to continue paying current employees as long as it stays in business, so employees who continue to work at the company when it files for Chapter 11 can expect to continue to receive paychecks.
Employees who were laid off or dismissed before the bankruptcy filing and are owed wages or benefits become Chapter 11 creditors, which means they may have to wait for their payment and may or may not receive all they are owed. Treatment of the claim depends on where the claim falls in the hierarchy that establishes the priority order that applies to payment of claims in a Chapter 11 bankruptcy case.
The nature of a former employee’s claim determines its place in the hierarchy. For example, an employee who is laid off during the Chapter 11 bankruptcy proceeding may receive payment promptly, since the bankruptcy court may order the claim to be paid as an administrative expense, rather than a priority claim.
For employees who remain in their jobs, the business may seek to modify benefit plans, such as healthcare, to reduce costs. Common changes include reducing or eliminating employer contributions, discontinuing certain benefits, or reducing the extent of coverage. Significant changes to benefit plans require bankruptcy court approval.
Pension plans are protected assets in a Chapter 11 proceeding. Any change to a pension plan requires bankruptcy court approval. The Pension Benefit Guaranty Corporation (PBGC) ensures that participants receive benefits earned before a pension plan was changed or canceled.
Collective bargaining agreements (union contracts) are not protected under a Chapter 11 bankruptcy. If the business can no longer comply with the terms of the agreement, bankruptcy laws may allow the business to reject the contract.
Rejection of the union contract may help the business reorganize but also carries significant consequences. The business may seek to renegotiate the contract and get concessions or modifications from the union, but failure to reach an agreement with the union may result in the bankruptcy being converted to a Chapter 7 liquidation bankruptcy.
Complex bankruptcy attorney Aaron Wernick is certified in business and consumer bankruptcy law by the American Board of Certification and recognized as a top bankruptcy lawyer by Chambers, Super Lawyers®, and Avvo. Attorney Hayley Harrison is recognized as a top bankruptcy lawyer by Chambers, Super Lawyers, the American Bankruptcy Institute and Florida Trend. The firm concentrates the majority of its practice on Chapter 11 debtor representation.
Wernick Law welcomes Florida businesses, individuals, and referring professionals wishing to learn more about the firm’s Chapter 11 reorganization bankruptcy practice to schedule a consultation by calling 561-961-0922 or using the online contact form. Based in Boca Raton, Wernick Law serves clients in South Florida (including West Palm Beach, Broward County, and Miami), Southwestern Florida (including Naples and Fort Myers), Tampa, Orlando, Jacksonville, and elsewhere in the state.
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