What Happens to Employees When a Company Files Chapter 11

What happens to employees when a company files Chapter 11? When a business files for Chapter 11, its objective is typically to sustain operations while engaging in negotiations with creditors to restructure its debts under the protection of the bankruptcy court. The company’s actions require approval from a bankruptcy judge, and creditors must also seek court approval before taking any collection actions against the company.

The process of debt restructuring usually indicates that the company’s expenses exceed its revenue. These costs are typically associated with the company’s workforce and encompass wages, healthcare expenses, and other labor-related outlays. Chapter 11 bankruptcies commonly involve layoffs as creditors demand management to reduce labor costs. It’s important to note that job actions and layoffs are governed by state and federal laws and regulations.

In situations where a company determines that its collective bargaining agreement is ineffective, they often resort to declaring bankruptcy under Chapter 11. Under specific circumstances, bankruptcy laws allow companies to renegotiate contracts with labor unions.


When Work Is Protected by the Worker Adjustment Retraining Notification Act

The WARN Act stipulates that employers with over 100 full-time workers, and where 50 or more of them are affected by a shutdown or layoff, must provide a 60-day notice to their employees. This requirement remains in effect even if a company has filed for Chapter 11 bankruptcy, although there are certain exceptions.

If you fail to give a 60-day notice to your employees during your Chapter 11 bankruptcy, you could be held responsible for wages and benefits.


How to Treat Wages in Chapter 11 Bankruptcy

The employee’s pay should not be halted if your company is owed wages by a current employee at the time of filing for Chapter 11. The company will seek permission from the court to continue paying its employees for as long as it remains in operation.

All creditors are classified as Chapter 11 creditors, including employees who were terminated or laid off before the Chapter 11 filing and are owed wages or other benefits. These employees may be required to wait and may not receive the full amount owed to them.

Employees will be pleased to know that their wages, categorized as “priority claims,” are given precedence over regular debts if they meet two conditions: 

  1. The wages were earned within 180 calendar days from the date of filing Chapter 11 bankruptcy, and;
  2. The amount does not exceed $13,650 for each employee in April 2019.

Wage amounts exceeding $13,650 or earned after the 180-day deadline can still be claimed, but they are not considered priority claims. In the case of an employee being laid off during the Chapter 11 bankruptcy, the bankruptcy court may order immediate payment due to the “administrative” claim taking precedence over the “priority claim.”


How Chapter 11 Affects Union Contracts

Chapter 11 bankruptcy does not protect union contracts, also referred to as collective bargaining agreements. Some companies file for Chapter 11 specifically to leverage bankruptcy laws for negotiating new contracts before the existing union contract expires.

Under bankruptcy laws, the company has the right to reject the contract if it cannot meet the terms set by the union. While contract rejection may aid the company in its reorganization efforts, it also carries significant consequences.

In many cases, the company will seek concessions or modifications from its unionized employees. However, if the financial situation of the company is dire and an agreement with the union cannot be reached, it may result in the company converting its bankruptcy case into a Chapter 7 liquidation.


How Chapter 11 Treats Independent Contractors

Independent contractors who earn commissions for your company may have the option to file a priority claim for unpaid commissions they earned before you filed for Chapter 11. If, within the 12 months preceding the Chapter 11 filing, the independent contractor derived at least 75% of their commission income from the company, their claim will be classified as an administrative claim.

A Proof of Claim Is Required

Creditors must submit a Proof of Claim along with supporting documents to demonstrate the amount they believe is owed to them before a bankruptcy claim can be paid. Additionally, unpaid medical insurance claims or documented unreimbursed costs are also eligible for coverage. 

Unemployment Claims Still Valid

Even if the company’s bankruptcy is the cause of an employee’s job loss, they still have the right to file a claim.

Health and Pension Benefits to Date Are Safe

Health and pension plans may be terminated following the filing of Chapter 11 bankruptcy, which primarily benefits the company. However, the benefits that employees have already earned up to that point should still be safeguarded. The Employee Retirement Income Security Act (ERISA) governs the majority of these plans. The Summary Plan Description for each plan should provide information on how the benefits will be handled.


How Pension Funds Are Treated

ERISA requires that the pension fund be held separately from other assets of the company, either in a trust or through an insurance contract. If a company is liquidated, ERISA mandates that 100% of the pension benefits be vested. Additionally, many pension benefits are insured by the federal government.

During a Chapter 11 bankruptcy, your company may request permission from the bankruptcy court to terminate or modify the pension plan. If the pension plan is fully funded, the former employer may utilize assets to purchase an annuity to fulfill employee benefits. The pension plan will either be completed under bankruptcy proceedings or transitioned to the Pension Benefit Guaranty Corporation (PBGC). In the latter scenario, the PBGC assumes all assets and liabilities to ensure the payment of employees’ benefits.

Protect Your 401(k) Funds

The company is not obligated to match or contribute to future contributions. Employees who hold stock investments in your company may consider reassessing their investments now that the company has entered Chapter 11.


COBRA Option Is No Longer Available for Health Coverage

Your employees will not be able to maintain their coverage under COBRA if you discontinue all health plans. They will have only two alternatives: purchasing individual policies or adding their names to their spouse’s policy.

If your employees receive health benefits through a collective agreement or as retirees, they may be affected by bankruptcy regulations. In such instances, employees should reach out to either their union representative or the administrator of each plan.


Contact Bruner Wright Today for a FREE Consultation

At Bruner Wright, we understand the concerns employees face when their company files for Chapter 11. Our team of experienced advisors is here to provide guidance and support during this challenging time. We can help you navigate the impact of Chapter 11 on your employment rights, benefits, and financial stability. With our expertise in bankruptcy law, we can assist you in understanding your options, protecting your interests, and ensuring you have the necessary information to make informed decisions. 

Contact Bruner Wright today to receive personalized assistance and trusted advice for your specific situation.


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