The filing of bankruptcy by an individual’s employer can have significant consequences to the employee.
The employee should takes certain steps to enhance the likelihood of receiving compensation for the moneys owed to them for wages, benefits etc. Below is a checklist of items to consider.
- Get a copy of the Notice of Filing of the Bankruptcy with the case information.
- If a chapter 7 liquidation is filed the employer will be out of business. The employee should promptly apply for temporary benefits such as unemployment insurance or seek new employment
- If a chapter 11 reorganization is filed the employer remains in business. The employee’s claims for pre-bankruptcy wages, salaries, and vacation, sick and severance pay, as well as unpaid contributions by the employer to the employee benefit plans, are given priority over unsecured claims up to a maximum of $12, 850 per employee (last adjusted 4/1/16). This amount is adjusted for inflation every three years. This priority claim must be paid in full in order for the employer’s plan to be confirmed.
- The automatic stay prevents creditor from taking collection or legal action against the employer to try and collect what is owed to them. The employee can and should however file a timely Proof of Claim with the Bankruptcy Court for the amount they assert is owed. The claim should assert the maximum amount entitled to priority payment. The balance will be an unsecured claim. The employee must take note of the Bar Date for filing claims because late claims may not be paid anything.
- Best practice is to file a Proof of Claim in both chapter 11 and chapter 7 cases. If a proof of claim is not filed in a chapter 7 case the employee cannot and will not be paid. In a chapter 11 case if the employee does not file a Proof of Claim they will be paid based on what the debtor lists in the schedules as liquidated, non-contingent and undisputed. If they are not properly listed they may get paid nothing or be paid on a lower priority basis than they are entitled.
- Priority status only applies to unpaid hourly wages, salaries, commission, vacation, severance, sick leave pay, and contributions to an employee benefit plan, if earned within 180 days of the company’s bankruptcy filing or when the company ceased operating its business, whichever is earlier.
- Wages, salaries, commission, paid time off and benefits incurred after the bankruptcy is filed, to the extent unpaid, are administrative claims for which a separate claim should be filed.
- Employees may be entitled to additional compensation if the employer does not comply with The Workers Adjustment and Retraining Notification (WARN) Act applicable to employers with more than 100 employees. New York State has a parallel statute which applies to employers with more than 50 employees.
- The employee should contact the administrator of health and pension plans or their union to find out how the bankruptcy will affect them.
- The bankruptcy will generate numerous notices to creditors including the debtor’s employees. Notices should be read and understood as rights can be lost by failure to act timely. If the employee is unsure of what do to they should consult competent bankruptcy counsel to provide advice. In chapter 11 cases there may be a Creditors Committee of unsecured creditors that may be able to provide advice.