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Employee Claims in Bankruptcy Pose Significant Liability Exposure
When a corporation determines to file for Chapter 11 protection, questions concerning the status of existing labor and employment agreements and viability of employee claims immediately arise. Indeed, there are litanies of potential pitfalls for companies that file for bankruptcy without strictly following the requirements of federal or state employment laws.
Perhaps the most-well known among these is the Worker Adjustment and Retraining Notification Act (WARN Act), which mandates that companies pay compensation up to average earnings for no more than 60 days. This compensation is paid to replace earnings lost by prematurely terminated employees. If this liability is triggered within 180 days of the bankruptcy filing, such liability amounts to a first-tier, fourth-priority (wages) claim under section 507(a) of the Bankruptcy Code (see In re Riker Ins. Indus., Inc., and In re Cargo, Inc.). If triggered during the post-petition period, such liability is a first-tier, first-priority claim under section 507(a) of the WARN Act (see In re Hanlin Grp.).
“Back pay” is also a common remedy under other federal and state employment laws, such as Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, as well as the historic common law remedy for unlawful termination due to unfair labor practices.
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