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The Bankruptcy StrategistFeaturesBankruptcyEmployment LawLitigation

Employment Law Considerations In Bankruptcy

By Wendy Johnson Lario, Alan Brody and Scott Humphreys
May 01, 2021

COVID-19 continues to impact businesses, both large and small. As a result, many companies must face the unfortunate reality of shutting down operations or filing for bankruptcy protection. When considering any change in operational status, businesses are well-advised to consider present and future liabilities, including potential exposure under applicable labor and employment laws. This article addresses some of the relevant employment laws and litigation vulnerabilities that companies, including their owners, officers and directors, should consider before ceasing operations or filing for bankruptcy.

Ceasing Operations

A Chapter 7 bankruptcy filing results in layoffs and the liquidation of all business assets in order to pay creditors. Important for Chapter 7 filers: employment litigation claims are often unsecured and unliquidated debt capable of discharge. However, this comes at a cost, as Chapter 7 traditionally results in the termination of operations and closure of the business.

By contrast, Chapter 11 bankruptcy allows for management to continue business operations and attempt restructuring. In this context, unpaid employer contributions to sponsored benefit plans and a limited amount of employee wages, salaries, and paid time off receive priority over unsecured debts. Moreover, the business debtor customarily is granted first day motions to use cash collateral, obtain new financing and immediately pay employees their wage-related priority claims. In some circumstances, bankruptcy also allows management to approve structured bonus plans to incentivize employees to remain with the company through either a sale or restructuring. Additionally, 11 U.S.C. §503(c)(1) provides that Chapter 11 petitioners may, with court approval, make qualified distribution payments to "Key Employee Incentive and Retention Plans."

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