When a company files for Chapter 11 bankruptcy, it usually intends to remain in business while it negotiates with creditors to reorganize its debt under the protection of the bankruptcy court. This means its actions must be approved by a bankruptcy judge, and creditors must get court approval before they can take any collection action against the company. Heres what happens to employees when a company files for Chapter 11 bankruptcy:
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Employee Wages and Benefits: If a company owes a current employee wages when it files for Chapter 11, then the employee’s paychecks should not be interrupted. The company will ask the court’s permission to keep paying its employees as long as it stays in business. However, if an employee is laid off before or after the bankruptcy petition was filed, and is owed back wages, he or she will automatically be considered a creditor. This means the employee might not receive all or some of the owed money. If the employee does receive compensation, it will not be paid right away.
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Union Contracts: When companies see their collective bargaining agreements as unworkable, they often file Chapter 11 Bankruptcy. The bankruptcy laws allow companies to renegotiate union contracts in certain cases. For union workers, the rules are entirely different when it comes to Chapter 11 filings from the company they work for. Union contracts are not protected under Chapter 11, and the company may even reject the collective bargaining agreement contract if they are no longer able to meet its terms. Bankruptcy filing companies often file Chapter 11 to negotiate new union contract terms. If the company rejects a union contract, it can cause a domino effect of issues for the company if it is unable to reach an agreement with the union. This could even cause the case to be converted over to Chapter 7 liquidation bankruptcy.
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Employee Layoffs: If a company files for Chapter 7 liquidation, it no longer intends to operate its business. The assets will be sold to pay off the creditors. It’s possible that some employees will be temporarily retained to assist with the liquidation process. However, all employees can expect to lose their jobs once this process is complete and the company is disbanded. If a company files for Chapter 11 reorganization, it still intends to operate. Chapter 11 enables the company to reorganize its debts, protect its assets, and enter into negotiations with the creditors. Employees who work for a company in Chapter 11 have cause to be cautiously optimistic.
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Employee Benefits: If an employer declares bankruptcy, it will generally take one of two forms: reorganization under Chapter 11 of the Bankruptcy Code, or liquidation under Chapter 7. A Chapter 11 (reorganization) usually means that the company continues in business under the court’s protection while attempting to reorganize its financial affairs. A Chapter 11 bankruptcy may or may not affect employee retirement or health plans. In some cases, plans continue to exist throughout the reorganization process. In a Chapter 7 bankruptcy, the company liquidates its assets to pay its creditors and ceases to exist. Therefore, it is likely that employee retirement and health plans will be terminated.
Its important to note that if a company must abide by the WARN Act and doesn’t give employees 60 days’ notice, then it might have t...
