What Happens to the Business’s Employees in Chapter 11 Bankruptcy?

A Chapter 11 bankruptcy will impact an entire company, including its employees. Our West Palm Beach bankruptcy lawyer explains in further detail below.

Due to the fact that businesses file Chapter 11 bankruptcy when they are in financial trouble, the process naturally has many negative connotations associated with it. Truthfully, business owners file bankruptcy in an attempt to save their business and to continue managing as many of the most important business components as possible. This includes ensuring that employees are treated fairly.

The Impact of Chapter 11 Bankruptcy on Employees

The primary purpose of Chapter 11 bankruptcy is to reorganize a business’s debts. This restructuring is necessary when a business’s expenses are greater than the income it is generating. For many organizations, the largest expenses are often wages, healthcare insurance, and other employee-related costs.

Due to the fact that payroll and other employee expenses are very high for businesses, layoffs are not uncommon in Chapter 11. By laying off employees, business owners can save these expenses and try to repay their debt while also maintaining or increasing their income. However, companies that have a minimum of 100 full-time employees at the time of filing, and at least 50 of them will be impacted by the bankruptcy, employers must meet certain requirements.

Under the Worker Adjustment and Retraining Notification (WARN) Act, employers must warn employees of any impending shutdown or layoffs at least 60 days before they occur. When businesses meet the requirements and they do not provide proper notice, they can be held liable for paying the employees’ wages.

When are Employee Wages Prioritized in Chapter 11 Bankruptcy?

If an employee is owed a wage when Chapter 11 is filed, they should continue to receive their paycheck regularly. The wages can be included in the reorganization plan so the business will continue paying the employee if they remain in business and the employee is not laid off.

If an employee was laid off prior to a Chapter 11 filing, the employer is still liable for paying the employee’s wages. In these instances, former employees are treated like the business’s creditors. This can make it more challenging for employees, as they will be pooled with other creditors, which can make it take longer for them to receive the full wages they are owed. However, if the wages did not exceed $13,650 and they were earned within 180 days of the bankruptcy case being filed, the wages are given priority. This means that there is an expectation that they will be paid before any other unsecured debt.

Our Bankruptcy Lawyer in West Palm Beach Can Help Your Business

When filing for Chapter 11 bankruptcy, you will likely have many questions. At Brian K. McMahon, P.A., our West Palm Beach bankruptcy lawyer can answer them and provide the legal advice you need to ensure that you and your company are protected. Call us today at (561) 658-1789 or contact us online to schedule a free consultation and to learn more about how we can help.