When a business faces significant financial difficulties, it may pursue bankruptcy to restructure or wind down its operations. However, as filing for bankruptcy can also affect a company’s workers, it’s important for the company’s leaders to get help from an experienced bankruptcy lawyer to understand their obligations and avoid potentially costly mistakes.
Types of Business Bankruptcy and What They Mean for Employees
Most businesses will pursue one of two types of bankruptcy: Chapter 7 or Chapter 11.
In Chapter 7 bankruptcy, also called liquidation bankruptcy, a company will cease operations and sell its assets to pay creditors. Any further business operations must further the liquidation process, such as a retailer selling its remaining inventory. Because Chapter 7 bankruptcy means the company will shut down, employees typically lose their jobs, though some may remain employed during the bankruptcy to facilitate the company’s liquidation. Employees who lose their jobs due to their employer’s Chapter 7 bankruptcy have the right to receive payment for any wages they have earned or other pay owed to them under their employment contract. However, employees owed wages and other pay become priority creditors of the company’s bankruptcy estate, which means they receive payment after the company’s secured creditors.
In Chapter 11 bankruptcy, also called reorganization bankruptcy, the company continues operating as it restructures its debts and operations to become profitable. During reorganization, the company may reduce expenses by selling off or winding down unprofitable business lines or by reducing its workforce through layoffs. As a result, some employees may lose their jobs in a Chapter 11 bankruptcy. A Chapter 11 bankruptcy may also allow companies to renegotiate labor contracts or change employees’ benefits.
Employee Wage and Benefit Protections in Bankruptcy
The Bankruptcy Code converts any unpaid wages, salaries, commissions, and benefits (such as accrued PTO) that a business in bankruptcy owes its laid-off workers into unsecured priority creditor claims. Although laid-off employees have a lower priority claim than secured creditors, they will receive payment before the company’s other unsecured creditors (i.e., unsecured business loans or lines of credit).
Employee benefit plans, such as retirement or pension plans, may receive legal protection under ERISA, which requires employers to place the assets of such plans in separate trusts. As a result, the company’s creditors cannot seize those assets to repay the company’s debts. However, a company’s bankruptcy may terminate a retirement or pension plan, requiring employees to take action to preserve their benefits.
Health Insurance and Other Employee Benefits
A business bankruptcy may also cause employees to lose their group health benefits. When a company liquidates under Chapter 7, its group health plan will also terminate, meaning employees will not have the right to elect COBRA coverage to continue their health insurance, as the employer’s plan has ceased to exist. Employees may have the option to convert to an individual plan with the same insurer. When the bankruptcy company maintains its group plans, it can offer laid-off employees continued COBRA coverage. Furthermore, if another company succeeds to the bankrupt business’s assets or operations, it may become responsible for providing COBRA coverage.
Job Security and Worker Adjustment Rights
As an at-will employment state, Michigan allows companies to terminate workers for any reason that does not violate state or federal law or public policy. However, union contracts may impose additional requirements or restrictions on companies’ ability to lay off workers.
Furthermore, the WARN Act requires employers to provide at least 60 days’ notice before a mass layoff or plant closure. However, it provides an exception to the notice requirement for “unforeseeable business circumstances” beyond the employer’s control.
Contact Our Firm Today
Are you a business leader whose company is considering bankruptcy? If so, contact Marrs & Terry, PLLC today for a confidential consultation with a bankruptcy attorney from our law firm. We serve Michigan business clients from our offices in Ann Arbor, Jackson, Saginaw, and Midland.