Cecily Zamora
The relationship between labor law and bankruptcy is a complex one, with the potential for serious consequences for employees and employers alike. When a company files for bankruptcy, it can have a significant impact on labor law issues, including unpaid wages, non-competition agreements, and employment lawsuits. For employees, this can mean losing out on wages owed, while employers may use bankruptcy as a tactic to avoid paying out settlements or wages. Understanding the nuances of bankruptcy law is crucial for both parties, as certain types of debts, such as those arising from willful and malicious injury, may not be eligible for discharge in bankruptcy proceedings.
| Characteristics | Values |
|---|---|
| Purpose of bankruptcy petition | To relieve the debtor of all debts that existed prior to the bankruptcy filing and give the debtor a "fresh start" |
| Bankruptcy types | Chapter 7 liquidation, Chapter 11 reorganization |
| Chapter 7 liquidation | The organization informs the court it is no longer able to meet its financial obligations to creditors and is dissolving the business |
| Chapter 11 reorganization | The employer asks the court to assist with a repayment schedule or sell off company assets to pay off creditors |
| Priority of repayment | Secured creditors, creditors owed wages, salaries or commissions, individual employees |
| Employee priority | $15,150 (as of April 2022, adjusted to inflation every 36 months) of all wages, salaries, or commissions earned up to 180 days before bankruptcy filing |
| Non-dischargeable debts | Willful and malicious injury, false pretenses, false representation, fraud, or fraud while acting in a fiduciary capacity |
| Noncompete agreements | Generally enforceable unless the company rejects the contract and the employee is in a state where material breach of the agreement by the employer excuses the employee's obligations |
| Automatic stay exceptions | Litigation constituting an exercise of regulatory or police powers |
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What You'll Learn
Unpaid wages
When a company files for bankruptcy, it can have a crushing effect on its employees. They not only lose their source of income but also possibly their health insurance. Employees still deserve payment for the work they did before and during the bankruptcy process.
The impact of an employer's bankruptcy on unpaid wages depends on the type of bankruptcy filed with the U.S. Bankruptcy Court. An employer's bankruptcy will generally take one of two forms: reorganization under Chapter 11 or liquidation under Chapter 7 of the U.S. Bankruptcy Code. Under Chapter 11 reorganization, the employer asks the court to assist with a repayment schedule or sell off company assets to pay off creditors. A reorganization under Chapter 11 means the organization will continue normal business operations under the protection of the court until it resolves its financial affairs. The filing of a Chapter 11 reorganization should have no direct impact on employee wage payments. Under Chapter 7 liquidation, the organization informs the court that it is no longer able to meet its financial obligations to creditors and is dissolving the business.
Former employees owed wages by employers that filed Chapter 7 bankruptcy can protect their rights by contacting the clerk of the U.S. Bankruptcy Court in the county where the bankruptcy was filed. A "proof of claim" form will be used by the court to determine how much money will be paid to individual employee creditors. As creditors of the employer, employees may exercise their right to participate in bankruptcy proceedings. Each individual employee of a bankrupt employer is given a priority of $15,150 (as of April 2022, adjusted to inflation every 36 months) of all wages, salaries, or commissions the employee earned up to 180 days before the organization filed for bankruptcy. In some cases, there will be sufficient assets to satisfy employee claims in full; in others, employees may be compensated for only a portion of their claims or receive nothing at all.
When a company decides to reorganize its business model in the process of bankruptcy, its goal is to keep the company afloat while handling the case. During this process, some employees may keep their jobs and continue to receive wages, while others may be laid off. If you're still an employee during the reorganization, the bankruptcy case shouldn't affect your pay or benefits. If you're one of the employees laid off during this time, you become a creditor—the company is in debt to you for your labor.
If your unpaid wages are solely due to the bankruptcy filing and not deliberately withheld by your employer, then the U.S. Department of Labor doesn’t have jurisdiction. Any claim you file for bankruptcy-related unpaid wages will fall under the purview of the U.S. Bankruptcy Code. However, the Bankruptcy Code is also supposed to ensure that dishonest debtors cannot take advantage of the “fresh start” policy, winning the discharge of their debts despite their unlawful business practices. So, discharge is unavailable for some kinds of debt, including debts that arise from “fraud” or “willful and malicious injuries.” These exceptions are the avenue for a worker to keep their employer on the hook for wage theft even after their employer declares bankruptcy.
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Willful and malicious injury
The overall purpose of bankruptcy is to relieve debtors of their financial obligations and give them a fresh start. However, this does not apply to all debts, and there are certain types of debts that cannot be discharged in bankruptcy proceedings. One such type is "willful and malicious injury".
The U.S. Bankruptcy Code defines "willful and malicious injury" as "any injury to an entity or to the property of an entity caused by willful and malicious conduct by the debtor". In this context, "willful" means that the debtor intended to cause the injury or was aware that their actions would likely cause injury. "Malicious" means that the act was done without just cause or excuse, regardless of whether it was motivated by ill will.
For a debt to be considered non-dischargeable due to willful and malicious injury, both willfulness and maliciousness must be proven. A guilty plea alone is not sufficient to establish these elements. In one case, a bankruptcy court had to determine whether an individual who had pleaded guilty to criminal assault had intended to cause harm to the victim and whether there were any mitigating factors, such as self-defense.
If a creditor believes that a debt is non-dischargeable due to willful and malicious injury, they must bring a separate case in bankruptcy court, known as an adversary proceeding. In one example, an individual who had been awarded damages in a civil suit for injuries inflicted by their neighbour was able to successfully argue in an adversary proceeding that the debt was non-dischargeable because the harm was caused willfully and maliciously.
It is important to act promptly when dealing with potential challenges to debt dischargeability, as bankruptcy courts have short deadlines for initiating complaints based on willful and malicious injury.
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Non-compete agreements
The enforceability of non-compete agreements in the context of bankruptcy is a complex issue that has been approached in various ways by different courts. The general understanding is that a bankruptcy discharge wipes the debtor's slate clean of all "claims". In the case of non-compete agreements, the party seeking to enforce the provisions usually seeks both financial damages and an injunction to prevent future breaches. The financial damages are considered a "claim" and would be discharged in bankruptcy, whereas the injunction does not give rise to a right to payment and, therefore, would not be discharged.
Some courts have found that non-compete clauses can be discharged in bankruptcy, while others have ruled that they survive a bankruptcy discharge. The outcome often depends on the governing state law and the unique circumstances of the case. For example, in the TSG, Inc. case, the non-compete agreement was assigned to a subsidiary, TSG Finishing, during bankruptcy proceedings. The employee later resigned from TSG Finishing and joined a competitor, leading to litigation over the non-compete agreement. The appellate court held that the non-compete agreement was enforceable by the assignee, TSG Finishing, without the employee's consent.
It is important to note that each situation is unique, and the enforceability of non-compete provisions post-bankruptcy filing requires a thorough review of the provisions, applicable state law, and the specific facts of the case.
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Priority of employee repayment
When a company files for bankruptcy, it can have a significant impact on its employees, including unpaid wages and other benefits. The priority of employee repayment in bankruptcy proceedings depends on various factors, including the type of bankruptcy, the jurisdiction, and the specific circumstances of the case.
In the United States, there are two common types of bankruptcy filings for employers: Chapter 11 reorganization and Chapter 7 liquidation. Under Chapter 11 reorganization, the employer works with the court to create a repayment schedule or sell off assets to pay off creditors. This process allows the company to continue normal business operations under the court's protection. On the other hand, Chapter 7 liquidation involves the dissolution of the business, indicating that the company cannot meet its financial obligations to creditors.
Employees who are owed wages, salaries, or commissions are given priority over other creditors, except for secured creditors. Each individual employee is typically given a priority of a certain amount (adjusted for inflation) of all wages earned up to a specific number of days before the bankruptcy filing. This amount varies by jurisdiction and may be adjusted over time. It is important for employees to act promptly and contact the relevant authorities, such as the clerk of the U.S. Bankruptcy Court, to protect their rights and participate in bankruptcy proceedings.
In some cases, employees may need to take legal action to ensure their claims are respected. This may involve engaging a labor lawyer or union representative to navigate the complex bankruptcy proceedings and understand their rights. Additionally, employees with long tenures may need to take proactive steps to assert their claims and seek legal counsel if necessary.
It is worth noting that labor and employment law issues can complicate bankruptcy cases. For example, non-compete agreements may be impacted by bankruptcy, and employees should be aware of their rights and obligations in such situations. Additionally, plaintiffs in employment discrimination cases have successfully argued that their debts are nondischargeable in bankruptcy, citing “willful and malicious injury" by the defendant.
Overall, the priority of employee repayment in bankruptcy proceedings varies depending on the specific circumstances and applicable laws. Employees affected by their employer's bankruptcy should seek information and guidance specific to their situation to understand their rights and options.
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Employment lawsuits
The intersection of bankruptcy and employment law is a complex area, fraught with legal and financial complexities. The decision to file for bankruptcy carries wide-ranging implications, including halting most collection efforts and legal actions against the debtor. However, the automatic stay's application to employment-related lawsuits varies based on the nature of the claim and the specific circumstances of the individual or entity filing for bankruptcy.
For plaintiffs in employment lawsuits, filing for bankruptcy can impact their pursuit of justice and financial situation. They may need to balance their legal rights with their financial reality. Plaintiffs in employment cases are considered creditors of the defendant employer under the Bankruptcy Code, and while the code provides mechanisms for creditors to maximize their claims, the purpose of a bankruptcy petition is often to relieve the debtor of all prior debts and give them a "fresh start". This can make it challenging for plaintiffs to recover their claims.
On the other hand, defendants in employment lawsuits who file for bankruptcy can seek relief from financial liabilities. The automatic stay triggered by a bankruptcy petition halts all litigation and collection efforts, providing defendants with a temporary reprieve from legal actions. However, certain types of debts, such as those arising from "'willful and malicious injury', may not be eligible for discharge in bankruptcy proceedings.
The timing of filing for bankruptcy in relation to the employment lawsuit is crucial. Filing before a judgment is entered in the employment lawsuit may offer broader protections. Additionally, plaintiffs should consult with both employment and bankruptcy attorneys to understand the implications of bankruptcy on their lawsuit and to protect their rights. Transparency and disclosure of all claims are essential to ensure legal protections.
The impact of an employer's bankruptcy on unpaid wages owed to employees depends on the type of bankruptcy filed. Under Chapter 11 reorganization, the employer seeks court assistance with a repayment schedule or selling off assets to pay creditors, while under Chapter 7 liquidation, the employer is unable to meet financial obligations and is dissolving the business. Employees are given priority for unpaid wages, salaries, or commissions earned up to a certain period before the bankruptcy filing.
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Frequently asked questions
The purpose of filing for bankruptcy is to relieve the debtor of all debts that existed prior to the bankruptcy filing and give the debtor a “fresh start”.
Employees are given creditor status and may exercise their right to participate in bankruptcy proceedings. Each employee is given a priority of $15,150 (as of April 2022) for all wages, salaries, or commissions earned up to 180 days before the bankruptcy filing.
It depends on the type of violation and the type of bankruptcy. For example, in Chapter 7, 11, and 13 bankruptcies, the debtor can be relieved of any legal responsibility to pay damages. However, some types of debts cannot be discharged, including debts that arise from "fraud" or "willful and malicious injuries".
Bankruptcy can have a serious impact on the outcome of an employment lawsuit. If the defendant files for bankruptcy, it can help them avoid paying damages. If the plaintiff files for bankruptcy, they may lose what they were awarded.
