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Administrative Expense Priority of Certain Wages, Salaries and Commissions

Bankruptcy Code section 503(b)(1)(A) makes clear that among the actual necessary costs and expenses of preserving an estate are wages, salaries or commissions for services rendered after the commencement of the case.
 
The Different Priority Accorded Postpetition and Prepetition Wages. The distinction between prepetition and postpetition wages should be kept in mind. Those expenses for wages, salaries or commissions incurred postpetition in an effort to preserve the estate or operate the debtor’s business can qualify as administrative expenses. Those incurred prior to the filing of the petition are not. Courts have emphasized that for employment compensation to receive administrative priority, the services must be rendered after commencement of the bankruptcy case.
 
Wage claims are entitled to a second priority by section 507(a)(2) to the extent they are administrative expense claims. A different priority is given by section 507 to prepetition unsecured claims for wages, salaries or commissions earned within 180 days before the filing of the petition. Such prepetition claims are accorded a fourth priority under section 507(a)(4). Section 507(a)(4) of the Code grants a fourth priority to “allowed unsecured claims for wages, salaries, or commissions, including vacation, severance, and sick leave pay”' earned within 180 days before the petition, but limits such priority claims to $10,950. Wage claims not falling in one of these priorities are general unsecured claims against the debtor.
 
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Vacation Pay. Among the most difficult questions relating to the reach of the priority given by section 503(b)(1)(A) are those involving claims for vacation and severance pay by employees of the debtor who were discharged at some point during the administration of the case. The courts seem to have had less difficulty with the rules regarding vacation pay. The general rule seems to be that originally set forth by the Second Circuit under the Bankruptcy Act in Straus-Duparquet, Inc. v. International Brotherhood of Electrical Workers.
 
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Severance Pay. A business enterprise operating after bankruptcy may find it necessary to offer severance pay or another form of employee retention program to keep employees from leaving the business. Payments under a severance program established after the commencement of the case ought certainly to qualify as administrative expenses.
Because such a program is unlikely to be in the ordinary course of the company’s postpetition business, adoption would require court approval,9 or at least “notice and a hearing” under section 363(b). Whether severance pay based on a prepetition severance program qualifies as an administrative expense has been the subject of many cases.
 
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Back Pay Awards. The Bankruptcy Abuse Prevention and Consumer Protection Act of
2005 (the “2005 Act”) added clause (ii) to section 503(b)(1)(A) to provide that certain back pay awards qualify as administrative expenses.
 
 
Pension Plan Obligations. A priority wage issue involving the termination of employees arises from claims for withdrawal liability from a multiemployer pension plan established pursuant to the Employees’ Retirement Income Security Act of 1974 (ERISA), as amended by the Multiemployer Pension Plan Amendments Act of 1980. Under ERISA, when an employer withdraws from a multiemployer plan, its withdrawal liability is based on its allocable portion of the “unfunded vested benefits” for the plan. The issue of whether and to what extent withdrawal liability should be accorded an administrative priority has been answered differently in the cases, but most cases allow administrative status for only that portion of the withdrawal liability which relates to the postpetition labor of the debtor’s employees.
 
The Expert Commentary from which this material was excerpted was adapted from material appearing in Collier on Bankruptcy (Matthew Bender). Subscribers to lexis.com may purchase the entire Expert Commentary.