Prebankruptcy Planning Related to Employee Issues and Claims

Prebankruptcy Planning Related to Employee Issues and Claims

by Arthur T. Carter and Kenric D. Kattner


A company contemplating filing for chapter 11 relief should consider certain preparations to make a smooth transition into chapter 11 and to minimize potential claims against the bankruptcy estate. A number of these prebankruptcy preparations relate to employee issues and claims. This article outlines a number of these considerations, including managing employee relations before and during chapter 11.

WARN Act Notice

The WARN Act requires covered employers to give 60 days' notice (or pay in lieu thereof) to affected employees prior to closing a facility or laying off a large number of employees. There are two situations where the WARN Act requires an employer to give employees 60 days notice before such employees suffer an "employment loss." The first is a "mass layoff." The second is a "plant closing." The WARN Act only applies to entities that fall within the WARN Act's definition of "employer."

Failing to give proper notice under the WARN Act results in back pay and benefits liability for each day of the violation during the 60 day period. These liabilities could create priority claims in a chapter 11 bankruptcy case. Accordingly, consideration should be given to analyzing WARN Act issues in distressed situations where a plant closing or bankruptcy filing may be needed to restructure a company's financial affairs.

Employee Wages and Expenses

Any wages earned or expenses incurred prior to the time a bankruptcy petition is filed and remaining unpaid as of the filing are prepetition claims against the bankruptcy estate. Although these claims are likely entitled to priority treatment under the Bankruptcy Code, a chapter 11 debtor must request permission from the bankruptcy court to pay these employee wages outside of a chapter 11 plan. This permission is usually granted fairly readily; however, it may not be granted immediately.

A legal justification for authorizing the payment of prepetition wage claims is that all or substantially all of the wage claims would otherwise be treated as priority unsecured claims pursuant to section 507, and ultimately, paid in full under a chapter 11 plan pursuant to the requirements of section 1129(a)(9). An employee's claims for "wages, salaries, or commissions, including vacation, severance, and sick leave pay" earned within 180 days before the bankruptcy filing are afforded priority status up to the amount of $11,725. Priority claims are entitled to payment in full under any chapter 11 plan. Another issue that may arise is that the prepetition wage claims the debtor is seeking court permission to pay exceed the statutory cap of $11,725 in section 507. This means that the excess over the cap is merely an unsecured claim and the debtor is effectively seeking to pay the unsecured claims of employees when other unsecured creditors may not be paid in full. Because some courts may be reluctant to authorize payment exceeding the statutory cap, employers should attempt to satisfy these claims prepetition. If this is not practicable the debtor should be prepared to seek court authorization to pay the prepetition amounts owed. [footnotes omitted]

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Arthur T. Carter (Ch. 12, "Employments and Labor Issues in Bankruptcy") is a partner in the Dallas, Texas, office of Haynes and Boone LLP. Mr. Carter is Board Certified, Labor and Employment Law, Texas Board of Legal Specialization, and has more than 30 years of labor and employment law experience. He advises clients on the labor law aspects of complex business transactions including mergers, acquisitions, asset and stock sales, business reorganizations and bankruptcy. He also counsels employers on strategic considerations relating to collective bargaining and labor relations, and regularly serves as principal spokesman for management in labor contract negotiations. In litigation matters, he handles whistle blower complaints under the health safety and environmental laws administered by OSHA, wrongful discharge, breach of employment contract, employment discrimination, employment related torts and restrictive covenants. In addition to his legal practice, Mr. Carter is an Adjunct Professor at Dedman School of Law, Southern Methodist University, and teaches labor law, and labor and employment law arbitration. Mr. Carter is a graduate of the the University of Minnesota (B.A., 1973) and University of South Dakota School of Law (J.D., 1976).

Kenric D. Kattner (Ch. 12, "Employment and Labor Issues in Bankruptcy") is a partner in the Houston office of Haynes and Boone, LLP, where he specializes in bankruptcy, insolvency, and litigation matters and has been involved in numerous bankruptcy, reorganization, and litigation cases involving heavily litigated and complex legal issues. He has experience with many reorganization efforts representing debtors, secured and unsecured creditors, committees and asset purchasers in a wide range of cases involving manufacturing companies, airlines, computer and software firms, hospitality businesses, strategic asset acquisitions, retailers, wholesalers, real estate companies, service firms, travel agencies, and individuals. Mr. Kattner is a graduate of Southern Methodist University (B.A., 1983; B.B.A., 1983) and the Southern Methodist University Dedman School of Law (J.D., 1988).