Bankruptcy and Employee Rights

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Financially struggling companies often file for bankruptcy, and are likely to owe wages to their employees and have obligations under benefit programs or labor agreements. Employees are not considered secured creditors. However, some employers file for bankruptcy under Chapter 11 and continue to operate as they reorganize.

The wages and benefits earned following the bankruptcy filing by employees who are retained have a high-priority claim on the company’s resources. These payments are treated as administrative expenses necessary to maintain the viability of the enterprise. Employees have a weaker claim for wages and benefits earned prior to petitions for bankruptcy. These claims have lower priority and are limited to amounts earned within ninety days before the filing of the bankruptcy petition.

Nonunion employers are generally free to cancel expected raises or bonuses, cut wages, or reduce benefits as means of lowering costs. Employers with unions can approach representatives and attempt to negotiate to needed concessions. However, failing at that, unionized employers cannot unilaterally alter the terms of labor agreements or conveniently ignore them. Nor does filing for bankruptcy necessarily absolve an employer of its obligations under a labor agreement.

The Bankruptcy Code contains a set of procedures that must be followed before bankrupt firms can alter or circumvent labor agreements. Firms must present union representatives with proposals based on the most complete and reliable information available, provide the union with all relevant supporting information, and bargain in good faith. The proposed changes must be truly necessary to allow the company to reorganize, they must treat employees and other parties equitably, and they usually cannot be implemented until the court has approved them. If the union rejects the proposals without good cause, the court may permit the employer to make the desired changes.
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