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Bankruptcy? What Does That Have To Do With Employment Law?

Published by on February 21, 2008

An article in USA Today about the Sharper Image and Lilian Vernon bankruptcy filings predicts record bankruptcies in coming years.  Given the tightening of available credit, experts predict an increase in Chapter 11 filings by companies.  What does this have to do with employment law? Depending on how the process is handled, a corporate bankruptcy […]

An article in USA Today about the Sharper Image and Lilian Vernon bankruptcy filings predicts record bankruptcies in coming years.  Given the tightening of available credit, experts predict an increase in Chapter 11 filings by companies.  What does this have to do with employment law?

Depending on how the process is handled, a corporate bankruptcy may have little to do with employment law.  But there are issues to watch for.

For example, mass layoffs might implicate the Worker Adjustment and Retraining Notification Act (“WARN Act”) and state law equivalents.  The WARN Act requires advance notice of certain mass layoffs and provides for back pay for violations.  Here is a recent example.

Some companies may attempt to terminate severance pay plans on the eve of a bankruptcy filing.  Pre-filing changes to employee benefit plans or severance plans without proper notice to employees, however, may be void.  (See this Order for example.)

Depending on the location of the employer, executives with severance agreements who are terminated after the filing of a bankruptcy petition may be entitled to severance pay as an “administrative expense” of the estate (that is the minority view, however — see this opinion for example).  Oddly enough, non-compete agreements may survive a bankruptcy filing and still be enforceable by the company.

There may also be issues with bankruptcy court approval of employee compensation and severance agreements after the case is in bankruptcy court.  The company may also want to enter into retention bonus agreements with key employees to ensure that they remain with the company through the bankruptcy.

In sum, it pays to have an employment law expert on the team if your organization is contemplating a Chapter 11 filing.  A mistake on any one of these issues can result in substantial claims against the bankruptcy estate.

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