Wages and Benefits Where An Employer Goes Out of Business or Declares Bankruptcy

Frederick Perillo

If your employer goes into bankruptcy or receivership, or your employer simply goes out of business, then the question whether or not you will get paid your wages and your accumulated benefits depends on several factors.  First, is the business still operating?  Second, are you in a federal bankruptcy or a state receivership, or liquidating outside of bankruptcy?  And finally, is the employer badly insolvent (in other words, are its total debts much larger than its liabilities)?

Some employers go into bankruptcy to “reorganize”—that is, to re-finance their debt, to restructure their operations, or both.  The employer then stays in business, but under the protection of the bankruptcy court.  If so, wages you earn while working for the employer while in bankruptcy are considered to be expenses of administration of the bankruptcy estate, and they generally enjoy the highest priority accorded by the Bankruptcy Code.  There’s a high likelihood you will get paid, on time, and in full.

If however the employer liquidates, then your wages, even for your most recent paycheck just before the bankruptcy case is filed, are treated as a claim against the estate of the bankrupt.  They are paid only after court approval, and only if there are assets available to pay for them.  You may receive full pay, or only a fraction of what you are owed, depending upon the debtor’s overall economic picture.  There could be significant delays.

Generally, an employer in bankruptcy has all the powers of an employer outside of bankruptcy, including the power to change wages.  If you have a union contract, there is a special procedure (known as Section 1113) that an employer must follow before it can change the terms of a collective bargaining agreement.  These changes cannot be made retroactively, so they affect your wages in the future.  Your past accrued but unpaid wages are still treated as described above.