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Job Loss in Bankruptcy Q & A

Author: Jack A. Raisner

As more employers file for bankruptcy, fears of job loss have become widespread. Rumors of bankruptcy filings have caused sweeping job security concerns in industries such as manufacturing (GM), retail (Circuit City), insurance (AIG), financial services (IndyMac), banking (Lehman), and airlines (Frontier). Here are some frequently asked questions and basic answers.¹

1. My employer may be filing for bankruptcy, does it mean I will be fired?

Not necessarily. It may depend on the type of bankruptcy it files. Bankruptcy usually takes one of two forms: reorganization under Chapter 11 of the Bankruptcy Code, or liquidation under Chapter 7, which means the dismantling of the company. In reorganization, the company continues to do business under court protection, repays its debts and attempts to return to normal operations. Your job, pension or health plan may continue throughout the reorganization process. A company liquidated under Chapter 7, however, sells its assets to pay creditors and ceases to exist. A Chapter 7 filing will usually cause the prompt termination of both jobs and pension and health plans. For unprepared employees, that can be a catastrophic event (see question 5, below).

2. Which bankruptcy option is my employer likely to take?

Until the petition is filed in bankruptcy court, that may be hard to predict. Many airlines and retail chain stores have been operating in Chapter 11 bankruptcy for years. Unfortunately, in today's economic climate, bankruptcy often means going out of business. In the best case scenario, employees are "spun off" in a sale of the company's assets to a buyer. Otherwise, employees typically lose jobs immediately, or are retained temporarily during the winding-up period. Given these heightened prospects of job loss, you might wisely begin searching for a new job once bankruptcy enters the picture. You might also consider taking financial precautions against the loss of your job and benefits.

3. My employer has filed for bankruptcy. If I am let go, what legal rights do I have to my job and compensation/benefits package?

In the best of times, employees have few means to challenge the loss of their jobs in downsizings, layoffs or shutdowns. Beyond recouping unpaid wages and benefits (see below), employees terminated in a bankruptcy generally have even fewer options. At best, employees may hold some legal leverage if they: 1) have a contract claim; or 2) can show they were terminated in violation of specific job protection laws. While bankruptcy makes it harder to prevail and collect on these claims, one should seek legal advice before losing hope. Claims that have succeeded in bankruptcy include those brought under the WARN Act. The WARN Act provides awards for up to 60 days pay and benefits to employees terminated in mass layoffs or shutdowns without written prior notice. Employers in bankruptcy have been ordered to pay WARN awards to their terminated employees. It is essential that you consult with an employment lawyer with expertise in this area to determine what rights you may possess.

4. My employer has filed for bankruptcy and fired me without paying my last paycheck. What rights do I have?

You may be able to collect up to $12,475 of unpaid wages and benefit contributions up to 180 days prior to the filing. The Bankruptcy Code gives priority status to this amount, enabling it to be paid ahead of other creditors. If the amount of your claim for unpaid wages and benefit contributions exceeds $12,475, however, the balance falls into the pool of general unsecured debt (non-priority) which may be paid at a discount or not at all depending on the assets available. When you receive your "proof of claim" form from the Court, you should indicate the amount of your priority claim up to $12,475 and unsecured claim. Unless you complete and return this form, you will likely forfeit these amounts. If you have any questions, you should seek legal advice.

5. My employer has filed for bankruptcy and shut down its operations, what happens to my guaranteed health insurance, bonus, stock options, and other benefits?

Unfortunately, an employer that files for bankruptcy generally has the right to discontinue its health and benefits plans for current employees. The U.S. Department of Labor recommends that: "when your employer files for bankruptcy you should contact the administrator of each plan or your union representative (if you are represented by a union) to request an explanation of the status of your plan or benefits. The summary plan description will tell how to get in touch with the plan administrator. Questions that you may want to ask include:

•Will the plan continue or will it be terminated?

•Who will be acting as plan administrator of the plans during and after the bankruptcy, and who will be the trustee in charge of the pension plan?

•If the pension plan is to be terminated, how will accrued benefits be paid?

•Will COBRA continuation coverage be offered to terminated employees?

•If the health plan is to be terminated, how will outstanding health claims be paid, and when will certificates of creditable coverage (showing, among other things, the dates of enrollment in your employer's health plan) be issued?"


It is worth noting that under the WARN Act you may be entitled to 60-days of health insurance benefits including reimbursement for any medical expenses you incurred if your plan was terminated.

The WARN Practice Group at Outten & Golden LLP would be pleased to answer questions specific to the facts of your situation. Ask for Jenny Hoxha or René Roupinian (866) 544-9945.

¹This does not constitute legal advice. Our firm provides legal advice only upon engagement with respect to specific factual situations.

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