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My Employer Declared Bankruptcy and I Was Never Paid. Can I Sue For Lost Wages?

Jan 29

Economic hardships tend to have a trickle-down effect on all those involved. And when a business has financial difficulties, filing for bankruptcy may seem like a good option–except for employees. When an employer files for Chapter 7 or Chapter 11 bankruptcy, this can lead to employees losing their job, losing out on pay, and the benefits that have already been earned. But what options do you have if your employer declared bankruptcy? Brown Kwon & Lam explains.

Employee Wages In Chapter 7 Bankruptcy Filings

If a company files for Chapter 7 bankruptcy, a few things will occur. During Chapter 7 bankruptcy, the company will halt operations and employees will be laid off. During this time, any employees owed wages or benefits will become “creditors” in the filing.

The bankruptcy trustee will then sell off company assets to pay off creditors. However, this will be done in a specific order, starting with secured claims, the bankruptcy administration expenses then priority unsecured claims which include employee wages and benefits, and finally general unsecured claims.

Because the employer is now out of business, employees should apply for
temporary benefits, including unemployment insurance, as they seek new employment.

Employee Wages in Chapter 11 Bankruptcy Filings

Unlike a Chapter 7 filing, in a Chapter 11 bankruptcy filing, the employer remains in business and works to rebuild the finances of the organization. While many employees will remain in their positions and continue to be paid and receive benefits, others will likely face layoffs.

In cases of layoffs, those employees who are owed wages and benefits will become creditors to the company. If employees are unionized, the company will have to seek approval from the bankruptcy court to modify the collective bargaining agreement.

During the restructuring process, representatives from the company’s largest creditors (including employees) will serve as a check and balance to ensure the company is making sound decisions in the bankruptcy process.

In Chapter 11 filings, employee claims for pre-bankruptcy wages, vacation, sick time, and severance pay are given priority over other unsecured claims up to a maximum of *$13,650 per employee.

If the employer has filed for bankruptcy in the middle of a pay period, the court will review the benefit priority to make sure wages and benefits have been paid back promptly.

*This number is adjusted every three years to reflect inflation.

Employer Declared Bankruptcy – How do I get my paycheck and benefits?

In order to claim your owed wages, benefits, etc., you must submit a Proof of Claim form with the bankruptcy court. Failure to do so will waive your rights to receive a claim under the bankruptcy filing.

You will need to supply the following:

Remember, the federal Bankruptcy Code gives priority status to claims for unpaid hourly wages, salaries, commissions, vacation, severance, and sick leave pay, if earned within 180 days of the company’s bankruptcy filing or when the company ceased to be in operation.

In addition to these owed wages, if your employer falls under the guide of The Workers Adjustment and Retraining Notification (WARN) Act, and does not provide 60 days’ advanced notice of plant closings or mass layoffs, you may be able to file for additional compensation, though there are exemptions to the Act.

When you are facing a layoff because of your employer’s bankruptcy filing, you likely have many questions. We understand how complicated the process can be and will walk you through it all.

If you have questions about your New York employee rights during a company bankruptcy, contact Brown Kwon & Lam. We will help you recover the wages that are rightfully yours.

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