What Happens to Employees’ Claims for Wages in A Bankruptcy?

When a business files a petition in bankruptcy, it may have a number of employees who are owed payment for work performed prior to the filing of the petition. One of the most pressing questions for Rockland County individuals who work for firms entering into bankruptcy is the fate of their earned but unpaid wages, health care benefits and retirement plan contributions. The answer to this question depends in part on whether the employer has filed a Chapter 7 petition and intends to cease operations or whether the employer has filed a Chapter 11 petition and intends to remain in business.

In either case, employees should immediately file claims with the bankruptcy court. These employees become creditors of the bankrupt business upon the filing of the bankruptcy petition. In a Chapter 7 proceeding, employees with claims for unpaid wages have priority over general unsecured claims, but they generally have a lower priority than secured claims, administration expenses and priority unsecured claims. Unpaid wage claims are usually included in the class of priority unsecured wage claims. The priority of unpaid wage claims is more or less the same in a Chapter 11 proceeding.

If the employees are members of a union that has a binding collective bargaining agreement, the employer cannot modify the terms of this agreement without the bankruptcy court’s approval. In some cases, the union may have a large enough claim to be entitled to a seat on the creditor’s committee.

Employee benefit claims, such as health insurance premiums and retirement plan contributions that have been earned within 180 days of the filing of the bankruptcy petition are given a higher priority than unpaid wage claims, but the amount of the claim is limited to $12,475 for each employee. Other issues concerning employee benefit claims are handled according to the facts of the case, and no uniform rule applies to paying such claims. An experienced bankruptcy attorney may be able to assist employees in sorting out their claims and in finding useful remedies.