Top 10 Work and Employment Problems in Bankruptcy | Liskow & Lewis

The next phase of the COVID-19 and ever-evolving coronavirus crisis are the bankruptcies ahead. This year was already shaping up to be interesting, but the coronavirus quickly accelerated declarations of bankruptcy. One article estimates that about 100,000 companies have closed permanently and another article specifies that more than 57 million people have applied for unemployment since the start of the crisis. These numbers are hellish, and the impact of the crisis is not over.

In the world of oil and gas, there are a lot of companies with debt maturities maturing in 2020 or 2021 (see this Wall Street Journal article on the $ 120 billion debt wall these companies will face until 2023), and oil prices have been below breakeven for many drilling sites. Energy companies have been disproportionately affected by the pandemic and many have filed for bankruptcy. What does this mean for companies that have not yet filed for bankruptcy but are considering filing for bankruptcy?

There are a number of work and employment related issues that companies need to consider when filing for bankruptcy. The earlier the process starts and the more developed the bankruptcy strategy, the better the companies and the individuals who own them can come out of bankruptcy. Again, it is essential to have a well thought out strategy before you file.

Below are ten of the most common work and employment issues businesses face in bankruptcy, and considerations all businesses should consider when and if to file.

1. WARN Take action

One of the main issues that bankrupt businesses face is letting their employees know that the business is bankrupt. For many employers, this will be triggered when they need to provide notice under the WARN Act. Generally, the WARN law applies to employers with more than 100 employees. It requires companies to provide notice of a factory closure or mass layoff (a layoff of 50 to 499 employees at a job site for any 30-day period if that is 33% of the workforce and that the layoff lasts at least six months OR more than 500 employees are laid off at any site for a layoff that lasts at least six months).

The WARN law provides for some exceptions to provide 60 days notice before termination or closure (companies must always give notice). The three exceptions are:

  1. Shaky business exception (applies to closure but not mass layoffs) which requires the employer to 1) seek capital or a business when the 60 days notice would have been required, 2) have a realistic opportunity to obtain financing or a business which 3) would have been sufficient to avoid closure (the employer must objectively demonstrate this), and 4) the employer must have reasonably and in good faith believed that the required notice would have prevented the employer to obtain the business or capital.
  2. Exception for unforeseeable business circumstances, which applies when business circumstances were not reasonably foreseeable when 60 days’ notice would have been required. The circumstance must be a drastic change beyond the employer’s control, such as the loss of an important contract or a dramatic economic downturn.
  3. The natural disaster exception only applies in the event of a factory closure or massive layoffs due to a natural disaster.

You can read more about employee notice requirements and the basics of the WARN law. here.

2. Retain employees

Retaining employees during a restructuring can be one of the toughest hurdles for businesses. Companies must retain their employees in the event of bankruptcy if they continue to operate so that they can protect the value of their assets.

Companies must recognize the emotions of employees who remain in a restructuring company. Some of them will have lost close friends and colleagues with whom they have worked for years.

Employees need to understand that there is a plan to move forward. Companies must communicate about the future of the company. How is the work going to be redistributed now that there are not as many people working for the company? Is there a way for employees to ask questions in private? What’s the long-term plan?

Managers need special training to ensure they can address the concerns of the employees who remain. They need to make everyone as productive as possible and support the employees who stay with the company.

3. Employment contracts

Employment contracts are a type of enforceable contract that can be rejected in the event of bankruptcy (subject to the business judgment of the trustee or debtor-in-charge). Enforceable contracts, although not defined in the Bankruptcy Code, are generally considered to be agreements in which both parties have a significant unfulfilled obligation. The debtor can either assume the contract or reject it. If he assumes the contract, then the employee would still be subject to the obligations under the contract. If the debtor rejects the contract, this rejection constitutes a material breach which may release the non-debtor party from further performance. The non-debtor may also have damages claims against the company which would be treated as an unsecured claim prior to the claim.

4. Non-competition

The non-compete may be enforceable depending on the circumstances surrounding the non-compete and bankruptcy. Non-competition can be found in an enforceable contract (a contract requiring both parties to complete an action by a certain date) and enforceable contracts can be rejected (the associated damages being released). If an employer rejects a non-compete agreement, it may not be able to enforce the terms of an agreement it rejected (in this case, non-compete).

In other words, a non-compete agreement can be enforceable based on the actions of the bankrupt company. An employee will not be released from non-compete, at least generally under the Bankruptcy Code, unless the company rejects the contract and the party is in a state where the material breach of an employment contract by the employer excuses the requirement that an employee fulfill his obligations. obligations under the contract.

5. EEOC, NLRB, OSHA and other employment lawsuits

Filing for bankruptcy results in an automatic stay of all attempts to collect debts prior to the claim (including lawsuits) and of any attempt to exercise control over the assets of the estate. against a company that has been filed by private entities. The automatic stay, however, does not extend to any litigation that would constitute an exercise of regulatory or police powers 11 USC §362 (b) (4).

For example, OSHA can still perform inspections whether the business continues to operate and can become a creditor in the bankruptcy proceedings for any fine.

As with other government agencies, companies are still subject to unfair labor practice charges from the NLRB, but any back wages usually have to be investigated in bankruptcy court. Salary arrears claims may have special administrative priority status if the salary arrears arose from a period after the company filed for bankruptcy (see Section 11 USC 503 (b) (1) (A) (ii)).


Labor and employment law issues can quickly make bankruptcy even more complicated and frustrating. Bankrupt businesses must carefully weigh their options to determine the right course of action in their particular case. Next week, we’ll take a look at five additional labor and employment law issues that need to be considered in bankruptcy.

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About Marc Womack

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