After Filing For Chapter 11 Bankruptcy, Employers Shouldn’t Forget Their Collective Bargaining Obligations

Vinson & Elkins LLP

Vinson & Elkins LLP

Even with the economy starting to re-open, many businesses are still struggling to get back on track in the wake of the COVID-19 pandemic. Chapter 11 bankruptcies are up 26 percent over this time last year, a number that includes businesses in a wide array of industries from large retailers like J. Crew and J.C. Penney to energy companies like Diamond Offshore Drilling and Whiting Petroleum.

For companies with unionized workforces, this is a good time for a reminder about collective bargaining obligations in the event of a Chapter 11 restructuring. Generally, in bankruptcy, a debtor can choose to reject its contracts. Collective bargaining agreements (“CBAs”), however, can only be rejected or modified after the company has tried to negotiate with the union. A bankruptcy court can only order rejection or modification of a CBA if, among other things:

  • The company made a proposal to the union to modify the CBA after filing the bankruptcy petition and before filing an application with the court to modify the CBA.
  • The proposed modifications are necessary to permit reorganization and treat all parties fairly and equitably.
  • The company has provided the union with the information necessary to evaluate the proposal.
  • The debtor has met with the union and conferred in a good faith attempt to reach satisfactory modifications of the CBA.
  • The union has refused to accept the proposed modifications without good cause.

A 2016 Advice Memorandum (“Memo”) from the National Labor Relations Board’s general counsel that was released on May 5, 2020, adds additional wrinkles to the process. The Memo states that even after a bankruptcy court has approved modifications to a CBA, the NLRB can pursue unfair labor practices charges related to the approved modifications and for any modifications to the CBA that were not “clearly authorized” by the court. In that case, the NLRB alleged that the Trump Taj Mahal casino engaged in unfair labor practices through anti-union discrimination, denying the union access to information, and making statements interfering with union rights. The NLRB also alleged that the casino had made unilateral changes to the CBA other than those authorized by the court. The casino settled an unfair labor practices charge in 2018 for $1 million.

Employers with unionized workforces that are considering Chapter 11 bankruptcy should carefully manage their obligations to the union during that time. The bankruptcy process will not necessarily protect them from unfair labor practices claims.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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