Congress Again Considers Expanding Worker Protections in Bankruptcy

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With the COVID-19 pandemic creating a significant upswing in Chapter 11 bankruptcies and with more expected to come, Congress is once again considering substantial changes to the way the Bankruptcy Code addresses worker compensation, retiree benefits and collective bargaining agreements with the Protecting Employees and Retirees in Business Bankruptcies Act of 2020 (PERBBA), introduced recently in both the House and the Senate (House Bill 7370; Senate Bill 4089). PERBBA is the latest iteration of legislation designed to add additional worker protections to business bankruptcies and to make it more difficult for companies to reject collective bargaining agreements in bankruptcy.

Specifically, PERBBA proposes the following changes to claims related to worker compensation and benefits:

  • increasing to $20,000 from $13,650 the amount of prepetition wages and compensation entitled to priority treatment per employee;
  • increasing to $20,000 per covered employee the amount of contributions to employee benefits plans entitled to priority treatment;
  • removing the requirement that priority wage and benefit claims must be earned 180 days prior to the bankruptcy filing;
  • allowing priority claim treatment for amounts, including penalty amounts, owed for violation of labor and employment laws, including the WARN Act; and
  • adding additional priority claims for severance pay and employee benefit plan contributions due post-petition.

Other provisions of PERBBA include:

  • making it more difficult to reject collective bargaining agreements and reduce employee benefits;
  • requiring the Bankruptcy Court to consider and give “substantial weight” to preservation of jobs when approving Section 363 sales;
  • allowing debtors to recoup payments made to executives to the extent that employee compensation is reduced; and
  • making it more difficult to increase executive and management compensation.

Overall, these changes may create challenges for employers to reduce their operating expenses in Chapter 11. The increases in priority claims may also make it more difficult for large employers to obtain sufficient capital to pay priority claims and confirm a plan, particularly if WARN Act or other similar laws were violated.

PERBBA was first introduced to Congress in 2007, following the collapse of Enron, and has been repeatedly introduced since then. None of the prior bills have been successful, and this iteration has yet to garner bipartisan support. However, the impact of the continuing pandemic on businesses and their employees may create bipartisan interest in PERBBA that previously has been lacking.

Any opinions expressed and any legal positions asserted in the article are those of the author(s) and do not necessarily reflect the opinions or positions of Miles & Stockbridge P.C. or its other lawyers. This article is for general information purposes and is not intended to be and should not be taken as legal advice on any particular matter. It is not intended to and does not create any attorney-client relationship. Because legal advice must vary with individual circumstances, do not act or refrain from acting on the basis of this article without consulting professional legal counsel. If you would like additional information on the subject matter of this article, please feel free to contact any of the lawyers listed above. If you communicate with us, whether through email or other means, your communication does not establish an attorney-client relationship with either Miles & Stockbridge P.C. or any of the firm's lawyers. At Miles & Stockbridge P.C., an attorney-client relationship can be formed only by personal contact with an individual lawyer, not by email, and requires our agreement to act as your legal counsel together with your execution of a written engagement agreement with Miles & Stockbridge P.C.

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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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