Top 10 Labor and Employment Issues in Bankruptcy

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The next phase in the ever evolving COVID-19 and coronavirus crisis are the upcoming bankruptcies. This year was already shaping up to be an interesting year, but the coronavirus rapidly accelerated bankruptcy declarations. One article estimates that approximately 100,000 businesses have permanently closed and another article states that more than 57 million people have filed for unemployment since the crisis began. These numbers are hellacious, 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 coming due in 2020 or 2021 (see this article from the Wall Street Journal discussing the $120 billion debt wall these companies will face through 2023), and oil prices have been below the break-even point for many drilling sites. Energy companies have been disproportionally affected by the pandemic and many have filed for bankruptcy. What does this mean for businesses who have yet to file for but are considering filing for bankruptcy?

There are a number of labor and employment issues that companies must consider when they file for bankruptcy. The earlier the process starts and the more developed the bankruptcy strategy is, the better the companies, and the individuals that own them, can emerge from bankruptcy. Again- having a well thought out strategy is essential before filing.

Below are ten of the most common labor and employment issues that companies face in a bankruptcy and considerations all companies must review when and if they file.

1. WARN Act

One of the main issues that companies in  bankruptcy face is letting their employees know that the company is going through bankruptcy. For many employers this will be triggered when they must provide notice under the WARN Act. Generally, the WARN Act applies to employers with more than 100 employees. It requires companies to provide advance notice of a plant closing or a mass layoff (A layoff of 50 to 499 employees at one site of employment for any 30 day period if this represents 33% of the workforce and the layoff lasts for 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 Act has a few exceptions to providing notice 60 days prior to the layoff or closure (companies must still give notice eventually). The three exceptions are:

  1. Faltering Company Exception (applies to closing but not mass layoffs) which requires that the employer 1) sought capital or business at the time that the 60 days’ notice would have been required, 2) had a realistic opportunity to obtain finance or business which 3)  would have been sufficient to avoid the shutdown (the employer must objectively show this), and 4) the employer must have reasonably and in good faith believed that the required notice would have precluded the employer from obtaining the business or capital.
  2. Unforeseeable Business Circumstances Exception, which applies when business circumstances were not reasonably foreseeable at the time that 60 days’ notice would have been required. The circumstance must be a dramatic change outside of the employer’s control like losing a major contract or a dramatic economic downturn.
  3. The Natural Disaster Exception only applies if a plant closed or mass layoffs ensued because of a natural disaster.

You can read more about the requirements of giving notice to employees and the basics of the WARN Act here.

2. Retaining Employees

Retaining employees during a restructuring can be one of the most challenging obstacles for companies. Companies need to retain employees through  bankruptcy if they are continuing to operate so that they can protect the value of their asset.

Companies must acknowledge the emotions of the employees that are staying with a company that is restructuring. Some of them will have lost close friends and colleagues that they have worked with for years.

Employees need to understand that there is a plan to move forward. Companies need to communicate about the business’s future. 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 privately ask questions? What is the long-term plan?

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

3. Employment Agreements

Employment agreements are a type of executory contract that can be rejected in a bankruptcy case (subject to the business judgment of the trustee or debtor-in-possession). Executory contracts, while not defined in the Bankruptcy Code, are generally understood to be agreements where both parties have material, unperformed obligation. The debtor can either assume the contract or to reject it. If it assumes the contract, then the employee would still be subject to the obligations under the contract. If the debtor rejects the contract, that rejection constitutes a material breach that may relieve the non-debtor party from continued performance. The non-debtor may also have rejection damage claims against the company that would be treated as a prepetition unsecured claim.

4. Non-Competes

Non-competes may be enforceable depending on the circumstances surrounding the noncompete and the bankruptcy. A noncompete may be found in an executory contract (a contract requiring both parties to perform some action by a certain date) and executory contracts are subject to rejection (with the associated damages being discharged). If an employer rejects a noncompetition agreement, then it may not be able to enforce the terms of an agreement that it rejected (in this case the noncompete).

In other words, a noncompetition agreement may be enforceable depending on the actions of the company that is undergoing bankruptcy. An employee will not be released from the noncompete, 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 agreement by the employer excuses the requirement that an employee fulfill its obligations under the contract.

5. EEOC, NLRB, OSHA, and Other Employment Lawsuits        

The filing of a bankruptcy petition results in an automatic stay of all attempts to collect prepetition debts (including lawsuits) and any attempt to exercise control over property of the estate.   against a company that was filed by private entities. The automatic stay does not, however, extend to any litigation that would constitute an exercise of regulatory or police powers 11 U.S. C. §362(b)(4).

For instance, OSHA may still conduct inspections if the business continues to operate and may become a creditor in the bankruptcy proceeding for any fines.

As with other governmental agencies, companies are still subject to NLRB unfair labor practice charges but any back pay must generally be sought in the bankruptcy court. Claims for back pay may have special administrative priority status if the back pay stems from any period after the company had filed for bankruptcy (See Section 11 USC 503(b)(1)(A)(ii)).

Conclusion

Labor and employment law issues can quickly make a bankruptcy even more complicated and frustrating. Companies that are undergoing bankruptcy must carefully assess their options to determine the right action in their particular case. Next week, we will review five additional labor and employment law issues that must be considered in bankruptcy.

[View source.]

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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