The economic and social impact of COVID-19 has been devastating to our global workforce. With unprecedented mass layoffs and furloughs, millions of people are at risk of losing their livelihoods and falling into extreme poverty. So, when a Charlotte-based department store chain that employs thousands of Charlotteans announces that it will file for bankruptcy, employees and creditors alike have a reason to feel a bit trepidatious.
On January 26, 2021, Belk department store announced that it would file for Chapter 11 bankruptcy on February 24, 2021. Despite store officials and representatives dispelling rumors of layoffs and store closures, employees must have more than a promise from their employer to prepare for whatever lies ahead.
Action Steps to Protect Yourself When Laid Off During Company Bankruptcy
Step #1: Determine the Type of Bankruptcy Filed
Chapter 7 Bankruptcy or Liquidation
As a threshold matter, upon notice of a company’s intention to file for bankruptcy, the first question for any employee to ask is what type of bankruptcy did the company file. This question is crucial in determining what options may be available to an employee wanting to protect their claims against their employer.
In a Chapter 7 bankruptcy or “liquidation”, the company ceases all operations, employees are laid off, the company goes out of business, and employees who are owed wages and benefits become creditors. To the extent that funds are available, distributions (payments) will go to creditors with approved or allowed claims in the order of priority established by the Bankruptcy Code.
Secured claims are paid first, then the expenses of administering the bankruptcy, then priority unsecured claims, which may include all or a portion of employee wage and benefit claims (if earned within 180 days of the company’s bankruptcy filing or when the company ceased operating its business, whichever is earlier), and finally, general unsecured claims.
Unfortunately, if funds are not available to pay employees, they may be able to seek compensation unless the owner opens a new company after the bankruptcy has been completed. Notably, the administration of a Chapter 7 case can take many months or even years to complete. Therefore, it is critically important for laid off employees to promptly apply for temporary benefits, such as unemployment insurance, and to seek new employment.
Chapter 11 Bankruptcy or Reorganization
In a Chapter 11 bankruptcy or “reorganization” the company remains in business while trying to restructure their debts and emerge from bankruptcy as a financially sound company. Under this type of bankruptcy, the company will usually retain many of its employees to continue operations and will take a close look at expenses to reorganize the company’s financial affairs.
Typically, a Chapter 11 case will have no direct impact on the payment of employee’s earned wages. That is not to say, however, that some employees will not be laid off as a necessary cost-cutting measure. If the laid-off employees are owed wages and benefits they become creditors of the company and are paid in the above-mentioned order of priority.
If it becomes clear that the company will not be able to confirm a plan of reorganization, the company may convert the case to Chapter 7. Similar to a Chapter 7 case, Chapter 11 cases can take many months or years to resolve.
Step #2: Determine Whether or Not You Received Timely Notice
The Workers Adjustment and Retraining Notification (WARN) Act protects employees by requiring employers with 100 or more employees to provide at least 60 calendar days advance written notice of a plant closing and mass layoff affecting 50 or more employees at a single site of employment. The WARN Act applies to both Chapter 7 and Chapter 11 bankruptcy filings.
Worker Adjustment and Retraining Notification (WARN) Act
However, like virtually all federal statutes, the WARN Act is subject to certain exceptions, including layoffs that occur due to unforeseeable business circumstances, faltering companies, and natural disasters. Further, the WARN Act generally does not cover employees who have worked less than 6 months in the last 12 months leading up to the company’s bankruptcy filing and employees who work an average of less than 20 hours a week.
If a company is subject to the WARN Act and they did not give covered employees 60 days’ notice, those employees may be entitled to an additional claim for back pay and benefits for the number of days in which the required notice was not given.
Step #3: Determine the Amount of Wages and Benefits Owed to You
Wages include hourly wages, salary, commissions, vacation pay, severance pay, and sick leave. While typical wage claims are regulated by the Department of Labor (both state and federal), claims for wages due to bankruptcy do not fall under wages protections from federal and state laws unless the employer willfully failed to pay wages owed and filed for bankruptcy as an attempt to avoid paying wages. Thus, claims for unpaid wages as a result of company bankruptcy are regulated by the U.S. Bankruptcy Code and fall under the jurisdiction of the U.S. Bankruptcy Court.
Don’t Forget Health Insurance & Pension Plans
The impact of a company’s bankruptcy filing on health insurance and pension plans vary in each case. Upon notice of a company’s intention to file for bankruptcy, an employee should immediately contact the administrator of their health and pension plans or their union representative to request an explanation of the status of the plans or benefits. Employees should also carefully follow the notices they receive form the bankruptcy court or the company to stay informed as the case progresses.
Consolidated Omnibus Budget Reconciliation Act (COBRA)
If an employee is laid off but the company maintains its existing health insurance coverage, the employee may be able to continue receiving coverage under the existing policy by seeking coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA). Since this can be an expensive option, an employee may want to consider converting to or purchasing an individual policy or joining their spouse’s policy.
Additionally, if the company terminates some, but not all, of its health coverage plans, an employee may be able to switch to one of the remaining plans under Health Insurance Portability Accountability Act (HIPAA). Notably, if an employee is receiving health benefits as a retiree or as the result of a collective bargaining agreement, they may be subject to special bankruptcy rules.
Employee Retirement Income Security Act (ERISA)
In general, the Employee Retirement Income Security Act (ERISA) requires that pension benefits be maintained separate and apart from the company’s other assets, either held in trust or invested in an insurance contract. However, in a Chapter 11 case, the company can ask the bankruptcy court for permission to terminate or modify an employee’s pension plan. This is likely to occur in most Chapter 7 cases.
In that event, most employees are eligible for the Pension Benefit Guaranty Corporation (PBGC), which will take over the plan’s assets and liabilities and will pay their benefits, subject to certain dollar limits. Similarly, 401(k) plan assets are also maintained separate and apart from a company’s assets and may not be used to pay the company’s creditors.
Step #4: File a Proof of Claim
In any bankruptcy situation, if wages are unpaid for any period of time, the employee should apply for unemployment. The next most important step is to protect the employee’s claim by filing a document called a “Proof of Claim” form for owed wages, salaries, commissions, vacation pay, sick pay, severance pay, or other benefits.
This single-page form is typically available online, and it can be filed with the bankruptcy court where the case is pending or with the company’s claims agent. This form is critically important because it ensures that an employee – turned creditor – will be eligible to participate in any distribution to creditors made under the terms of the company’s bankruptcy plan.
If no Proof of Claim is filed, the employee may well lose the right to participate in the distributions to creditors. Notably, an employee is not required to file a Proof of Claim if the employee agrees with the amount listed for him/her in the company’s schedules of assets and liabilities and that correct amount is not listed as disputed, contingent, or unliquidated.
As soon as a company files its bankruptcy petition, an “automatic stay” goes into effect to give company a reasonable amount of time to get its affairs in order. An automatic stay is a statutory injunction that, with certain limited exceptions, prevents creditors from taking any action to collect debts or file lawsuits against the company.
Protect and Preserve Your Rights After Bankruptcy With a Proof of Claim
It is important for an employee to understand that an Automatic Stay does not affect their right to file a Proof of Claim with the bankruptcy court or the company’s bankruptcy claims agent. And, although employees are not required to have an attorney in order to file the Proof of Claim, an attorney should be consulted, as there are applicable filing deadlines.
As increasingly more businesses are affected by the economic fallout of COVID-19, more employees will file for bankruptcy protection. The consequences of not properly preparing and filing a proof of claim can be severe, so it’s important to consult with legal counsel to ensure that your rights are protected. The employment attorneys at Van Kampen Law are able to help employees impacted by the Coronavirus Pandemic. Fill out our confidential client intake form or give us a call at 704-247-3245 for more information.