As everyone knows, with the current economic difficulties that the country has been experiencing, more and more businesses, both large and small are going bankrupt. Unfortunately, even when the economy improves, businesses will still go bankrupt. A business may go bankrupt for many reasons. Some businesses fail when they are not able to compete, and others fail because their owners or managers made poor business decisions or serious mistakes. No matter the reason for the bankruptcy, the employees are the ones that suffer when a business goes bankrupt. The bankrupt company's employees must now find new employment and, in many cases, they are also owed wages.
Under the Fair Labor Standards Act, an employer must pay employees for any and all of the wages they earned. As a result, even bankrupt employers are responsible for paying their employees' unpaid wages.
The type of bankruptcy filed with the Bankruptcy Court will have the most impact on the employees' unpaid wages. Typically, a company will usually file for reorganization under Chapter 11 of the Bankruptcy Code or liquidation of the business under Chapter 7 of the Code.
With a Chapter 11 reorganization, a company essentially asks the bankruptcy court to help it create a repayment schedule for its creditors. The court may also help the company with the sale of certain assets to help raise money in order to pay off creditors. Fortunately, with a Chapter 11 reorganization bankruptcy, the business will continue its normal operations, under the protection of the bankruptcy court. The bankruptcy court's protection will continue until its financial issues are resolved. Luckily, a Chapter 11 bankrputcy will not have much of an effect on the payment of employee wages.
Under Chapter 7 liquidation, the company is admitting that it is completely unable to meet the financial obligations it has to its creditors. When this happens, the business must be dissolved. Upon filing for Chapter 7 liquidation, the bankruptcy court will prioritize creditors. Employees that are owed wages become creditors of the bankrupt company.
Employees that are owed wages by a bankrupt company are among the highest priority creditors in a bankruptcy proceeding. Each individual employee is given a priority of $10,000 of all wages or commissions he or she has earned up to 180 days prior to the company's bankruptcy filing. In some cases, the bankrupt company will have sufficient assets to completely pay the wages owed to its employees. In other circumstances, where the company has to pay the majority of its liquid capital to senior creditors or the company has little or no assets, the employees may only receive a portion of their claims or nothing at all.
It is important to note that a bankruptcy proceeding "freezes" any lawsuits against a company, including wage lawsuits by employees. For example, if employees file a lawsuit against a company for failure to pay overtime and the company then files for bankruptcy, the lawsuit will stop until the company's financial situation is determined. In a reorganization, the lawsuit will likely continue after the company exits the reorganization process, which unfortunately can last many months or even several years. If the company liquidates, then the lawsuit will be ended and the employees will have to submit their wage claims to the bankruptcy court as creditors.
If you have any questions regarding these wage payment issues, contact the Law Offices of Santiago J. Padilla, P.A. as soon as possible. Based in Miami, Florida, we represent employers and employees throughout South Florida in employment cases. To set up an initial consultation, you can contact us through the Internet or call us at (305) 358-1949.