What HR Must Do In Case of Bankruptcy

Probably the worst thing that could happen at work, even worse than your bagels being stolen from the communal fridge, is the news that your employer has become bankrupt. As an HR professional, not only do you have to come to terms with the fact that you could lose your job, but you also have to administer the job losses of your fellow workers.

There are no winners in the bankruptcy of a business, at least there shouldn’t be. You might argue that with executive pay often completely out of touch with the performance of a failing business, those at the top of the company do pretty well, but that’s a discussion for another article. Unfortunately, business bankruptcies are a fact of life. As the recent collapse of the US division of the retailer Toys ‘R’ Us shows, there’s no such thing as a company that’s too big to fail. And, when the worst does happen, it’s the employees that suffer the most.

But, as an HR professional, what is your role in all of this and how can you meet your legal obligations and do the best possible job for the business?

Two types of bankruptcy

The impact of the failure of the company depends very much on the type of bankruptcy that has been filed with the U.S. Bankruptcy Court. For the purposes of this article, there are two bankruptcies we need to discuss, namely liquidation under Chapter 7 of the Bankruptcy Code and reorganization under Chapter 11.

Reorganization – The less serious of the two bankruptcies is a Chapter 11 reorganization. This occurs when a business asks for the assistance of the court to sell company assets or make a repayment plan so it can repay creditors and remain in business. As the ultimate aim of the bankruptcy is to keep the business trading, many or even all of the jobs may be saved. However, as part of cost-cutting measures, jobs may be lost and all written employment agreements could be up for renegotiation.

Liquidation – A Chapter 7 liquidation is the worst case for the employees and the HR team. Operations will cease and the assets of the business will be sold for the benefit of the company’s creditors. Although some employees may be retained initially to aid the liquidator in their work, eventually all jobs will be lost and the business will cease to exist.

Key HR considerations

Before filing for a bankruptcy petition, any organization would be well advised to seek the services of professionals such as bankruptcy experts, turnaround specialists and accountants who can provide objective advice and help management understand the tough decisions that will need to be made. The whole HR team must then do all it can to understand the process and put a clear timetable in place for the key actions to take place. Those actions include:

Communication — The first job of employers and the HR team is to announce the bankruptcy filing and explain the impact it will have on staff as soon as possible. Ideally, this should take place within just a few days of the bankruptcy petition being filed. This communication can take the form of regular written updates, postings on the company intranet and briefings from senior management. Communicating regularly will help to reduce misinformation and stop the rumor mill going into overdrive.

Workforce reduction — If the company is undergoing a Chapter 11 reorganization then it’s likely the workforce will have to be downsized. Other cost-cutting measures are also common, such as cuts to benefit plans for existing employees and reductions in compensation and bonuses.

Layoffs, of course, will form a central part of a Chapter 7 liquidation. If layoffs do need to be made then you must meet federal and state notice requirements. The federal Worker Adjustment and Retraining Notification Act states that employees in a mass layoff or business closure must be given 60 days’ notice or receive 60 days’ wages and full benefits.

Retention — Although it may seem counterproductive at this point, you will also need to think about the retention of those employees deemed critical to the organization’s future. The longer the period of uncertainty lasts, the more likely key employees are to seek employment elsewhere. This can seriously damage the company’s ability to survive the reorganization process.

To persuade key members of staff to stay, retention plans and bonuses can be put in place. However, they must meet the terms included under Section 503(c)(1) of the bankruptcy code.

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Role changes — As part of a reorganization, it may also be necessary to change certain roles. Any changes relating to the location, reporting, authority or scope of roles you plan to retain should be announced as early as possible to improve the progress of the turnaround and reduce employee stress and anxiety.

Compensation and benefits — The bankruptcy of a business brings with it a great amount of flexibility in terms of the revision of benefits such as health plans, pension plans and employment contracts. Excessive compensation paid by the employer can even be recovered under certain circumstances for up to the two years before the bankruptcy petition was filed.

Retirement plans — Retirement plans are generally protected under federal law if a business files for bankruptcy. Pension funds and 401(K) accounts must be adequately funded and must not be considered a business asset under the liquidation. That means the retirement funds of employees are not at risk. The Employee Benefits Security Administration can step in if plan contributions have not been paid and provide advice to the affected parties.

Healthcare plans — Businesses in bankruptcy can choose to remove healthcare benefits completely or reduce them as much as they see fit, although removing coverage altogether could be subject to penalties under the Patient Protection and Affordable Care Act. For that reason, the potential penalties must be considered to determine whether the removal of healthcare represents a viable way to reduce costs. Under a Chapter 7 liquidation, all health coverage will be terminated along with jobs.

Unpaid wages — Any employee who is laid off with wages earned but not paid will become a preferential creditor of the liquidation. That means their debts will be given a higher priority than the unsecured creditors of the business. Each employee will receive a priority cap of $12,850, which is made up of wages and commission earned up to 180 days before the bankruptcy occurred.

If there are insufficient assets from the liquidation to pay all employee claims for unpaid wages then unfortunately, as unpaid wages are not covered by the Fair Labor Standards Act (FLSA), employees could receive nothing at all.

Severance pay — Employers that file for bankruptcy cannot make any payments of benefits to executive officers, directors or senior managers unless they form part of a program that’s available to all full-time employees. The amount they receive can also not be more than 10 times greater than the average amount received by non-management employees.

HR must take the lead

Although the bankruptcy of an employer is a very distressing time for all employees, HR professionals should be ready to lead the organization in terms of analyzing the legal and operational obligations and ensure employees are treated in the best possible way.

Mike Smith is the senior director of Company Debt, a turnaround specialist that helps businesses navigate their way through bankruptcy and liquidation processes.

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