Last week we reviewed five of the most common, and problematic, labor and employment law issues in bankruptcy. You can read last week’s article here. Below are five additional labor and employment law concerns in bankruptcy that companies must know and assess when they are undergoing bankruptcy.

6. Back Wages

Companies must obviously pay their employees. The Bankruptcy Code recognizes this and places a priority on employee wages and benefits that were earned prior to the filing of a bankruptcy proceeding. Employee wages, salaries and commissions owed by an employer,  $13,650 in 2020, that were earned within 180 days of a company filing for bankruptcy are given a higher priority in a bankruptcy proceeding (fourth priority level). Contributions to an employee’s benefit plan that were owed within 180 days of the company filing for bankruptcy, up to $13,650, are given a fifth level priority in any bankruptcy proceeding. This fifth priority cap is reduced by any amounts paid to the employee under the fourth priority. That is, the two are subject to an aggregate limit.

Employee wages that are earned during bankruptcy proceedings (after a company has filed for bankruptcy) are often treated as administrative expenses that are necessary to preserve the value of the asset (i.e., the company). Administrative expenses are accorded an even higher priority in the bankruptcy proceeding than wages that were owed prior to the company filing for bankruptcy.

Employee Benefits—Two Important Topics

General Note: For companies undergoing bankruptcy it is important to keep in mind that for certain employee benefit plan purposes “employer” may have a different meaning than many people expect. There is the so called “Single Employer Concept” which treats all related companies in the same “controlled or affiliated group” (as defined for the employee benefit matter at issue) as a “Single Employer”. So, it could be the case that one company is in bankruptcy, but certain of its employee benefit obligations or liabilities may in fact be affected by this Single Employer Concept and perhaps become the obligation or liability of its parent company or brother/sister company or other related company owned in part by the same individuals or members of their family or other related entities.

7. Group Health Plans and COBRA

Employers in bankruptcy may have certain obligations related to group health plan employee benefits and COBRA (The Consolidated Omnibus Budget Reconciliation Act of 1985). Employers with 20 or more employees are subject to COBRA (Employees of controlled group and affiliated group companies are included in this counting).

Generally, when employees are terminated and lose their health care coverage, companies have COBRA continuation coverage obligations. However, there may be different obligations based on the type of bankruptcy filing that a company makes and whether the company continues to maintain a health plan, but this is a big priority for businesses to ensure they treat employees fairly based on the particular circumstances.

(i).  Chapter 7 Bankruptcy: If a company files a chapter 7 bankruptcy, then a trustee is appointed to marshal the assets and liquidate them for the benefit of creditors. The chapter 7 trustee will not continue to operate the business. The company will have no obligation to follow COBRA because there is no longer an employer or an employer health plan.

(ii). Chapter 11 Reorganization: If the Company files a Chapter 11 reorganization, then the company may choose to continue its health care coverage or it may be able to terminate the health plan entirely, in which case there would be no obligations under COBRA. If it reorganizes and retains health care coverage, then obligations under COBRA remain.

(iii)  Special Rules:

In certain bankruptcy instances, there are special rules for retirees and COBRA health coverage that employers must consider. Bankruptcy can be a qualifying event for covered retirees, spouses and dependent children who lose health plan coverage. Also, for employer bankruptcy, a loss of coverage includes a substantial elimination of coverage that occurs within the 12 months before or after the date on which bankruptcy proceedings begin.

Special rules may also apply to individuals receiving health benefits under a collective bargaining agreement.

And, as referenced, in any of these situations the application and extent of continuing COBRA obligations will need to be reviewed if a member of the bankrupt employer’s controlled group or affiliated group maintains a group health plan.

(iv) Notice: The COBRA election notice requirement is triggered by a loss of employment or a reduction of hours that causes employees to lose their group sponsored health care coverage. Employers must provide notice to the plan administrator within 30 days of a qualifying event. After it receives notification, the plan administrator will provide an election notice to employees within 14 days. Many employers are also the plan administrators of their health insurance plans and are thus responsible for providing notice to their employees. A model COBRA election notice is available on the DOL website. Using the DOL’s election notice may be preferable to avoid lawsuits for an insufficient election notice. Employees have 60 days to elect to coverage under COBRA. In the coronavirus pandemic, it is especially important that employers give this notice as soon as possible to initiate the process and allow the employee to obtain the coverage that they need (Certain COVID-19 extensions currently apply to COBRA Notices and its related deadlines.).

You can read more about COBRA requirements here.

8. Pension Liability

Paying pension obligations under a defined benefit pension plan is a major concern of any company. Generally, funded retirement assets should not be at risk when a company declares bankruptcy, because ERISA requires these plan assets be kept separate from an employer’s business assets and held in trust or invested in an insurance contract. Therefore, if an employer declares bankruptcy, the retirement funds should be secure from the company’s creditors.  However, if a company goes bankrupt before the pension plan is fully funded, and is no longer able to make contributions to it, the plan may not have sufficient assets to pay all promised plan benefits. In this case, the company may terminate the plan and shift responsibilities to the Pension Benefit Guaranty Corporation (PBGC). When the PBGC assumes responsibility for a plan, it pays benefits after its termination up to a certain maximum statutory guaranteed amount.

If the PBGC takes over a terminated pension plan, it will always attempt to collect termination liability from not only the plan sponsor employer, but also its controlled group members (as defined for this purpose under ERISA), which are jointly and severally liable.

It is noted, however, that plan termination is a separate event from filing for bankruptcy. If the plan sponsor company has filed for bankruptcy, that does not necessarily mean the pension plan has been or will be terminated. Companies can emerge from bankruptcy without terminating their plans.

There is also an option for employers to discharge pension obligations before bankruptcy for distressed companies. A “distressed plan termination” can occur only if the employer and the members of the employer’s controlled group each meets one of the distress termination tests. To do so, however, the employer must prove that the controlled group is financially unable to support the plan. The statutory and regulatory framework for terminating a defined benefit plan for a Single Employer plan is found in 29 USC Section 1341 and 29 CFR 4041.41. Companies that file bankruptcy under Chapter 11, and wish to initiate a distress termination, must give 60 days’ notice to each affected party and give the PBGC a distress termination notice. After this notice, the PBGC will determine whether the company satisfies the distress termination criteria.

9. Trade Secrets

For many companies, trade secrets are one of the most valuable assets that they own. Trade secrets can include formulas, customer lists, and pricing information that often form the core of a company’s ability to compete and operate profitably. Oftentimes, there will be valuable employees of the company that will fear losing their jobs during or after the bankruptcy is finalized. These employees often look for other jobs and leave the company. As employees leave during a bankruptcy proceeding, companies risk losing their trade secrets or having employees misappropriate them.

Fortunately, companies in bankruptcy proceedings can still file actions to protect their trade secrets against employees that leave and others that misappropriate their trade secrets. The main issue will be determining whether such actions should be filed in the bankruptcy court or in the relevant state or federal court.

Ultimately, companies need to protect their trade secrets even though they are in a bankruptcy proceeding. They should consult their counsel to determine the best approach to protecting these valuable assets.

10. Collective Bargaining Agreements

Collective bargaining agreement obligations can be discharged during a Chapter 11 bankruptcy under certain conditions as noted in 11 U.S. Code § 1113. Under this provision a debtor must make a proposal to the authorized representative of the employees (i.e., the bargaining unit or union) that contains the necessary modifications in employee benefits and protections that ensure that the debtor, creditors, and any other affected parties are treated fairly and equitably. The employer must also provide the representative of the bargaining unit with all of the relevant information it needs to evaluate the proposal. The employer is then required to meet and confer in good faith with the representative of the union to engage in good faith negotiations regarding modifications of the proposal.

If the union rejects the agreement, then the court gets involved and can approve or deny the employer’s rejection of the collective bargaining agreement. The court will review the proposal of the employer to determine whether the employer has proposed modifications that are necessary to treat all parties fairly and the employer has provided information to the union necessary to review the proposal. The court will also review whether the representative of the bargaining unit refused to accept the proposal with or without good cause and whether “the balance of equities clearly favors rejection of such agreement.”

A court may also “authorize the trustee to implement interim changes in the terms, conditions, wages, benefits, or work rules provided by a collective bargaining agreement” while the collective bargaining agreement remains in effect if the changes are “essential to the continuation of the debtor’s business” or “to avoid irreparable damage to the estate….”

Any unionized company going through bankruptcy has an additional level of complexity that must be carefully considered when undergoing the bankruptcy proceedings and seeking to emerge from the bankruptcy.

Conclusion

Filing for bankruptcy is a major deal and involves many different levels of consideration and thoughtfulness from considering the legal ramifications to considering the emotional wellbeing of the employees affected. These are just a few of the many labor and employment problems that can arise during a bankruptcy proceeding. Employers must carefully assess their situation and their needs to ensure that they are able to protect their assets during bankruptcy and thrive after the bankruptcy is completed.

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