It happens all the time: A company files for bankruptcy and a vast majority of the employees are sent home without having had any prior knowledge that something was wrong. These employees are left to fend for themselves and to scramble to find another job to fulfill the loss of household income. For many of these employees, the bankruptcy comes as an especially hard blow because they worked for an extended period of time without receiving any pay at all. Whether this is because they were salaried and received monthly or quarterly payments or because they naively assumed that their employer would “pay them eventually” is of little concern. What is of concern is that many individuals, upon receiving the news, feel used and manipulated.

If your employer has sprung the news of bankruptcy on you, and if you are owed unpaid wages, consult with one of the wage and hour attorneys at Garcia & Gurney, ALC to see what rights you have regarding collecting unpaid wages during bankruptcy.

Understanding the Differences Between Chapter 11 and Chapter 7 Bankruptcy 

In order to understand what rights you have regarding unpaid wages, it is important that you fully understand the differences between the two most common types of bankruptcy filed by business owners: Chapter 11 and Chapter 7.

Unlike Chapter 7, which is a liquidation bankruptcy, Chapter 11 bankruptcy is intended for the reorganization of businesses with heavy debt burdens. Typically, larger corporations such as GM and American Airlines utilize Chapter 11,but every once in a while, a small business owner or consumer will take advantage of it.

When a debtor files for Chapter 11 bankruptcy, they are given the chance to trim operating costs, seek new sources of income, and temporarily keep creditors at bay. In essence, Chapter 11 bankruptcy gives business owners a chance to plan for profitability post-bankruptcy. Typically, because Chapter 11 means that there is enough money in the business to keep operations running, albeit on a much smaller scale, employees will likely not have much trouble, if any, collecting unpaid wages and benefits.

Chapter 7 bankruptcy on the other hand involves the complete closure of a business and the liquidation of its assets. The money gained from the liquidation is used to repay any debt owed by the company, including unpaid wages earned up until the filing date.

Wages Are Not Necessarily a Priority 

Unfortunately, wages are forth on the list of debts to be paid after a business files for bankruptcy, both in cases of Chapter 11 and Chapter 7 bankruptcy. According to 11 U.S. Code § 507 – Priorities, the order of priority for debts to be repaid is as follows:

  • Domestic support obligations;
  • Administrative expenses;
  • Claims in an involuntary bankruptcy petition;
  • Employee wages;
  • Contributions to benefits plans;
  • Claims for grain from grain producers or fish from fishermen;
  • Consumer layaway deposits;
  • Prepetition taxes;
  • Commitments by the debtor to a federal depository institution; and
  • Claims for death or personal injury.

As you can see, wages come forth on the list, and any unpaid benefits directly afterwards. However, even if an employer has enough money to repay unpaid wages, they are only required to pay up to $10,000 per employee, and only then, wages earned up until 180 days prior to the company filing for bankruptcy or prior to the cessation of the debtor’s business, whichever comes first.

Again, in a Chapter 11, you are likely to see your full wages owed to you; however, in a Chapter 7, whether or not you will be able to collect unpaid wages all depends on the value of the assets liquidated, and if there were enough to cover the first three items on the list of priority, and then yours and other employees’ wages.

Unfortunately in Chapter 7 bankruptcy cases, there are few, if any, assets left to cover the cost of employee wages. If this is the case, you will likely not see any of the money owed to you.

Suing an Individual for Unpaid Wages During Bankruptcy

Unfortunately, if the company was an LLC, the business owner(s) are not liable for much, including unpaid wages. However, according to The American Bar Association, the employer, defined as, “any person acting directly or indirectly in the interest of an employer in relation to an employee…,” is liable to some degree. However, to what degree varies from court to court. For instance, according to 29 U.S.C. § 203(d), the First Circuit Court held that “overwhelming weight of authority is that a corporate officer with operational control of a corporation’s covered enterprise is an employer along with the corporation, jointly and severally liable for unpaid wages.”

State law varies regarding personal liability for unpaid wages, as well; California’s new Senate Bill, Section 558.1 of the Labor Code, establishes personal liability for employers and Labor Commissioners, something that many California business owners are very unhappy about. The full text can be found here, but the gist is as follows:

“any employer or “other person acting on behalf of an employer” “may be held liable as the employer for” violations of the directives in the Wage Orders and in various provisions of the Labor Code. Thus, the Labor Commissioner may now hold individuals liable for certain wage and hour violations, including California’s big six: unpaid overtime, unpaid minimum wage, denied meal/rest breaks, untimely termination pay, inadequate wage statements, and failure to reimburse for employee business expenses.”

Furthermore, under the federal Fair Labor Standards Act (FLSA), and following the determination of Lambert v. Ackerly, 180 F.3d 997, 1012 (9th Cir. 1999), an employer may be held liable for unpaid wages if she “exercises ‘control over the nature and structure of the employment relationship,’ or ‘economic control’ over the relationship.”

Consult a Pleasanton Employment Attorney

Unfortunately, there is a lot of disagreement amongst the federal and state courts regarding unpaid wage claims during bankruptcy. On the other hand, several of California courts have ruled in favor of an employee seeking unpaid wages from an individual directly. Because of all the legal uncertainties, however, it is best to consult with a Pleasanton employment attorney before you make any legal claims against your former employer. To speak with a Garcia & Gurney, ALC attorney, contact us at 925-468-0400 today.