What happens to employees when their employer goes bankrupt?

Throughout the ongoing economic recession, a number of companies in Georgia and throughout the country have become insolvent and have been forced to file for bankruptcy. This has left many employees facing job loss and wondering about what they may be entitled to and what is going to happen next.

The good news is that employees of companies in bankruptcy are protected in some areas. By law, employees who are laid off as the result of a bankruptcy are, in many cases, legally entitled to be given advance notice of separation.

The Worker Adjustment and Retraining Notification Act (WARN) requires that employees be given advance notice of any shutdowns or layoffs. Under the federal law, companies with 100 or more employees must give a notice of at least 60 days, although some states require longer notification periods. Companies that fail to give advance notice to employees as required by WARN may end up paying severance for the requisite time period.

However, employees that are entitled to back pay and severance may not receive it if company assets are not sufficient to pay their claims. But they will likely receive any earned wages, as such payments have first priority over claims made by creditors in a Chapter 11 bankruptcy.

In addition, employees’ health insurance benefits will end if the company is no longer able to pay for them. Employees are generally still entitled to keep health benefit coverage for up to 18 months as allowed by COBRA if they pay the monthly premium.

Money that is set aside in 401(k) and other retirement plans, including payouts from employers, are not affected by a bankruptcy. This is because the money belongs to the individual employee and not the bankrupt company. Employees laid off in a bankruptcy are also eligible to file for and receive unemployment compensation benefits as regulated by federal and state laws.

Source: Main Street, “Your Company Went Bankrupt: Now What?” Jeanine Skowronski