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Chapter 11 bankruptcy and cutting labor costs

On Behalf of | Feb 3, 2022 | Chapter 11 |

When your business is in financial straits, filing for Chapter 11 bankruptcy is an option, especially when you do not want to cease operations. Unlike with a Chapter 7 bankruptcy that practically liquidates your business, filing for Chapter 11 gives you a chance to get your house in order by restructuring operations.

However, reorganizing operations comes with its share of headaches. Remember, the main objective of reorganization is cutting costs to enable the business to get back to profitability. Creditors to your business may demand that you cut labor costs, and you may have to lay off some employees.

You have to give adequate notice of mass layoffs

Under the Worker Adjustment and Retraining Notification (WARN) Act, your business needs to notify its workers 60 days before any mass layoffs. This rule applies to companies with over 100 full-time employees where the discharge will affect a majority. It means that if you were aware of the mass layoffs before filing for bankruptcy but did not give your employees any notice, you may have to pay the affected workers’ wages and benefits they lost for the 60 days provided by law.

How are pending wages treated?

For current employees, your business may seek the court’s permission to continue paying them so that operations can continue. Employees who are owed money but were dismissed before filing for Chapter 11 bankruptcy are treated just like other creditors. However, wages and salaries are considered high-priority debts and are paid before the other ordinary debts.

Are you considering filing for Chapter 11 bankruptcy?

If you are a business owner, it is crucial to learn more about how your decision will impact the company and its workforce. That way, you will be sure that you are making the right call before going all out.