Bankruptcy / Chapter 11 Bankruptcy / Managing Your Finances

You Must Pay Employees During Chapter 11 Bankruptcy

If you’re filing Chapter 11 bankruptcy as a small business owner you need to come up with a plan to insure that your employees continue to get paid during your bankruptcy if they are still working for your company while you restructure.  Failure to pay your employees during Chapter 11 bankruptcy can result in the following adverse actions:

  1. You could lose control of your bankruptcy case. In the recent Chapter 11 bankruptcy case of a chain of Arby’s restaurants, the owners of 22 stores failed to pay their workers and the bankruptcy judge took control of the stores away from the debtor.  Because it appeared that the owners were unable to handle the basic finances of the stores while in bankruptcy, they lost control.
  2. If you fail to pay your employees during Chapter 11 bankruptcy, even if it is for a few weeks, those employees will most likely quit.  While you will technically save money with fewer employees, it can adversely affect your business because you still need employees to run the daily operations of your company.
  3. The U.S. Labor Department could send their enforcement division after you if you fail to pay your employees even during bankruptcy.  Failure to pay employees is illegal and could result in heavy fines and/or imprisonment.

The key here is that it is illegal to have someone working for you, promise to pay them and then not pay them, even if you are in bankruptcy.  Bankruptcy will not exempt an employer from their legal obligation to pay employees as prescribed by federal law.  Just to clarify, if an employee continues to work with you after you file Chapter 11 bankruptcy, you must pay them.  If you closed your business down after you filed bankruptcy and owe employees money for work done before you filed bankruptcy, those employees become part of your creditors in that bankruptcy case.