Employees in Business Bankruptcy: 6 Wage and Benefit Claims That Jump the Line

If your business files for bankruptcy, employees don’t have to just get in line with other unsecured creditors to hope they can collect. In fact, several kinds of employee claims have special protections, including

• employees’ claims for recent unpaid wages (including vacation, severance, sick pay, and some commissions);
• current and former employees’ claims for unpaid contributions to employee benefit plans;
• wages earned by employees during the bankruptcy (after the bankruptcy petition is filed);
• claims under the WARN Act, for up to 60 days of pay; and
• taxes that were withheld from their wages.

”Priority Unsecured” Claims

The Bankruptcy Code establishes certain claims as ”priority unsecured” claims. That means they jump to the front of the line of unsecured claims. They are paid after all secured claims are paid. They are paid ahead of the claims of the company’s general unsecured creditors. Employee wage priority claims and benefit plan contributions also have the added restriction that in Chapter 11, a plan can’t be confirmed unless all the claims are paid in full in cash by the plan’s effective date. There’s an exception to this last restriction though: the class holding those claims can vote to accept deferred payments instead.

The first claim covers employee wages for up to 180 days before the petition date or the cessation of the debtor’s business, whichever happens first. This priority is limited to claims by employees for a total of $17,150 per employee in cases filed on or after April 1, 2025; amounts over that are general unsecured claims. The following claims are included as employee wages: salaries, commissions, vacation, severance pay, and sick pay.

The second claim covers commissions owed to independent sales contractors. An individual who was an independent contractor can only get priority for commissions (the same goes for a one-employee corporation) if 75% or more of what they earned in the year before the petition or stoppage date came from your business.

The third claim covers claims by benefit plans to receive contributions from the debtor (employer) for services an employee provided, during the 180 days before the filing date or the shutdown. The contributions are capped at $17,150 multiplied by the number of people covered by the employee benefit plan, minus what they already got under the wage priority.

The fourth claim includes wages earned by employees for work they actually did after the petition date. In Chapter 11, employers who need to keep their employees often make a special motion right after the petition, called a wages motion. Additionally, people who perform services for a debtor, post-petition, are entitled to administrative expense priority, wages motion or not.

Apart from the wages motion, in some respects, the type of chapter you file doesn’t make a big difference in how employee claims are treated. The priority amounts for these priority employee claims are the same in Chapters 7 and 11. In a Chapter 7, the company is liquidated; so every employee is laid off and can only file a claim. Under the Bankruptcy Code, as a general rule, in Chapter 11 reorganization cases you (as debtor) are the one who decides who stays and who goes. Employees who do get laid off before a Chapter 11 filing are treated like Chapter 7 employees.

The fifth claim comes from a notice rule. Federal law can require an employer to provide employees with advance notice of a mass layoff or closing, under the Worker Adjustment and Retraining Notification (WARN) Act. If you don’t give it, employees can file a claim in bankruptcy court for the days they should have been given notice. Under that law, they can claim back pay and benefits for each day of the violation, for up to 60 days, but never more than half the total number of days the employee worked for the debtor.

The final claim is an eighth-priority tax claim for taxes you took out of employees’ pay. A responsible officer might face personal liability for the amount of trust fund taxes not paid, through what the IRS calls a trust fund recovery penalty, equal to 100 percent of those taxes, if they willfully failed to pay them.

Work Out the Total You Owe Each Employee

Before your bankruptcy case is filed, work out the total you owe each employee for unpaid work they did up to 180 days before filing or the company stopped doing business. Add in payments you didn’t make to pension or employee health benefit plans, or withheld taxes not sent in (which an officer may have personal responsibility for). Let the employee “jump to the front” concept sink in. Write up cash flow and reserve forecasts based on the post-petition expense realities.

The “wages motion” can be a good way to get employees payments and calm things down early in a case. The bankruptcy code’s claim rules are involved and should be handled by your business bankruptcy lawyer, especially if the claims are based on a contract.