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

The people who worked the last shifts before a business failed are paid ahead of almost every other unsecured creditor, and ahead of the owners entirely, but only up to a number, only for a window of time, and only out of whatever the secured lenders leave behind. Each of those limits is written into Bankruptcy Code Section 507 and its neighbor, Section 503, and each one matters more to an employee than the word priority does.

Six kinds of wage and benefit claims move up the line. Four are prepetition claims with a statutory ceiling. Two arise after the filing and carry no dollar ceiling at all.

1. Unpaid Wages, Salaries, and Commissions Earned in the Last 180 Days

Section 507(a)(4)(A) gives fourth priority to "wages, salaries, or commissions" earned by an individual "within 180 days before the date of the filing of the petition or the date of the cessation of the debtor's business, whichever occurs first," up to a cap per individual that has stood at $17,150 since April 1, 2025, when the periodic adjustment raised it from $15,150.

The window deserves more attention than it gets. A hypothetical bakery that stops operating on May 1 and files its petition on August 1 has its 180 days measured back from May 1, because the cessation of business came first, so the window reaches to early November of the prior year rather than early February, and wages earned in November and December fall inside it even though they would have fallen outside a window counted from the petition (the date a paycheck was due or bounced is not the test, since the statute asks when the wages were earned, and a careful claim keeps the two dates apart).

Anything above the cap is not lost. It drops to the general unsecured pool. An employee owed $22,000 in covered wages in that hypothetical would hold a $17,150 priority claim and a $4,850 general unsecured claim, and the two portions may be paid at very different rates.

The cap is per person, not per business, which is why a payroll of twenty people can produce a priority total that surprises an owner who thought of the back wages as one debt.

2. Vacation, Severance, and Sick Leave Pay

The same subparagraph names "vacation, severance, and sick leave pay earned by an individual" as wages for priority purposes. The word earned carries the weight. Accrued vacation that the employee built up in the 180-day window fits the language; a severance promise, depending on how it is structured and when it was earned, may fit it only in part.

These amounts share the single $17,150 ceiling with regular wages. They do not get a cap of their own.

3. Commissions Paid to Independent Sales Contractors

Section 507(a)(4)(B) extends the same priority to sales commissions earned by an individual, or by a corporation with only one employee, acting as an independent contractor, if in the year before the earlier of the petition or cessation date "at least 75 percent" of what the contractor earned selling goods or services came from the debtor. The provision protects the salesperson who is an employee in every practical sense except the tax form.

4. Contributions Owed to Employee Benefit Plans

Fifth priority under Section 507(a)(5) covers unpaid contributions to an employee benefit plan arising from services rendered within the same 180-day window. The cap works differently and is, on a second reading, the most intricate arithmetic in this list. For each plan the ceiling is the number of covered employees multiplied by the per-person figure (the statute's base of $10,000, adjusted to $17,150), less whatever was paid to those employees under the wage priority, plus amounts the estate paid on their behalf to any other benefit plan.

Take a hypothetical ten-person shop whose health plan contributions went unpaid for four months. The starting ceiling is $171,500. If the same ten employees receive $60,000 in wage priority payments, the room left for the plan falls to $111,500. The two priorities draw on a shared allowance per employee, so money that flows through one narrows the other.

The design reflects a judgment that wages and benefits are two forms of the same compensation.

5. Wages for Work Done After the Petition

A business that keeps operating in Chapter 11 keeps paying its staff, and those wages are not prepetition claims at all. Section 503(b)(1)(A)(i) makes "wages, salaries, and commissions for services rendered after the commencement of the case" administrative expenses, and administrative expenses hold second priority under Section 507(a)(2), ahead of every wage claim above.

There is no $17,150 ceiling here. A debtor that cannot meet its postpetition payroll has a problem no plan can cure, and in a traditional Chapter 11 case Section 1129(a)(9)(A) requires administrative claims to be paid in cash on the effective date unless the holder agrees otherwise.

The same logic explains the treatment Section 1129(a)(9)(B) gives the fourth and fifth priorities in a Chapter 11 plan. If the class of priority employees accepts the plan, each holder may receive deferred cash payments with a present value equal to the allowed claim; if the class rejects it, each must be paid "cash on the effective date of the plan equal to the allowed amount of such claim." Employees therefore decide, voting as a class, whether they can be paid over time, which is a strange amount of power for a group that may have learned about the case from a notice taped to a locked door.

6. Back Pay Awards Attributable to the Period After Filing

The last category is the narrowest and the least known. Section 503(b)(1)(A)(ii) treats as an administrative expense "wages and benefits awarded pursuant to a judicial proceeding or a proceeding of the National Labor Relations Board as back pay attributable to any period of time occurring after commencement of the case," resulting from the debtor's violation of federal or state law, "without regard to the time of the occurrence of unlawful conduct on which such award is based."

The provision comes with a condition. The court must determine that paying the award "will not substantially increase the probability of layoff or termination of current employees" during the case. An award for a violation such as a failure to give required plant closing notice may qualify for the portion attributable to the period after filing, and the rest of it is treated under the ordinary rules. Whether a given award lands in one category or another is a question for the court.

Two ceilings run the other way. Section 502(b)(7) limits an employee's damages for termination of an employment contract to one year of compensation after the earlier of the petition date or the date performance stopped, plus unpaid compensation due on that date, a rule that matters most to employees holding multi-year contracts (the parallel to the landlord cap is plain), and Section 503(c) restricts retention payments to insiders unless the court makes specific findings.

Delancey Street and the Payroll Problem

None of these priorities reaches past a lender's collateral. A priority claim is paid from unencumbered value, and where a bank or funder holds a lien on the receivables and the equipment, the staff may be paid last from very little. Owners in New York should also know that Business Corporation Law Section 630 can make the ten largest shareholders of a corporation whose shares are not publicly traded personally liable for unpaid wages, subject to notice and timing conditions.

Delancey Street works on merchant cash advance debt; it is not a law firm, and wage claims, bankruptcy filings, and employment advice belong to a lawyer. Where daily advance debits are the reason payroll is at risk, Delancey Street will review that debt at no charge and in confidence, with independently licensed counsel involved when a legal question arises. A business that already cannot make payroll may need bankruptcy counsel first.

The statute ranks the people who stayed until the end above most of those who lent money at the beginning. It does not promise that anything will be left when their turn comes.