What Happens to My Employees During a Restructuring? 6 Answers

The Part of the File Nobody Wants to Open

Owners who call about a stack of advances almost never lead with employees. They lead with the debits, the funder that stopped answering, the account that got restrained. The staff question arrives late in the conversation and usually as a half sentence: I have eleven people and I do not know what to tell them. That half sentence is carrying more legal exposure than anything else in the call, because employment obligations are the ones that can move from the company to you personally and stay there after the entity is gone.

This page answers six of those questions with the rules that actually govern them. The second and third answers are the load-bearing ones, and if you read nothing else, read those: unpaid wages can reach shareholders directly in some states, and withheld payroll taxes are not the company’s money at all. Every other decision on this page can be corrected later. Those two get harder to fix every week they go unaddressed, and both are routinely made by owners trying to keep a daily debit from bouncing.

1. Whether the Law Requires Notice Before You Cut Headcount

The federal rule is the Worker Adjustment and Retraining Notification Act. Under 29 U.S.C. §2102(a), an employer may not order a plant closing or mass layoff until 60 days after serving written notice on the affected employees or their representatives, the state rapid response entity, and the chief elected official of the local government unit. Coverage starts at 100 or more employees excluding part-timers under §2101(a)(1). A covered plant closing means an employment loss for 50 or more employees at a single site; a mass layoff means at least 33% of employees and at least 50 people, or 500 people regardless of percentage.

New York goes further and catches far smaller businesses. Under N.Y. Labor Law §860-b, an employer may not order a mass layoff, relocation or employment loss unless it gives written notice at least 90 days before the order takes effect, to affected workers and their representatives, the state department, local workforce investment boards, the chief elected officials of the local government and school district, and locality emergency service providers. Section 860-a sets the employer threshold at 50 employees, plant closing at 25, and mass layoff at 33% and 25 employees or 250 employees.

Section 2102(b) contains exceptions, and they are narrower than owners hope. A faltering company actively seeking capital it reasonably believed would be jeopardized by notice, business circumstances not reasonably foreseeable at the time notice would have been due, and natural disasters can shorten the period, but the employer must still give as much notice as is practicable plus a written explanation of why the period was reduced. Several other states have their own statutes with their own thresholds. Check yours before you schedule a reduction, not after.

2. Whether the Paychecks Keep Clearing, and Who Answers If They Do Not

Wages earned are owed regardless of what the company’s cash position looks like, and state wage-payment statutes generally impose payment deadlines by pay frequency, penalties for late payment, and in many states liquidated damages and attorney’s fees on top of the unpaid amount. There is no restructuring theory under which staff work a week for free while a funder gets paid. When cash is short, payroll is not the line to shave; the line to address is the obligation that is actually negotiable, which is almost always the advance.

New York adds a personal liability rule most owners have never heard of. Under Business Corporation Law §630, the ten largest shareholders of a non-public corporation are jointly and severally personally liable for all debts, wages or salaries due and owing to laborers, servants or employees, covering compensation including overtime, vacation pay, benefits and pension contributions. The employee must give the shareholder written notice within 180 days after termination of services, and an action must be commenced within 90 days after an execution against the corporation is returned unsatisfied.

Read that sequence carefully, because it describes exactly what happens in a failed restructuring. An employee sues the company, wins, the sheriff returns the execution unsatisfied because the account is empty, and then the ninety-day window opens against the owners individually. Similar provisions exist for limited liability company members in New York and for officers or owners in a number of other states. Several other decisions in a workout can carry corporate debt onto your personal balance sheet, and they are collected in the restructuring mistakes that create personal liability.

3. The Money Withheld From Their Checks Was Never Yours

This is the single most damaging mistake an owner can make while trying to survive a stack of advances, and it is made constantly, usually with good intentions. Income tax and the employee share of FICA withheld from your staff’s paychecks belong to the United States from the moment they are withheld. 26 U.S.C. §7501(a) makes the withheld amount a special fund held in trust. When cash is tight and a funder is debiting daily, that trust money is sitting in the operating account looking like working capital, and it is not.

The consequence is personal and it is severe. Under 26 U.S.C. §6672, a person required to collect, truthfully account for and pay over the tax who willfully fails to do so is liable for a penalty equal to the entire amount not paid over. Responsible person status turns on authority and control rather than title, so it can reach a bookkeeper, a controller or a partner who signs checks. Willfulness in this context is generally satisfied by knowing the taxes were unpaid and paying other creditors anyway, which is a fair description of feeding a daily debit.

The liability follows you past the end of the business. It is not a corporate debt that dies with the entity, it is not dischargeable in the ordinary case, and the collection period under 26 U.S.C. §6502(a) runs ten years from assessment. IRM 5.8.4.21.1, revised April 25, 2025, addresses trust fund taxes in an offer in compromise, and the effect is that the trust fund portion is not simply compromised away and remains collectible from a responsible person. Why this category sits outside every negotiation is explained further in the debts you cannot restructure.

4. Where Employee Claims Stand If the Company Files

Bankruptcy reorders creditors, and employees do better than most unsecured claimants. Under 11 U.S.C. §507(a)(4), allowed unsecured claims for wages, salaries and commissions, including vacation, severance and sick leave pay, earned within 180 days before the petition date or the cessation of business, whichever comes first, receive fourth priority up to a capped amount per individual. Section 507(a)(5) gives fifth priority to contributions to an employee benefit plan for services rendered in the same 180-day window, subject to its own calculation.

The cap is a dollar figure that moves. It was adjusted to $17,150 per employee effective April 1, 2025 under the triennial adjustment mechanism, with the next revision due April 1, 2028. Wages earned outside the 180-day window, and any amount above the cap, drop to general unsecured status and are paid alongside everything else, which in most small business cases means very little. Wages for work performed after the filing are treated as administrative expenses and are ordinarily paid in the ordinary course while the case proceeds.

What that means at a practical level is that timing matters a great deal to your staff. A business that keeps operating with staff unpaid for months and then files has pushed a large portion of those wages outside the priority window. A business that files while the arrears are recent preserves priority for more of them. That is one of several reasons the decision about when to file, if filing becomes necessary, belongs with a bankruptcy attorney early rather than after the last account is emptied.

5. What Happens to Health Coverage, and the Condition Nobody Reads

Continuation coverage under COBRA applies to group health plans, and the small employer carve-out is at 29 U.S.C. §1161(b): the requirement does not apply for a calendar year if all employers maintaining the plan normally employed fewer than 20 employees on a typical business day during the preceding calendar year. Where it does apply, a qualified beneficiary who would lose coverage as a result of a qualifying event may elect continuation coverage. Termination other than for gross misconduct and reduction of hours are the two qualifying events restructurings produce most often.

Duration and cost are set by statute. 29 U.S.C. §1162(2)(A)(i) runs the period to 18 months after the qualifying event for terminations and reduced hours, and §1162(3) allows the plan to charge up to 102% of the applicable premium. That extra 2% is the administrative allowance, and the full premium is why continuation is expensive for a family that just lost a paycheck. Many states layer their own continuation rules on smaller employers, so the federal floor is not the whole picture.

Then the condition that catches owners. Under §1162(2)(B), continuation coverage ends on the date the employer ceases to provide any group health plan to any employee. If you shut the plan down to save premium during a restructuring, the continuation right your former employees are relying on ends with it, and people who thought they had eighteen months discover they have none. Before you cancel a plan, find out who is currently on continuation coverage and what the cancellation does to them, because that is a conversation you want to have in advance.

6. What to Tell Staff, and When

Silence is the option owners default to and it is the worst one available. People who work in a small business already know. They see the vendor calls, the equipment that did not get replaced, the way you look at the bank app on your phone. What silence produces is not calm but rumor, and rumor is what makes your best two people take calls from competitors in the month you can least afford to replace them. Say something early, and say something specific enough to be believed.

There is a version of this that is honest and does not create legal problems. Confirm the facts they can verify: the business is working through a debt issue with its lenders, payroll is the priority, and you will tell them personally before anything changes about their job. Do not promise outcomes you do not control, do not guarantee that no one will be laid off, and do not share negotiation details or a creditor list. Where a WARN or state notice may be required, coordinate the message with counsel first, because the statutory notice has content requirements and a formal recipient list.

The sequencing question owners ask most is whether to tell people before or after a decision is final. Where the law requires notice, the law answers it. Where it does not, tell key staff earlier than feels comfortable and everyone else on the day the decision is made, in person, with the practical details ready: final pay date, accrued time treatment, coverage end date and continuation election, and a reference or a phone call to somebody hiring. Those specifics are what people remember, and in a small industry they are also what protects your name for the next business.

Who Should You Call? Our Top-Rated Business Debt Firms

One firm on this list works the entire lifecycle of a business debt file, from stopping the daily debits through attorney-led negotiation, UCC lien removal, and a signed release. The other two cover broader debt categories that often sit alongside the advances. Choose accordingly.