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Priority Debts: Employee Obligations

by Adam Mack

Hillary Stirling, research assistant

Priority debts that can be considered employee obligations that arise from two interconnected subsections of 11 U.S.C. §507. The first is§507(a)(4) anddeals with actual wages. The other is §507(a)(5) and deals with employee benefits. Both are limited to expenses incurred during the 180 days previous to either the business closing or the filing of the bankruptcy petition – whichever happens first.

Wages

If a business owner files bankruptcyand still owes wages to employees, that debt is considered priority and is non-dischargeable. Wages include traditional “wages, salaries, or commissions, including vacation, severance, and sick leave pay earned by an individual.” (See 11 U.S.C. §507(a)(4).)

If the business owner owes sales commissionsto an independent contractor (or to a single-owner LLC acting as an independent contractor) who was selling goods for the business owner, that debt can also be considered priority if it meets certain criteria. The independent contractor must rely heavily for its income on the business owner, receiving 75% or more of its income from that business owner in the previous year.

There is a cap of $10,000 for the amount any single employee or independent contractor can claim as a priority debt. Any amount beyond that is considered unsecured.

Employee Benefit Plans

The law gets much more complicated when employee benefit plans enter the picture. In order for an employee to make a priority debt claim, the business owner must have been paying into a plan run by the business that directly benefited its employees. (See Howard Delivery Service, Inc. v. Zurich American Insurance Co., 547 U.S. 651 (2006).) The business must also be in arrears on paying the plan premiums, and the employees must be making up the difference themselves. Then the employee can make a priority claim for employee benefit plans.

Once those legal hurdles have been cleared, there’s a formula in statute capping the amount the employee can receive. That formula essentially makes the amount available to all employeesuniform. It multiplies the number of employees by $10,000 and then subtracts the total amount the business owner had to pay out to all employees under the Wages subsection of the statute. Finally, it divides the amount by the number of employees.

The Most Important Part

Bankruptcy is a complex area of law and anytime businesses are involved – even small businesses – the level of complexity increases dramatically. Especially with something as critical as employee obligations, you deserve a qualified Kansas bankruptcy attorney as a legal ally to help you through the process. Call us today to find out how we can help you get debt free!
 

Disclaimer

These articles are for general informational use and do not constitute legal advice. Since laws change over time, it’s possible some articles are out of date and for that reason, we make no representation that the articles are fully accurate. For actual, up-to-date legal advice (including a free consultation), please contact us!