What happens to unpaid wages owed employees when a company files for bankruptcy?

The impact an employer’s bankruptcy will have on unpaid wages depends on the type of bankruptcy filed with the U.S. Bankruptcy Court. An employer’s bankruptcy will generally take one of two forms: reorganization under Chapter 11 or liquidation under Chapter 7 of the U.S. Bankruptcy Code.

Under Chapter 11 reorganization, the employer has basically asked the court to assist with a repayment schedule or with selling off company assets as a means of raising money to pay off creditors. A reorganization under Chapter 11 normally means the organization will continue normal business operations under the protection of the court until the time it is able to resolve its financial affairs. The filing of a Chapter 11 reorganization should have no direct impact on payment of employee wages.

Under Chapter 7 liquidation, the organization is informing the court it is no longer able to meet its financial obligation to creditors and is dissolving the business. With Chapter 7 liquidation, the bank will prioritize creditors into the order in which they are to be paid off. Under this classification of bankruptcy, when an organization owes employees' wages, the employees then become creditors of the bankrupt company. As with other creditors, employees who are owed wages share in the remaining assets of bankrupt employer.

With the exception of secured creditors, which are typically given the highest priority for repayment, creditors that are owed wages, salaries or commissions are given a higher priority for repayment than other creditors. Each individual employee of a bankrupt employer is given a priority of $15,150 (as of April 2022, adjusted to inflation every 36 months) of all wages, salaries or commissions the employee earned up to 180 days prior to the organization filing for bankruptcy. In some cases, there will be sufficient assets to satisfy employee claims in full; in others, employees may be compensated for only a portion of their claims or receive nothing at all.

Because claims for unpaid wages due to insolvency do not fall under the Fair Labor Standards Act (FLSA) unless the employer willfully failed to pay wages owed and filed for bankruptcy as an attempt to avoid paying wages, the U.S. Department of Labor has no jurisdiction in this area and will not accept claims. Claims for unpaid wages resulting from bankruptcy are regulated by the U.S. Bankruptcy Code and fall under the jurisdiction of the U.S. Bankruptcy Court. Former employees owed wages by employers that filed Chapter 7 bankruptcy can protect their rights by contacting the clerk of the U.S. Bankruptcy Court in the county where the bankruptcy was filed. A “proof of claim” form will be used by the court to determine how much money will be paid to individual employee creditors. As creditors of the employer, employees may exercise their right to participate in bankruptcy proceedings.