Is it true that employees can over claim the $12K in unpaid wages earned within the only last 180 days before filing bankruptcy?
A: The 180 day limit is as to the 4th position priority. Bankr. Code 507(a)(4). The employee still has an unsecured claim
for the remainder of any unpaid wages, but he/she must stand in the same line as all of the other unsecured creditors. So, the risk calculation is whether or not the assets left in the corporation after sale is enough to satisfy the employee claims, and then the unsecured creditor claims, which will still include any balance owed for unpaid overtime. My thumbnail calculation for 40 employees, not considering the 180 day priority is a settlement of $4,937.13 per employee (197,485.71), not including attorney's fees and costs of suit to the prevailing party. Federal law permits the employees to recover liquidated (double) damages for unpaid overtime. 29 U.S.C. 216(b). If so, the plaintiff employee has already left our company for 4 months, so we don't have much left from the 180 days, plus we are talking only 8 hours unpaid OT per week averaging about $12/hr. For the current employees, we have already changed our system so the clock is also ticking.
A: The premise is incorrect. The employees have a priority claim for $12,475, plus a no-priority claim for any amounts that do not fall within the scope of the priority. So, even though the claim amount is likely to be less than the priority limit, the employees will still be your unsecured creditors after the asset sale. In sum, unless you conduct a "fire sale," and get away with it, the employees are going to get paid some of what they are owed, if you choice bankruptcy as the way to mitigate this debt.
Given that we are a small business with gross only $2.5M, in you opinion, logically would the counsel of the plaintiff employee even bother to pursue a ch 11 company with not much return? You mentioned max $12K. Is that all they would get if they pursue us during ch 11 or are they entitled to any damages or fees or penalties. (Right now, they are asking for unpaid wages and all kinds of liquidated damages and penalties)
A: First issue is whether or not plaintiff's counsel is a member of the federal district court bar. If not, then counsel can't represent the employee in bankruptcy court -- so counsel would have to associate with another attorney (which means sharing legal fees, and attorneys don't like doing that), or withdraw from the case. Assuming counsel follows you into bankruptcy court (I would, if it were my case), then you can probably expect that counsel will carefully scrutinize your asset sale.
I think my original answer is still valid here. I would consider putting together a settlement package for all of the employees, and then try to get them to accept a payment plan. If you were to spread the settlement over 12 months, it would probably work out to about $2.50 per hour per employee.
Not cheap, but if you can negotiate the settlement down below what could be obtained in court, you may be able to reduce the bite to something you can swallow.
We don't really want to disclose to our current employees to this unpaid OT hours issue. Telling to get a lesser settlement with them is like inviting lawsuits, right? Then why not just jump to 363 sale without offering settlement? Our goal is the protect ourselves with the least disruptions with current employees as well as front sales. The less people know about this, the better.
A: The only way to keep the issue with the current employee confidential is to enter into a confidential settlement agreement. If you cannot settle, then, were I opposing counsel, I would be considering filing a class action against you on behalf of all of the employees, and then you really will have a reason to file for bankruptcy.
If you really believe that you can keep a lid on this matter, then you may want to seriously consider trying to counter the employee's current offer, and try to get a confidential settlement. Otherwise, I see this as potentially exploding -- after which, Chapter 7 will probably be the only option.
Can you explain on payroll tax liability? We haven't not paid payroll tax. Are you talking about the payroll tax attached to the unpaid OT wages? These money don't go to the employees at all, right? Just to IRS?
A: Each employee is entitled to wages for hours worked. Each payroll check must have withholding for FICA, FUTA, Medicaid, SDI, unemployment, etc. If an employer is found liable for unpaid wages, and the settlement characterizes the payment as such, then tax withholding must be made on the unpaid wages. If you go bankrupt and you don't pay the unpaid wages, then you will also not pay the withholding, and that means that IRS has a claim for the remitted withholding.
If the corporation dissolves, the IRS can come looking for that withholding in the form of a penalty, equal to the amount not withheld, from any person who had the authority as a corporate officer or other responsible person, to withhold, but who failed to do so.
With the 363 sale, what are tax consequences on the original owners of the old, bankrupted, company?
A: Owners aren't liable for unpaid corporate income tax. They are potentially liable for unpaid employee payroll withholding (TFRP). Also, personal liability can attach for any unpaid unemployment insurance contributions -- and for unpaid sales or use tax.
Hope this helps.