Does a business/employer have a legal obligation to pay the employees all of what they are owed if the company goes out of business?

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Does a business/employer have a legal obligation to pay the employees all of what they are owed if the company goes out of business?

My employer may be filing bankruptcy and going out of business. The employees have not been paid for 2 months. We’re afraid that if we continue to work at the company that we will not get paid what we are owed.

Asked on August 11, 2014 under Bankruptcy Law, California

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 7 years ago | Contributor

Legally--yes, employees should be paid for all work they do. But the debt to the employees for unpaid wages, while a priority debt (paid earlier in the bankruptcy process) is still an unsecuted debt (that is, not backed-up by or secured by some asset), and *is* dischargeable in bankrupty. That means that if the company files bankruptcy, they may be able to either discharge the wage debts entirely, or else reduce them substantially, if there is enough money/assets to pay a portion, but not all, of the wages and other priority debts. Therefore, an actual bankrupty filing could reduce or eliminate the obligation.

Furthermore, if the company is an LLC or corporation, then only the company--and not, say, the owners personally--is liable for the wages. That means that if the company goes out of business and does not have enough assets (e.g. money) to pay the wages, then the legal obligation to pay is irrelevant--if there is no money to pay wages, there is no money, and all the legal obligations in the world wll not change that.


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