With the COVID-19 pandemic creating a significant upswing in Chapter 11 bankruptcies and with more expected to come, Congress is once again considering substantial changes to the way the Bankruptcy Code addresses worker compensation, retiree benefits and collective bargaining agreements with the Protecting Employees and Retirees in Business Bankruptcies Act of 2020 (PERBBA), introduced recently in both the House and the Senate (House Bill 7370; Senate Bill 4089). PERBBA is the latest iteration of legislation designed to add additional worker protections to business bankruptcies and to make it more difficult for companies to reject collective bargaining agreements in bankruptcy.

Specifically, PERBBA proposes the following changes to claims related to worker compensation and benefits:

• increasing to $20,000 from $13,650 the amount of prepetition wages and compensation entitled to priority treatment per employee;
• increasing to $20,000 per covered employee the amount of contributions to employee benefits plans entitled to priority treatment;
• removing the requirement that priority wage and benefit claims must be earned 180 days prior to the bankruptcy filing;
• allowing priority claim treatment for amounts, including penalty amounts, owed for violation of labor and employment laws, including the WARN Act; and
• adding additional priority claims for severance pay and employee benefit plan contributions due post-petition.

Other provisions of PERBBA include:

• making it more difficult to reject collective bargaining agreements and reduce employee benefits;
• requiring the Bankruptcy Court to consider and give “substantial weight” to preservation of jobs when approving Section 363 sales;
• allowing debtors to recoup payments made to executives to the extent that employee compensation is reduced; and
• making it more difficult to increase executive and management compensation.

Overall, these changes may create challenges for employers to reduce their operating expenses in Chapter 11. The increases in priority claims may also make it more difficult for large employers to obtain sufficient capital to pay priority claims and confirm a plan, particularly if WARN Act or other similar laws were violated.

PERBBA was first introduced to Congress in 2007, following the collapse of Enron, and has been repeatedly introduced since then. None of the prior bills have been successful, and this iteration has yet to garner bipartisan support. However, the impact of the continuing pandemic on businesses and their employees may create bipartisan interest in PERBBA that previously has been lacking.

Miles & Stockbridge is closely monitoring current events and legislative developments, and remains ready to help its clients navigate this complex and ever-changing legal landscape.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format that complies with IRS rules and may be relied upon to avoid penalties.