As a wage and hour mediator, I have run across a number of cases where the defendant-employer’s approach to settlement discussions is largely reliant on the claim that there is no money to recover. This blog post explores the rationale and considerations behind these situations as well as some guidance from my experience as a mediator in cases where the employer claims insolvency.
Why Sue a Defunct Employer?
The main reason plaintiffs end up in situations where they have a defendant who cannot pay is they didn’t know the employer was defunct until after filing suit. In many cases, plaintiffs get to know the financial situation of their employer only after they have expended time and resources on a lawsuit. While it is possible for plaintiff’s to do some diligence into the financial situation of a company before initiating a lawsuit, that level of diligence depends on how much public information is available. If the company is a large public company, a plaintiff can get a good sense of their financial situation from their public filings (10-Ks and 10-Qs). In most cases, however, employers are not public companies and there is often not much diligence a plaintiff or their counsel can do in advance of filing a lawsuit. Ultimately, it usually is not until financial diligence is exchanged, often times in the days leading up to a mediation, that a plaintiff knows the situation.
Challenges in Suing a Bankrupt Employer:
If a plaintiff finds themselves in a situation where the defendant is citing lack of funds to pay, there are likely to be challenges to any recovery. Assuming the defendant employer is being genuine in the presentation of their financial status, expending resources to go after an insolvent defendant isn’t likely to be prudent. Without going into a primer on bankruptcy law that I am ill-equipped to provide, here are the high level reasons why these situations are challenging:
- Limited Financial Resources: Bankrupt companies may have limited or no assets, making it challenging for employees to recover significant damages.
- Legal Complexity: Bankruptcy proceedings can be complex and may take precedence over individual claims, delaying potential settlements.
- Uncertain Outcomes: The outcome of such lawsuits can be uncertain, as courts may prioritize different creditors in bankruptcy cases.
How to Deal with Insolvency Claims in a Mediation
In wage and hour mediations, when a defendant claims insolvency, it is often the case that plaintiff’s attorneys will want to verify the accuracy of the insolvency claim. Lawyers will often require information that allows them to conduct due diligence, including a review of financial documents, to ensure the validity of the insolvency assertion. Since a settlement against a defendant who is claiming insolvency is likely to be at a lower amount than one against an apparent “deep pocket”, plaintiff lawyers want to make sure that the lowering of their demands are justified.
On the flip side, while insolvency does typically lead to lower settlement amounts, claims of insolvency should be carefully made by defendants, as there will be diligence conducted. An employer will need to be willing to open up their financials to the plaintiff, which can be a dangerous tactic if those financials do not support the claim of financial distress.
In my experience as a wage and hour mediator, Plaintiff lawyers almost always ask for this financial information in these situations. The step is vital not only for assessing the defendant’s ability to pay, but also for strategizing the mediation process in relation to their demands. Additionally, attorneys must be cognizant of the potential risk that a court may not approve a settlement agreement if it appears unreasonably low in light of the class size and claims. Such a situation might necessitate further briefing or presentation of detailed evidence regarding the defendant’s financial condition. This is to ensure that the settlement is fair, reasonable, and in compliance with legal standards, thus safeguarding the interests of both the aggrieved employees and maintaining the integrity of the legal process.
Insolvency Doesn’t Usually Mean No Settlement
Even if a plaintiff finds themselves in a situation where they have sued a defunct employer, it does not mean that there won’t be any recovery. An insolvent company usually has assets, they just do not have the cash flow to service their liabilities. The process of bankruptcy will often result in a restructuring of the company or a selling off of its remaining assets. Therefore, anyone with a claim against that company, including a plaintiff with a judgment or settlement agreement, could recover a portion of their debt in the bankruptcy process.
Interesting Case Study: Suing a Company that Shut Down Without WARN Notices
An interesting case that is currently ongoing is that of is Belendez-Desha v. JAF Comms. Inc. In Belendez, the former employees of The Messenger (a defunct digital news company) are suing the company despite its shutdown because they allege violations of the Worker Adjustment and Retraining Notification (WARN) Act.
WARN requires employers to provide at least 60 days’ notice to employees in the event of mass layoffs or plant closings. The purpose of the lawsuit is likely to seek compensation for the lack of notice, as well as any wages, benefits, or severance that they argue they are owed under the law. If the former employees win the lawsuit, they could potentially receive back pay for the 60 days’ notice they should have received, along with any other benefits that were due during that period. This could include the cost of healthcare benefits, unpaid wages, and possibly other damages, depending on the specifics of the case and the court’s findings.
While WARN cases are not uncommon, Belendez is interesting because the plaintiff is suing a company that has shut down. If they are successful in recovering damages from the defendant, if could result in more and more similar suits of bankrupt companies being sued for employment matters. While recovery from a bankrupt employer presents challenges, even if The Messenger has shut down, the company might still have assets or insurance policies that could be used to pay any court-ordered compensation. Alternatively, if the company is completely insolvent, the employees might receive a smaller amount or potentially nothing, depending on the remaining assets and the claims of other creditors.
Conclusion:
Plaintiff’s who find themselves in a legal action against an employer who claims to not have funds to pay face a road filled with both opportunities for recovery and challenges. Unfortunately, most situations involving an insolvent employer are not entered into knowingly. It is only after a lawsuit is filed and time and money expended that the plaintiffs realize the situation they are in. For both employees and employers, when mediating a case where solvency is an issue, understanding and respect for each other’s positions, and sharing of financial information to support the contention, can lead to more amicable resolutions.