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Post a CommentPriority Status for Wages Earned within 180 Days before Filing the Petition
Collier on Bankruptcy
6/18/2008 A fourth priority is available under Bankruptcy Code section 507(a)(4) for allowed unsecured claims for wages, salaries and commissions, including vacation, severance and sick leave pay earned by an individual. It is also available for sales commissions earned by an individual, or a corporation with only one employee, acting as an independent contractor in the sale of goods or services for the debtor in the ordinary course of the debtor’s business if, and only if, during the 12 months preceding that date at least 75 percent of the amount that the individual or corporation earned by acting as an independent contractor in the sale of goods or services was earned from the debtor. The third priority is available only for wages, salaries and commissions earned within 180 days before the earlier of the date of the filing of the petition or the date the debtor ceased business. The maximum dollar limit on the priority is $10,950 for each individual and corporation. Any excess claim for wages, salaries and commissions will be a general unsecured claim.
Purpose of the Fourth Priority. A priority for wages was included as part of the Bankruptcy Act upon its original enactment in 1898 and has been a feature of the bankruptcy law since that time. The purpose of allowing a priority for wages is to alleviate hardship on workers who lose their jobs or part of their salary by bankruptcy. Employees are usually the hardest hit financially by a bankruptcy because the debtor/employer is typically the only source of income for the employees. When a debtor fails to pay debts to its other creditors, those creditors presumably have other sources of income and do not rely on the debtor as their sole source of income. Another distinction is that other creditors presumably knowingly extended credit to the debtor. Employees do not typically view themselves as extending credit by waiting for their paychecks. One additional purpose of the wage priority is to encourage employees to stand by an employer in financial difficulty. Still another advantage of the wage priority is one not cited by the legislative history or explicitly recognized by cases in which the scope of the priority has been litigated. Because wages are priority claims, courts have often permitted debtors to pay prepetition wage claims in the ordinary course in response to a motion filed by a debtor in possession at the commencement of a chapter 11 case. The ability to ensure that the employees receive their unpaid prepetition salary and do not miss a paycheck is critical to obtaining the stability necessary for the transition to operating as a debtor in possession. If wage claims were not entitled to priority, it would be difficult to justify “first day” orders approving payment of prepetition wages. There is no clear statutory authority for such first day orders, although a court with some confidence in the debtor’s ability to satisfy claims through the third priority could justify the order under section 105.
The Expert Commentary from which this material was excerpted was adapted from material appearing in Collier on Bankruptcy (Matthew Bender). Subscribers to lexis.com may purchase the entire Expert Commentary. Return to Bankruptcy Law Expert CommentaryBack to top
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