This Expert Commentary provides brief excerpts from the Collier Monograph Employee Benefits and Executive Compensation in Corporate Bankruptcy on (1) the treatment of defined benefit plans and interactions with the Pension Benefit Guaranty Corporation, (2) executive compensation and claims related to non-qualified retirement benefits and (3) modification of retiree welfare benefits under section 1114 of the Bankruptcy Code.
The authors write: There are unique issues that arise with respect to employee benefits and executive compensation when a business entity, typically a corporation, files for bankruptcy.
Employees of a company that enters bankruptcy are likely to be concerned about their livelihood and may seek more secure employment opportunities. Executives of the company may have personal interests very different from the interests of the debtor, and unless those interests are balanced, they may have difficulty envisioning the proper course for the reorganization and negotiating with creditors. Handling executive compensation issues can thereby become a challenge much larger than protecting the financial wellbeing of individual employees.
Unions generally present significant issues in a bankruptcy case where employee benefits of the debtor are collectively bargained. Labor laws are complex and negotiations are difficult outside of bankruptcy. The Bankruptcy Code imposes even more legal hurdles on modifying labor contracts, and the interests of labor unions (who may have a seat on the creditors committee) result in more challenging negotiations. At the same time, the escalating cost of union benefits, including retiree medical and retirement plans, may be a substantial contributing factor in the decision to file.