These competing mandates require careful legal planning to appropriately balance the best interests of the company and its creditors generally, and in particular to head off potentially severe legal risk to those officers responsible for reductions in force. While there is theoretical risk that severance and other employee payments may be subject to clawback attack in a later bankruptcy case, bankruptcy judges are very reluctant to order the return of payments previously made to rank-and-file employees, making the practical risk of disgorgement remote.
Large severance or projected bonus payments to exiting officers would be subject to more careful scrutiny. It appears, however, that there are no decided cases that impose personal liability upon responsible persons for the payment of such court-ordered clawed-back amounts. In our experience, state enforcement agencies would be less likely to pursue such clawed-back amounts even if those amounts were severance or other wages that would have created officer liability if not paid in the first place. Where state law allows, enforcement agencies are likely to authorize the employee to pursue such amounts through a private right of action.
In light of the above, in most instances you should pay all accrued severance and bonus amounts at the time of the reduction in force. You should do this even if it means taking those funds from your vendor check-run or other obligations that do not give rise to such severe risk of officer liability.
Also, in these situations state enforcement agencies are usually very receptive, in all but the most egregious cases, to a constructive dialogue with the company. It will almost always be more protective, in the long run, for you to start this dialogue with the enforcement agency before employee complaints are lodged. Ultimately, enforcement actions may still be brought against your responsible officers. But you may be able to delay the commencement of these proceedings until all sources of other funding are exhausted, if the enforcement agency believes that good faith efforts are under way and are reasonably likely to bear fruit.
Few workplace issues raise emotions, and the danger of liability, as starkly as compensation and terminations do. But by following the steps outlined above, you can successfully navigate the shoals of your obligations to your executives and other employees when your company faces corporate restructuring or bankruptcy.
William R. Baldiga is the managing director of the litigation and restructuring department of Brown Rudnick, which includes the firm's worldwide bankruptcy practice. James L. Hauser is a Brown Rudnick partner who focuses his practice on executive compensation and ERISA–related matters. Jed M. Nosal is counsel in Brown Rudnick's government law and strategies group, as well as in the firm's energy, utilities, and environmental group.
This article originally appeared in Corporate Counsel under the headline “Going Broke? Not Until You Pay Me.”
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