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elaws - employment laws assistance for workers and small businesses - WARN Advisor

What Happens if My Firm Goes Bankrupt?

WARN remains applicable to an employer that declares bankruptcy in some circumstances. If an employer declares bankruptcy and then orders a plant closing or mass layoff, it may still be liable under WARN. There are two situations in which WARN may apply in a bankruptcy.

  1. When the employer knew about the closing or mass layoff before filing bankruptcy and should have given notice but seeks to use bankruptcy to avoid giving notice.

  2. When the employer continues to run the business in bankruptcy, usually as a "debtor in possession", WARN does not, however, apply to a trustee in bankruptcy whose sole function is to wind up or close down the business. In other words, when a company goes into bankruptcy, it may either seek to continue in business and restructure its operations so that it can "emerge" from bankruptcy as a going concern or it can close down, wind up its operations and go out of business. If a company seeks to continue in business, ordinarily, its existing owners or managers remain in charge and are called a "debtor in possession." Since the business remains a going concern in bankruptcy, its WARN obligations remain alive too. When a company goes out of business, the winding up of the business is usually run by a trustee in bankruptcy. In this case, WARN obligations do not apply to the trustee.

The faltering company and unforeseeable business circumstances exceptions to the notice requirement often come up in bankruptcy cases. The bankruptcy proceeding does change the court in which any WARN claim must be filed from the District Court to the Bankruptcy Court.

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