Document Type
Research Memorandum
Publication Date
2026
Abstract
(Excerpt)
The Bankruptcy Code establishes a tiered priority system for the payment of unsecured claims, governing the order of distribution when there are insufficient assets to pay all creditors in full. The priority system is fundamental to the operation of the Bankruptcy Code because in most bankruptcy cases, the debtor lacks adequate assets to fully pay all creditors. The Bankruptcy Code grants fourth-level priority up to $17,150 per individual for “wages, salaries, or commissions, including vacation, severance, and sick leave pay earned by an individual.” To receive priority treatment, wages must be earned within 180 days before either the petition date or the date the debtor ceased business operations, whichever of those two dates came first. Wages that are not classified as “earned” are treated as general unsecured claims receiving no priority and are paid after all § 507 priority claims are paid.
The WARN Act is a federal law passed in 1988 requiring employers with 100 or more employees to provide at least 60 days’ advance written notice before mass layoffs affecting 50 or more workers in connection with a plant closing. During the 1970s and 1980s, the United States economy was shifting away from manufacturing and towards globalization and services, leading to mass layoffs and sudden plant closures in industrial areas like the Midwest and Northeast. In the 1988 presidential election, many of the states in these areas, known as the “Rust Belt”, were key battlegrounds and focusing on employee-protective legislation like the WARN Act was important to easing the economic anxiety created by layoffs and winning important votes. The legislative intent behind the WARN Act is to give workers time to adjust to job loss and seek alternative employment. An employer who violates the WARN Act by failing to provide the requisite notice is liable to each aggrieved employee who suffers an employment loss for back pay for each day of the violation and the cost of benefits under an employee benefit plan. The back pay must be at a rate of compensation no less than the higher of the average regular rate received by the employee in their last 3 years of employment and the final regular rate received by the employee. Employers must additionally provide notice with sufficient content to the unit of local government where the layoff is to occur to allow the state to respond as well. There is a civil penalty included in the WARN Act for failure to provide notice to governmental units which the statute explicitly distinguishes as separate from the employee-directed back pay remedy. The WARN Act is highly employee-friendly and harsh to employers, imposing significant liability on those who fail to comply.