How does an employer’s closing, sale or bankruptcy affect final pay for accrued and unused vacation?

Any act that severs the employment relationship, such as a closing of the business, sale of the business or a bankruptcy, other than a reorganization, would operate as a termination for the purposes of the California Labor Code sections below:

• Section 201 requires an employer to pay all earned and unpaid wages immediately at the time of discharge.

• Section 202 requires an employer to have an employee's final wages available within 72 hours, if the employee has not provided at least 72-hours' notice of the quit, and at the same time of the quit, if such notice has been provided.

• Section 203 imposes a penalty of continuing an employee's wage for up to 30 calendar days.

• Section 227.3 requires an employer to pay all accrued and unpaid vacation at an employee's final rate of pay at the time of termination.

In California, the sale of a business entails certain rights and responsibilities on the part of the employees and the employer.

California courts have held that a sale of the business constitutes a termination of employment (Chapin v. Fairchild Camera and Instrument Corp. (1973) 31 Cal.App.3d 192).

The employer who owes the wages or benefits may not substitute another obligor (the buyer) in their place without the employee's express written consent..

In some sales, the purchasing entity may contractually agree to assume any wage liability to the employees and/or agree to continue the old employer's vacation accruals and policy. Although this may alleviate the burden on the employees, it does not eliminate the old employer's wage obligations.

In a bankruptcy, an employer sometimes fails to pay wages because it is insolvent and lacks sufficient funds to meet the employer's wage and other obligations.

If the employer becomes insolvent and closes the business, it obviously has terminated the employment relationship. The employer's inability to pay is not a defense against a failure to timely pay wages under Labor Code Sections 201 and 202.

Furthermore, insolvency does not relieve the employer of penalties under Labor Code Section 203. The civil penalty assessed under Labor Code Section 203 does not require that the employer intend the action; it merely requires that the action occurred and was within the employer's control (Davis v. Morris (1940) 37 Cal.App.2d 269).

Bankruptcy permits insolvent parties to discharge or limit their obligations to creditors. An employee who files a claim for wages against an employer in bankruptcy becomes a creditor.

A priority is granted for certain "wages, salaries, or commissions" earned by an individual within 90 days of the bankruptcy filing or cessation of the employer's business, whichever occurs first.

Federal bankruptcy law expressly extends its coverage to include vacation, severance and sick leave pay. Unpaid vacation pay accrued before the bankruptcy filing may be entitled to priority status. Claims for vacation pay earned after the 90-day period preceding the filing of the bankruptcy or the cessation of business are simply general unsecured claims.

When a debtor files a petition for bankruptcy relief, an automatic stay goes into effect. This stay prohibits creditors from proceeding on actions to collect any part of a debt except through the federal bankruptcy court.

California Labor Code Section 200.3 specifies that an employer identified as a successor to a judgement debtor is liable to the debtor’s former workforce when a final judgment holds that employer liable for unpaid wages, damages and/or penalties, and the time to appeal has expired and no appeal is pending. Businesses that are acquiring another business and/or taking over the same facilities or workforce should consult with legal counsel to analyze any potential successor liability issues.

Read more about Vacation in the HR Library.