Using Bankruptcy to Avoid an FLSA Judgment is Not a Good Strategy

Although hopefully you do your best to comply with wage and hour laws, imagine that the day comes when you’re sued for not paying workers, or not paying them overtime, in violation of the Fair Labor Standards Act (FLSA). It seems like a large case, and one that may cost you money to defend. Could you just do nothing, allow a judgment to be entered against you, and then discharge that debt in bankruptcy later on?

Is Bankruptcy the Answer?

It isn’t that simple because of bankruptcy laws. There is nothing in the bankruptcy code that says that you cannot discharge judgments related to FLSA lawsuits, but doing so is more complex than you may think.

One thing to remember is that many FLSA cases will involve lawsuits against both the business, as well as the business’ owners individually. That means that if you do nothing, you will technically have a judgment against each named Defendant. And that means that to get rid of the FLSA judgment, you would need to file two (or more) bankruptcies.

Individual Bankruptcy

If you are the one named individually, you would have to file for bankruptcy, personally, to discharge that debt, and in bankruptcy, you could lose a good amount of your own personal assets.

Don’t have personal assets to lose? Even assuming that is true, you have another problem: in some cases, an FLSA claim may allege that owners or the higher level executives acted maliciously or willfully.

Debts incurred as a result of willful or malicious behavior cannot be discharged in bankruptcy. And even if you didn’t act maliciously, because you never defended the FLSA case, which alleged that you engaged in knowing and intentional behavior in violation of the FLSA, you now have a judgment that is potentially not dischargeable in bankruptcy.

A Business Bankruptcy

The business is a different story.

The good news is that if the FLSA lawsuit is only against the business, then an owner’s personal assets are not at stake because there’s no judgment against the individual owner. The bad news is that a business does not get a discharge following a completed bankruptcy the way that an individual does.

You may be able to restructure or reorganize the business under Chapter 11 bankruptcy, but again, even then, that only works out or resolves the judgment against the company—not against the individual owners or the employer.

And many corporate contracts may be voided, or found to be in default, upon the filing of bankruptcy—not to mention the potential loss of control of the business to a trustee, or the cost of handling a Chapter 11 bankruptcy, which may be pretty close to whatever the original FLSA judgment initially was anyway.

The bottom line is not to ignore FLSA claims, threats, or lawsuits. There are defenses, and defending the claim is almost always a better option than bankruptcy.

Need help with a wage and hour claim? Reach out to the West Palm Beach commercial litigation attorneys at Pike & Lustig for help.

Sources:

law.cornell.edu/uscode/text/11/523

uscourts.gov/court-programs/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics#:~:text=Chapter%2011%20of%20the%20Bankruptcy,and%20pay%20creditors%20over%20time.