Jurisprudence

Bankruptcy Shouldn’t Get Employers Out of Paying Workers What They’re Owed

But in the U.S., far too often it does.

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For 20 years, Raymond Diaz worked in a dry cleaning store in New York, regularly clocking 60 hours every week. But once the pandemic hit, the company had to close down. Business dried up, and soon the store let him go. As the economic downturn deepened, Diaz turned to New Immigrant Community Empowerment (NICE), an immigrant advocacy group, for help—maybe they could help him get his job back. Instead, he was told that, for the past two decades, he should have been getting paid overtime. For Diaz, it was one more blow in an already difficult moment. “I worked there for a long time,” he said. “I wanted to go back.” Instead, he had to grapple with the fact that a boss he trusted had deceived him for years. Worse, he’d probably get away with it: with rent and unpaid bills piling up, Diaz had little interest in pursuing costly legal action, which would be expensive and risky.

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“Wage theft” is a simple concept—employers steal their employees’ wages when they don’t pay for all of their work. Obvious forms include when a boss doesn’t pay the minimum wage, or overtime. Other forms are more deceptive. Employers can claim that their employees are independent contractors, like in the gig economy, allowing them to avoid paying employee benefits.

In 10 states, it’s estimated that more than 2 million workers lose $8 billion as a result of wage theft each year. The problem is widespread largely because victims are typically low-wage workers who cannot afford legal services. Some, like Diaz, can file a complaint with the state or federal Department of Labor. Others can take legal action, but if they do, the small claims courts that hear their cases are usually too rushed to properly identify the crime and often incorrectly rule against them.

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But the economic downturn caused by the pandemic has pushed workers even further to the brink of financial ruin. Meanwhile, wage theft has likely become more common (it becomes more widespread during economic downturns but harder to detect). Cash-strapped businesses typically violate minimum wage requirements more often as financial pressure increases. And, when jobs are scarce, employees are less likely to file wage theft claims for fear of losing a job when there aren’t many others available. At the same time, businesses, particularly in the retail industry, are increasingly going bankrupt. At the beginning of the pandemic, roughly 800 small businesses and more than 40 retailers filed for bankruptcy, figures not seen since the 2009 recession. This makes it even harder for workers to recover what they’re owed.

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The purpose of bankruptcy is to give businesses a “fresh start” by forgiving certain debts so the business can stay open. However, these protections only apply to an “honest but unfortunate debtor.” Practically, this means that there are certain “dishonest” debts that bankruptcy does not discharge. They include student loans, child support, some taxes and fees—and debt accrued through larceny, a type of theft. There’s a logic to these categories: for each one, there is an evident public interest at stake that outweighs any one business’s rehabilitation prospects.

Someone is guilty of larceny when they wrongfully take from someone else for their own gain. Courts have generally recognized that stealing under the definition of larceny can include both physical items as well as money. So making a larceny claim seems like the obvious legal channel to recover stolen wages, even if an employer goes bankrupt.

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Bankruptcy courts have ample opportunity to recognize that there’s a serious public interest issue at stake to weigh in favor of workers. In 2012, robberies led to roughly $300 million in stolen property. In the same year, wage theft led to more than $900 million in stolen wages—roughly three times the amount of economic damage. And yet, bankruptcy courts don’t usually consider wage theft a form of larceny. This is because of how bankruptcy law identifies the rightful owner of the stolen wages.

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Wages come from the revenue that an employer generates. Because that money goes through the employer first—before he pays employees—in the eyes of the law, the employer is the rightful original owner of the wages. So if a business goes bankrupt and its employees want to collect their stolen wages, bankruptcy courts effectively say: that doesn’t count because employers can’t steal what’s theirs to begin with. Instead, courts claim that those wages aren’t protected under a larceny claim during the bankruptcy process, meaning they may never get paid back.

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At some point, it’s worth asking whether there’s a way around these legal gymnastics. States like New York have attempted to avoid this issue by expanding their definition of larceny to explicitly include wage theft. But bankruptcy courts only look to federal, not state, definitions of larceny. Some go as far as arguing that an expanded understanding of larceny is an unjust imposition on the business owner. To force a business owner to pay a wage debt, “on the basis of such a ‘technical’ definition of larceny,” a bankruptcy judge in North Carolina wrote, “would be to allow the states to place in the way of the debtor’s fresh start.”

This interpretation of larceny isn’t just a failure of legal imagination in a single, isolated case. It’s one more labyrinthine area of the law turning a blind eye to the plight of workers.

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Indeed, in many other countries, bankruptcy courts don’t play much of a role in recovering stolen wages for employees when the employer goes bankrupt. Instead, they maintain an insurance model where both employees and employers pay into a fund that is responsible for paying any stolen wages if the employer cannot in the event of bankruptcy. As federal and state legislators grapple with shoring up the economy and “building back better,” setting up this kind of fund could help resolve at least one obstacle to recovering stolen wages not only during this pandemic economy but also in future downturns.

After finding out that his employer was stealing his wages, Diaz was resigned to thinking that pursuing legal action wouldn’t offer much recourse. Unfortunately, his instincts were probably correct. But maybe there’s a chance that the fallout of this pandemic could help us to see workers not as collateral damage, but as deserving of protection in their own right.

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