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When retailers go bust, workers often get nothing

  • Retail workers thrown out of jobs by corporate bankruptcies often also lose severance and pensions
  • Proposed legislation would put workers on par with bankers, lawyers and consultants -- who typically get paid in full in Chapter 11 bankruptcies
  • Industrial and mining companies have perhaps the worst record of shedding retirement and other benefits when they go bankrupt

For employees at the slew of big stores that have collapsed in recent years, such bankruptcies are often financially devastating for reasons that go beyond losing their jobs. That's because workers often get no severance or other health care benefits when companies go bust, while even funds supposedly set aside for their retirement can suddenly disappear in a tide of red ink.

The reason: When a company files for Chapter 11 protection, pension and severance payments are labeled as "unsecured debt." That puts workers at the back of the line when it comes to collecting any money that might be owed to them.

Who's at the front of the line when companies go bust? Investors, for one. That can seem like adding insult to industry in the case of retailers like Toys R Us, whose private equity owners heaped billions of dollars on their balance sheet before the retailer finally folded last year. 

"Our bankruptcy laws prioritize corporate and Wall Street interests over working people," said Lily Wang, deputy campaigns director for United for Respect, a worker advocacy group.

The issue is particularly acute in retail -- the second-largest sector by employment in the U.S. -- while on the political front issues of economic security are likely to figure heavily during the 2020 presidential campaign. 

Congress to the rescue?

Two lawmakers, each with first-hand experience of seeing workers in the manufacturing and energy sectors get the shaft following big bankruptcies, want to change that. 

U.S. Rep. Tim Ryan, D-Ohio, and U.S. Sen. Joe Manchin, D-West Virginia, within weeks plan to push parallel bills in the House and Senate that would prioritize workers' claims in corporate bankruptcies.

"We've seen this in northeast Ohio for 30 years -- companies go bankrupt, almost everybody gets paid, but workers are at the back of the line. It's been the case as long as I can remember," Ryan told CBS MoneyWatch. 

Ryan's congressional district includes Lordstown, Ohio, which after losing its steel mills decades ago is now bleeding auto factory jobs. Only two auto-parts makers remain after the closure of General Motor's Lordstown assembly plan.

More specifically, the measure would classify worker claims in bankruptcy as administrative costs, putting them on par with the investment bankers, lawyers and consultants who get paid in full through a bankruptcy proceeding. 

The fall of Sears

Manchin first introduced the worker protection bill in late 2017, drawing support from the United Mine Workers of America (UMWA). The number of active coal miners in West Virginia has withered to about 13,000, but tens of thousands of retired miners face losing health and pension benefits after the coal companies that employed them went belly up.

"Ryan's bill is a step in the right direction to improve the status of employees in the bankruptcy process, and we need to do more to fundamentally fix this broken system so that our severance, health care and pensions are protected," Wang said.