The Bankruptcy Code’s Automatic Stay Is Not So Automatic For DOL Wage And Hour FLSA Enforcement Actions – Employment and HR – United States – Mondaq…

07 July 2021

Dickinson Wright PLLC

To print this article, all you need is to be registered or login on Mondaq.com.

The U.S. Bankruptcy Code (the "Code") 11 U.S.C. 362(a)(1) provides that when a party files for bankruptcy,an automatic stay is triggered. However, it turns out that thereare limitations to the type of cases that these automatic staysextends, and in the employment context, this may not necessarilyinclude wage and hour claims.

For example, in the recent case of Stewart v. Holland Acquisitions,Inc. Case No. 2:15-cv-01094 (W.D. Pa. Feb. 2,2021), the U.S. District Court for the Western District ofPennsylvania held that the U.S. Bankruptcy Code's automaticstay does not extend to enforcement actions brought by the U.S.Department of Labor (DOL) under the Fair Labor Standards Act(FLSA). In applying section 362(b)(4) of the Bankruptcy Code torenounce the application of the stay, the court rejected a contraryholding out of the Sixth Circuit (which hears appeals from districtcourts in Kentucky, Michigan, Ohio, and Tennessee) that an employercannot shield itself from FLSA enforcement actions brought by theDOL by seeking to trigger the automatic stay protection under theBankruptcy Code. The court is now persuasive authority in the ThirdCircuit (which hears appeals from district courts in areas ofPennsylvania, New Jersey, Delaware, and the Virgin Islands).

So, how did this happen? First, Section 362(b)(4) of the Codecarves out a number of exceptions to the reach of the automaticstay, including one for certain police and regulatory actions asfollows:

The filing of a petition...does not operate as a stay...of thecommencement or continuation of an action or proceeding by agovernmental unit...to enforce such governmentalunit's...police and regulatory power, including the enforcementof a judgment other than a money judgment, obtained in an action orproceeding by the governmental unit's...police or regulatorypower[.]

In Stewart, the DOL filed a civil complaint againstHolland Acquisitions, Inc. (Holland), claiming that Hollandwillfully and repeatedly failed to pay its employees overtime andmaintain proper wage and hour records in violation of the FLSA.Holland later filed for chapter 11 bankruptcy protection and soughtto have the FLSA action stayed under the automatic stay provisionof the Code.

The court first found the DOL fell within the definition of a"governmental unit" as defined by section 101(27) of theCode. The court then found that the DOL was not seeking to enforcea pre-existing monetary judgment. Rather, the DOL was seeking tostop further FLSA violations and obtain back wages and liquidateddamages on behalf of the impacted employees.

Holland relied on Chao v. Hospital Staffing Services,Inc., 270 F.3d 374 (6th Cir. 2001) in arguing that the FLSAaction was not rooted in public policy because the DOL was seekingback pay, which is a private right, not a public one. The courtrejected Holland's attempt to stay the FLSA action and foundthat the Sixth Circuit's reasoning in Chao conflictedwith Third Circuit principles and, if applied to Holland,would "substantially impair the core remedial purposes of theFLSA."

In other words, even though the FLSA litigation could result inan award of back pay to specific individuals, the DOL'senforcement power is there to bring violating employers intocompliance with the FLSA. Accordingly, the court held that the DOLcould proceed with its action against Holland, notwithstanding theautomatic stay, which was applicable to stay other claims. However,while the court noted that the automatic stay would not prevent thecourt from entering judgment against Holland, to the extent the DOLobtained any judgment against Holland, enforcement would have to beadjudicated by the bankruptcy court, meaning the collection of anysuch monetary award would be subject to creditor priority rights asotherwise structured under the Code.

Holland's application is limited. First, it onlyapplies to employers within the Third Circuit. Second, it islimited to only wage and hour enforcement actions brought by theDOL. It is not applicable to private causes of actions pursued byemployees directly. The Holland decision does, however,create a circuit split on this issue, which could drive the issueto the U.S. Supreme Court as more and more circuits have theopportunity to weigh in on this issue. So, while not bindingoutside the Third Circuit, the Holland decision willprovide persuasive authority within the Third Circuit that thepolice and regulatory exception under section 362(b)(4) extends toFLSA enforcement actions, meaning the Code's automatic stayprotections will not protect a violating employer from theDOL's wage and hour division's grasp.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circumstances.

POPULAR ARTICLES ON: Employment and HR from United States

Potomac Law Group

With safety restrictions now being lifted as the COVID-19 vaccine becomes readily available and the percentage of the vaccinated US population is rising, the time has come for many employers to plan...

Pavia & Harcourt

A recent decision by the U.S. District Court for the Southern District of New York in Flatiron Health, Inc. v. Carson found that an employer's restrictions on a former employee were unenforceable.

Visit link:

The Bankruptcy Code's Automatic Stay Is Not So Automatic For DOL Wage And Hour FLSA Enforcement Actions - Employment and HR - United States - Mondaq...